The damages-based agreement (DBA) regulations should be clarified so that hybrid DBAs are explicitly allowed and recoverable legal costs are excluded from the sum used to decide the contingency payment to the lawyer, the independent review run by leading costs counsel Nick Bacon QC (pictured) and Professor Rachael Mulheron of Queen Mary University, London has recommended.
In its review of part 2 of LASPO in February, the Ministry of Justice accepted that the 2013 DBA regulations would benefit from “additional clarity and certainty” – given their limited take-up by the market – and said it would give “careful consideration” to the way forward following the review.
The detailed recommendations are being discussed at a stakeholder event taking place today.
Hybrid DBAs allow the lawyer to charge a discounted hourly rate as the case progresses, in addition to the contingency element, but it is not clear that the current regulations allow for them.
Saying they should be explicitly provided for, the reviewers said hybrid DBAs ensured that, for long-running matters, the solicitor could at least keep some money coming in, while they removed the need for the work-around that has emerged of solicitors entering into side agreements with third-party funders. Under these, the funders pay the law firm for their work in progress as the case progresses and then may take percentage cuts from both the solicitor and the client if the case is won.
The DBA would have to state whether the solicitor could retain any of the discounted hourly rate amounts if the case lost. If so, the draft regulations would allow the solicitor to ‘bank’ up to 30% of the fees earned from the retainer.
Among their other recommendations was to redefine ‘financial benefit’ – which triggers payment under a DBA – so that it could encompass more than just money and could also enable defendants to use DBAs. So a defendant would achieve a ‘financial benefit’ where they did not have to pay the claim.
Further, the financial benefit must exclude recoverable costs, meaning the DBA payment should only be calculated by reference to the damages recovered. The 2013 regulations are not clear on this point.
In the event that a client obtained a financial benefit, the draft regulations created by the review say the client would be liable to pay their lawyer three separate sums: their recoverable representative’s costs, the DBA payment and expenses.
Professor Mulheron and Mr Bacon said this model made DBAs, as a concept, “far easier to explain to clients” and also avoided the consequences of the indemnity principle.
“That is, if the DBA payment payable to the legal representative is less than the amount of recoverable costs, then the opponent is not obliged to pay those recoverable costs — i.e. the DBA payment represents a ceiling on the recoverable costs to which the client is entitled, under the [current] model, and can represent a significant windfall to the losing opponent, by enabling that losing opponent to escape the consequences of an award of recoverable costs against that opponent.”
Further, they said, without the indemnity principle in operation, “an opponent has less motivation to challenge the enforceability of a DBA, which will reduce the prospect of satellite litigation surrounding DBAs”.
Finally, they said their model was likely to enhance access to justice in low-value claims.
“Where the recoverable costs are quite high for a legally-complex claim, compared with the DBA payment accruing from a low-value claim, then the viability of that claim correspondingly reduces. The DBA payment is being ‘eaten up’ by the recoverable costs. By contrast, a legal representative who prosecutes, and wins, a low-value claim is not ‘punished’ by the success fee model.”
However, to avoid the draft regulations being “too ‘lawyer-friendly’ and too generous”, the reviewers recommended reducing the DBA cap to prevent over-compensation – from 25% to 20% in personal injury (but 40% for defendant insurers) and 50% to 40% in other cases.
The DBA payment would include irrecoverable representative’s costs, counsel’s fees and VAT which was not recoverable by the client from another party.