Where did DBAs go wrong?

Getting the scales of justice right: does low risk mean high reward?

Posted by Neil Rose, Editor, Litigation Futures

The Damages-Based Agreement (DBA) Regulations 2013 were up for review pretty much as soon as they became law on 1 April 2013. Since then there has been much talk, many complaints, little take-up, and increasingly urgent calls for reform.

So yesterday the Ministry of Justice (MoJ) finally responded to all of this by calling in the Civil Justice Council (CJC) to conduct a review of where improvements to the regulations could be made – but specifically excluded any changes to enable ‘hybrid’ DBAs, the source of most of the talk and complaints.

These would allow for firms to mix hourly rates with a contingent element, the reasonable argument being that only firms with a commercial death-wish or incredibly deep pockets would run a large case that could take some years on a pure contingent basis.

This does not seem overly controversial. Just last month Lord Justice Jackson came up with no fewer than eight reasons why hybrid DBAs should be allowed.

But, the CJC reported, “the government has ruled this out as it considers such arrangements could encourage litigation behaviour based on a low risk/high returns approach”.

This argument doesn’t stand up to examination. A ‘low risk’ DBA would be one where the firm put only a small proportion of its fees at risk; the return, if successful, would be similarly modest. To get a high return, you have to take a high risk.

As Sir Rupert also pointed out, there is no logic to banning hybrid DBAs while allowing ‘no win, low fee’ conditional fee agreements (CFAs), and also to allow third-party funding (TPF) to operate on a hybrid basis where funders meet some or all of the litigation costs if the case fails, and receive a share of the winnings if they succeed.

He said: “Indeed, it is worse than illogical. DBAs are a more efficient form of funding than TPF, because only two entities (rather than three) have a stake in the litigation. Therefore the law should not be sidelining DBAs in favour of TPF.”

So what has happened? Jackson LJ suggested that opposition to hybrid DBAs was coming from those who disliked DBAs in principle – those on the receiving end of claims. He called for “those in authority” to stand up to “powerful vested interests within the ‘big business’ camp”.

Certainly the American Chamber of Commerce, which was lobbying MPs and peers to clamp down on third-party litigation funding and DBAs during the passage of LASPO, continues to be active behind the scenes. Opposition to the introduction of opt-in class actions (for which DBAs are to be banned anyway) is their current focus.

So mark it up as a victory for big business over the little guy for whom DBAs offered the chance of justice? The government’s reasoning certainly sounds like it. It is important to remember that a key element of Jackson LJ’s rationale for allowing DBAs was that following the abolition of recoverable success fees, it was important to open up as many other options for funding as possible.

But I believe there is another reason too. The profession has never convinced the Ministry of Justice that it would actually use hybrid DBAs – instead, officials wondered whether all the agonising over the uncertainty around the regulations was actually just a convenient excuse not to embrace DBAs, particularly among the big City firms.

After all, as Jackson LJ noted, solicitors have long been able to offer ‘hybrid’ CFAs, which are a very close relation. Yes, it may be illogical to allow one but not the other, but equally, are any large firms (or indeed is anyone) actually offering hybrid CFAs? I’d be very keen to hear from readers who can correct the impression that they are the legal equivalent of hen’s teeth.

So if firms don’t do hybrid CFAs, there’s not much reason to suppose they would embrace hybrid DBAs. Maybe if they start doing so now that the DBA option has been closed off, the MoJ could be convinced to think again.

In the meantime, the winners may well be third-party funders, which have been coming up with arrangements that get around the hybrid DBA problem that sees the firm put skin in the game. For example, the law firm enters a full DBA with the client, and then does a deal with a funder to bankroll some of their fees in return for a share of the contingency fee if successful.

The ‘synthetic’ model promoted by Burford Capital involves the client entering into a traditional TPF agreement and a normal retainer with their solicitors. Meanwhile, the funder has a back-to-back agreement with the law firm, which sees the solicitors put some of their fees at risk in exchange for a share of the funder’s cut of the damages.

Then again, why not just go for a conventional funding agreement with the firm on a CFA?

So is this the end of the road for DBAs, before they’ve even got going? Not quite yet. Let’s see what the Civil Justice Council comes up with first.

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