Revisions to damages-based agreements for civil litigators

Revisions to damages-based agreements for civil litigators
calculations on spreadsheetWhat is the significance of the Civil Justice Council's (CJC) The Damages-Based Agreements Reform Project—Drafting and Policy Issues report for civil litigators? Francesca Kaye, partner at Russell-Cooke, advises that if you are likely to consider offering damages-based agreements (DBAs) under the draft Regulations (the draft 2015 Regulations) you need to consider the basis and terms on which you would offer them.

Original news

The CJC has recommended technical clarifications for DBAs. These include increasing payment caps for DBAs and what parts of recoverable costs can be offset against the fee.

What is the relevance of this report for civil litigators?

The CJC working group’s report sets out wide-ranging recommendations for DBAs and their regulation. The working group was asked to review the position in relation to the Damages-Based Agreements Regulations 2013, SI 2013/609 and to provide assistance on how the regulatory framework set out in those Regulations could be improved to provide an alternative to Conditional Fee Agreements (CFAs).The working group was provided with draft 2015 Regulations and as part of its report, it provided suggested amendments to them, including:

  • amending the definition of financial benefit so that the legal representative and their client can define the trigger for payment—particularly where there are both claims and counterclaims—but also to make the use of DBAs by defendants more likely
  • clarifying how the DBA cap should operate in relation to counsel’s fees—whether counsel is on a DBA or not—experts fees, other disbursements and how VAT is to be treated

The draft 2015 Regulations are expected to allow sequential hybrid DBAs. This, for example, would allow a private retainer to be followed by a DBA at a certain point in a case, but would not permit two concurrent forms of funding.

The working group has made suggestions about how pre-commencement work should be dealt with under a DBA and how DBAs are to work with appeals.

It is anticipated that the proposed amendments to the draft 2015 Regulations will be addressed by draft legislation in the autumn of 2015. Only then will we know the extent to which the government has been prepared to adopt the working group’s recommendations.

The second part of the report focusses on policy issues, including the issue of concurrent hybrid DBAs. It is unlikely that the government will engage in any debate around these policy issues and consider further changes within the same time frame.

What does the report say about concurrent hybrid DBAs and do other recommendations make up for this?

Concurrent hybrid DBAs are discussed in the second part of the report. Even the working group has divergent views about the need for hybrid concurrent DBAs and the arguments are finely balanced.It is argued that until concurrent hybrid DBAs are permitted, the number of cases in which legal representatives or their clients might consider DBAs will continue to be limited. In complex, high value, long-running cases pure DBAs—which will provide cash flow challenges—are unlikely to provide the appropriate balance between risk and reward. These types of cases would be more suited to concurrent hybrid DBAs. At present these can only be achieved using a third party funder.If the draft 2015 Regulations permit the use of sequential hybrid DBAs this may significantly increase the use of DBAs. In some cases sequential hybrid DBAs may provide an appropriate risk sharing regime for both legal representatives and their clients.This step towards hybrid DBAs will help inform the debate around concurrent hybrid DBAs and address some of the policy concerns.

 

What impact would the removal of the indemnity principle have in practice?

The working group on balance recommended that the indemnity principle be removed for DBAs. Alternatively, the model used for DBAs should be changed to a success fee model.This recommendation is primarily intended to avoid an outcome which provides a windfall for defendants. For example, if the recoverable costs that a defendant has to pay exceed the DBA cap, the costs the defendant actually has to pay are limited to the DBA cap. In such cases the legal representatives would not even receive the recoverable costs let alone any additional element for taking the risk of a DBA. It would have no impact on the claimant.The removal of the indemnity principle for DBAs—or the adoption of the success fee model in place of the Ontario model for DBAs—resolves this problem without affecting the claimant’s position.As this recommendation is in part two of the report it is unlikely to be addressed in the draft 2015 Regulations.

 

While the indemnity principle remains in place there is a practical problem in relation to costs awarded for interim hearings. If a claimant were to be entitled to a costs order as a result of a interim application, those costs could not be assessed and the amount of costs could not be determined or paid at that time without it being a breach of the indemnity principle. All interim orders should be held over for assessment at the end.

What did the report have to say in relation to the Arkin principle?

The working group considered that there might be some uncertainty around the issue of a legal representative's liability for adverse costs—which is something addressed by the Arkin principle (Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 3 All ER 613).They proposed that the position be clarified so that it mirrored the position for legal representatives acting under a CFA. This would mean the legal representatives would not be liable for adverse costs while acting under a DBA.

 

Do the recommendations assist with the real concern practitioners had in terms of the termination of a DBA by a client and the costs implications?

The recommendations in relation to early termination are in part two of the report and are unlikely to be addressed in the draft 2015 Regulations. The working group recommend that the grounds for and manner of termination of a DBA and the costs consequences should not be prescribed by the 2015 Regulations. It should be open to the legal representative and their client to agree the terms and consequences of early termination of a DBA.

 

What happens next? Should lawyers be taking any action at this stage?

The working group anticipates that the draft 2015 Regulations will be addressed by draft legislation later this year. It is not clear how many of the working group's proposed drafting amendments will be adopted or whether any of the recommendations they make in part two will be included in the draft 2015 Regulations.If the majority of the part one amendments are adopted, many of the concerns raised by legal representatives will have been addressed. However, the position on early termination and costs will need to be addressed before most legal representatives are likely to have sufficient confidence to offer DBAs to clients.If you are likely to consider offering DBAs under the draft 2015 Regulations you need to consider:

 

  • the basis and terms on which you would offer them
  • what your minimum terms will be and the basis for early termination and the costs consequences
  • how you will provide appropriate advice to the client and how you will decide whether a DBA, CFA or some other form of funding is the most appropriate for the client

You will need to accept that the negotiation of a DBA will change the dynamics of the relationship between a lawyer and their client. As the relationship becomes a more commercial arrangement with greater risk-sharing between the lawyer and their client, the lawyer will have to be careful to ensure that they satisfy their professional obligations to provide advice about alternatives and advice about whether the proposal is one they can advise their client to accept.

While each DBA arrangement is likely to be different, there will be some minimum requirements that each firm will want to ensure they meet to protect both them and the client. There is no reason why they could not be looking at those issues while we wait to see what the 2015 Regulations actually look like later this year.

Francesca Kaye is a partner at Russell-Cooke LLP and immediate past president of the London Solicitors Litigation Association. She has experience across a broad spectrum of commercial and chancery litigation, including complex disputes with an international element, construction, property and professional negligence disputes and contractual disputes. Francesca is also a qualified commercial mediator and a deputy district judge.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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