Posted by Christopher Deadman, sales director at Litigation Futures sponsor Augusta Ventures
In the most recent edition of the Law Society’s Civil Justice Newsletter, Rocco Pirozzolo laid bare the reasons why damages-based agreements (DBAs) have yet to take off.
The essential problem with the DBA is that it is an all or nothing bet. A single roll of the dice. An ‘empty out’ job on the last favourite at Sandown. Inelegant as these phrases undoubtedly are, it is appropriate to employ the argot of the betting shop or the casino because they accurately describe the attitude to risk which lawyers are expected to adopt when considering the adoption of a DBA.
Under the current regime, if a DBA fails to comply with the provisions of the regulations, then it will be void and unenforceable. In a nutshell, if the governing document is faulty in any respect, the law firm will not be entitled to receive payment irrespective of the outcome. So you could conceivably have a case which is wildly successful in every respect but where the law firm incurs a massive loss simply by dint of a flaw in the documents. One tiny mistake and you are gone.
Prior to the launch of the Jackson reforms, it was widely believed that it would be permissible for lawyers to enter into so-called ‘hybrid DBAs’. This would seem to have provided a useful bridge between the current position and a more sensible approach which would have allowed them to share the costs risk with the claimant or a third-party financier.
As Rocco Pirozzolo notes, the current regime requires lawyers to act like funders by assessing the quantum which may realistically be obtained together with the likelihood of recoverability. But it goes further than simply asking lawyers to act like funders.
In a normal funding arrangement subject to a partial CFA, the funder will usually expect other parties to share some of the financial risk associated with the claim. If the claim fails, only the funder will lose actual cash. But in that event, the lawyer acting under a partial CFA will also be unable to recover the balance of their deferred fees. In a DBA, however, the lawyer assumes everyone’s risk – not just their own costs but also the disbursements incurred.
This is actually asking a lawyer to go beyond what many professional funders would regard as reasonable. It requires a firm whose core business is the provision of professional services, to adopt practices which even the institutional investor would consider unacceptable.
Or to put it another way, law firms are being asked to embrace risk management strategies which even Stuey Ungar (Google him!) in his final years would have eschewed.