The government needs to be sure that allowing hybrid damages-based agreements (DBAs) will not encourage abuse by lawyers, such as speculative litigation, the civil servant in charge of civil litigation reform has warned.
Robert Wright, head of civil litigation funding and costs at the Ministry of Justice, also challenged the profession to explain why reform was needed now, at a time when the department has other priorities.
He was speaking at a seminar to discuss the recommendations of the independent review of the 2013 DBA regulations, which were published this week by Nick Bacon QC and Professor Rachel Mulheron.
These included allowing hybrid DBAs – under which a solicitor can be paid for some of their work in progress even if they lose. Uncertainty as to whether the regulations allow this has been blamed for the minimal take-up of DBAs since 2013.
Mr Wright summarised his position as “an appreciation of the case for change but a healthy concern about the potential adverse impacts whether or not unforeseen and unintended”.
He highlighted his worries about hybrid DBAs: “Are the risks of hybrid DBAs real and if so how could they be mitigated?
“I have spent much time dealing with what could be described as the excesses of pre-LASPO regime. It was a regime in which it could be said that high costs were encouraged and litigation behavior was altered to chase those high costs.
“I am naturally concerned about opening up a new area which could encourage abuse.”
He said that, while those in the room would “no doubt” enter into hybrid DBAs wisely, potentially allowing them to pursue strong cases more easily and cheaply than now, there may be others “who look at cases not so much with their clients’ best interests at heart but more with a view to maximising their own profits”.
Mr Wright posited the example of a high-value case run on a DBA where the lawyer advised to settle straight away and received a large payment for little work.
“What of the argument that the client should have been advised to enter into a CFA, which as it turned out would have been more in the client’s interests than a DBA, or vice versa?
“These bad behavours are likely to be encouraged. Do we need new guidance, rules or regulations? Does the client need extra protection? Does the solicitor or the barrister?”
While the Jackson reforms had reduced the amount of “unmeritorious litigation”, the civil servant questioned whether the attraction of “more substantial rewards” risked increasing it again.
“Does allowing cases on an entirely speculative basis encourage entirely speculative cases, or are these unfounded concerns from a too-cautious civil servant?”
Mr Wright said that resources at the Ministry of Justice were “tight” but it did have a priority of improving the attractiveness of the legal sector through the ‘Legal services are GREAT’ campaign.
“While we have accepted the need for some reform of DBAs, what is the case for action now? As part of that, do you have data, or could you start collecting data, to inform the impact assessment of the revised regulations?”
In response, Mr Bacon argued that the concerns about hybrid DBAs could be dealt with under the general law.
There was no reason why a DBA could not be a contentious business agreement and thus subject to scrutiny by the Senior Courts Costs Office.
“The retainer is no different from any other; the costs office is able to examine the agreements and decide whether they are fair and reasonable,” he said.
Also, the Legal Ombudsman would be able to investigate whether the lawyer had treated the client unfairly, Mr Bacon said.
Giving a practitioner’s perspective, Anthony Maton, managing partner of the London office of litigation firm Hausfeld, strongly backed reform.
He declared an interest to the extent that Hausfeld wanted to take on more cases “on a risk basis”, but he argued that an access to justice deficit had developed as a result of the end of recoverability of success fees in conditional fee agreements (CFAs) and the DBA regime not being able to pick up the slack.
The inability to do hybrid DBAs made the regime “unattractive”, he said, leading to the situation where Russian oligarchs found it easier to use the courts than regular English businesses, as well as solicitors doing “back-door” deals with third-party funders to get around the problem.
Mr Maton said: “The data will demonstrate that there is a very fundamental access to justice problem at the moment, to the extent that it is the worst it has ever been in our court system and calls into question the rule of law in this jurisdiction. We can’t allow this to continue.”
Mr Wright said that, if the reforms were taken forward after Mr Bacon and Professor Mulheron issue their final report – having consulted over the next month – it would probably take a year or so “with a fair wind” to get the revised regulations all the way through the parliamentary process, as both houses would have to approve them.
Speaking after the event, Greg Cox, managing partner of Simpson Millar, said the blueprint set up by the pair would enable firms like his to “give better choice to our clients” and enable some clients who have previously been unable to access legal services to progress their cases.
“I would like to pay tribute to the work of Professor Rachel Mulheron and Nick Bacon QC. Most importantly, I would urge the government and the MoJ to implement these proposals as soon as they are able to find time given the wider and more pressing matters they are engaged in.
“Similar proposals were frustrated in 2013 and it would be a significant missed opportunity to increase access to justice if these current proposals were not implemented.”
Steve Din of funder Doorway Capital, which owns Simpson Millar, added that firms which failed to recognise the “economic impact” of DBAs would “suffer at the hands of their better funded competitors”, as happened when Canadian law firms shifted from CFAs to DBAs in 2002.
He said there was initially a shortage of funding in Canada: “Whilst clients will still have access to standalone litigation funders, given the reforms we anticipate many law firms will prefer to sign up clients onto a DBA quickly without external funding first being underwritten, which will require access to considerable internal funding.”
Mr Din continued: “Of particular interest to law firms with a corporate and commercial practice is a recognition of the need for hybrid DBAs, which will allow the solicitor to ensure at least some money is coming in, albeit at a discounted rate.
“This proposed fee option will be particularly advantages to SMEs and other corporate clients that are able and willing to pay for a limited element of legal advice but unable to fund heavyweight litigation through to trial.
“We anticipate that DBAs will lead to higher case velocity and a marked improvement in profits per equity partner, and marketing practices should also transform as the ’no win no fee’ tagline is condemned to the history books.”