Review lays ground for both hybrid and defendant DBAs

Bacon: Conducted review with Rachel Mulheron

Changes to the damages-based agreement (DBA) regulations, including opening them up to defendants and allowing hybrid DBAs, have been put forward by an independent review – with the approval of Sir Rupert Jackson.

The review also recommends removing recoverable legal costs from the sum used to calculate the fee the solicitor is entitled to, while reducing the current caps to ensure the rewrite is not too “lawyer friendly”.

The lack of take-up of DBAs since the introduction of LASPO has been attributed to the drafting of the 2013 DBA regulations, particularly uncertainty over whether they allow for hybrid DBAs – under which solicitors receive some payment as the case proceeds and also take a share of the damages.

In its review of part 2 of LASPO earlier this year, the Ministry of Justice accepted that the regulations would benefit from “additional clarity and certainty” and said it would give “careful consideration” to the way forward following the independent review of their drafting.

This has been conducted by Professor Rachael Mulheron of Queen Mary University, London – who chaired the Civil Justice Council working party on DBAs that made unadopted recommendations for reform in 2015 – and leading costs counsel Nicholas Bacon QC.

They published their detailed recommendations yesterday ahead of a stakeholder event to discuss them tomorrow. After a month of consultation, a final report will then be submitted to the government.

One key change is to the definition of ‘financial benefit’ which triggers payment under a DBA – currently the “sum recovered in respect of the claim or damages awarded” – to “money or money’s worth”.

The notes accompanying the draft new regulations said this reflected that a financial benefit could constitute real or personal property, or some chose in action.

“Thus, ‘money or money’s worth’ means any money, assets, security, tangible or intangible property, services, and any other consideration reducible to a monetary value.”

Further, they said, the financial benefit must exclude recoverable costs, i.e. the DBA payment should not be calculated by reference to what costs were paid or payable by the opponent, what they called the ‘success fee model’.

“That point had been uncertain under the 2013 DBA regulations, because the DBA payment was calculated as a percentage of ‘the sums ultimately recovered by the client’. That phrase could have technically included the client’s recovery of recoverable costs and expenses.”

This also explicitly allowed defendants to use DBAs – which reference to the sums recovered precluded unless the defendant also had a counterclaim.

The notes said this brought the regulations in line with section 58AA(3) of the Courts and Legal Services Act 1990, “which also envisaged that DBAs could be used by defendants”.

Under the new definition, a defendant would achieve a ‘financial benefit’ where they did not have to pay the claim which was mounted against it

In the event that a client obtained a financial benefit, the draft regulations said 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 the success fee model made DBAs, as a concept, “far easier to explain to clients, particularly to those who have had no prior experience of litigation”, while it 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.

“Anything remaining, after deduction of those three items, is profit accruing to the legal representative.”

If directly engaged, counsel’s fees would be outside the cap. They would either be an expense or could be subject to a separate DBA.

The notes acknowledged that including irrecoverable VAT within the DBA payment could render some claims, especially low-value personal injury claims, infeasible to conduct on a DBA basis, because it effectively reduced the 25% cap to 20%.

“However, notwithstanding these concerns, the suitable response may be to seek further consultation upon the DBA cap which applies to personal injury claims, rather than to remove VAT from being inside the DBA payment.”

The notes stressed that the draft regulations were structured to ensure there was no double recovery.

They also provided explicitly for hybrid DBAs. The authors said there were two reasons for this. First, hybrid DBAs ensured that, for long-running matters, the solicitor could at least keep some money coming in, which would be offset against the DBA payment if it turned out to be irrecoverable in the event of success.

Second, they removed the need for the work-around that has emerged of solicitors entering into side agreements with third-party funders, who pay the law firm their work in progress as the case progresses and then may take percentage cuts from both the solicitor and the client when 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 – enough to cover expenses without enjoying a windfall.

Other recommendations included:

  • If counsel is paid by the client via a direct DBA, then the sum of the solicitor and barrister’s DBA should not exceed the statutory caps;
  • It was not intended that agreements with third-party funders should be caught by the regulations; and
  • The DBA percentage in personal injury cases should not apply to damages obtained by the client for future pecuniary loss, but could apply to every other head of damages.

Professor Mulheron and Mr Bacon also published a letter from Sir Rupert Jackson – whose 2009 report recommended the introduction of DBAs and who has subsequently called for the 2013 regulations to be amended – in which he expressed his “admiration” for their proposed reforms.

“I agree with your analysis and support the proposals,” he said.

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