DBAs in contentious litigation: Damages Based Adolescence

Damages Based Agreements (DBAs) may finally be coming of age. When they do, they may transform the claims landscape facing insurers.

DBAs were introduced for contentious litigation in April 2013, but to date their popularity has been limited because of the regulatory position. Recently their boundaries have been tested in the courtroom. In the future we expect to see an increasing number of claims where the legal team acts under a DBA and is incentivized by a share of the spoils.

Civil justice reform

DBAs – also known as contingency fee agreements – were legalized for contentious litigation in April 2013 as part of the Jackson civil justice reforms. While the recoverability of success fees (under Conditional Fee Agreements) was largely abolished, DBAs were intended to widen access to justice by opening up a new method of claims funding.

DBAs were already allowed for employment tribunal claims (which are not regarded as contentious litigation), but in civil litigation they had traditionally been viewed as champertous or unlawful, and were therefore unenforceable.

Under DBAs, a claimant’s solicitors and barristers can now get paid a share of any winnings. That is a radically different approach to getting paid by the hour. One consequence is that if lawyers enter into a DBA for a claim which then settles at an early stage, they will gain a windfall after having done little work.

Regulatory restrictions

The 2013 DBA Regulations introduced a number of client protections:

  • DBAs must be in writing, and specify the reason for setting the share of winnings payable to the legal team.
  • That share cannot exceed 50% (25% in personal injury claims) of the sums ultimately recovered from the defendant.
  • Barristers’ fees cannot be charged in addition to the share of winnings. So either the solicitors have to cover the barristers’ fees, or the barristers have to act under their own DBAs. Disbursements - other than barristers’ fees - can be charged under DBAs in addition to the share of any winnings.
  • If the claim is successful, the legal team only gets paid its share of the winnings - and any disbursement costs that the court orders the defendant to pay – to the extent that the defendant actually pays them. So the risk of any judgment going unpaid is shared between the claimant and the legal team.
  • No additional payment is allowed to the legal team (whether the defendant pays the damages awarded or not).

The rationale for some of these client protections is not clearly set out. The logic seems to be that the legal team is incentivised to advise the claimant on the litigation risk by being placed in the same position as the claimant and sharing in all aspects of that risk. As a result, take-up has been limited.

Further, the general understanding is that lawyers acting under DBAs cannot also charge by the hour or, to put it another way, that “hybrid” DBAs (combining contingent fees and hourly rates) are not allowed. If that understanding is correct and the relationship between the claimant and their legal team breaks down before the resolution of the claim, then the lawyers cannot get paid by the number of hours that they have already worked.

Testing the boundaries

We recently acted in one of the first claims to go to court testing the boundaries of DBAs (Glasgow v ELS Law Ltd [2017]). While the client under the DBA had sought to argue that it was unenforceable because it provided for payment of the legal team at hourly rates upon early termination, the legal team (supported by the Bar Council) argued that hybrid DBAs are – contrary to the general understanding - in fact permitted. This aspect of the case was settled, and until the point is clarified, this important aspect of the DBA Regulations will be subject to further argument. The same issue was also raised, but has not yet been resolved, as a preliminary issue in another recent case (Lexlaw Ltd v Zuberi [2017]).

A further development is that a litigation finance broker (called The Judge) has recently launched a new product, DBA insurance, onto the market. This is a new type of insurance for claimant lawyers, allowing them to insure against the risk of losing.

According to the Judge, this insurance typically covers around 50% of the lawyers’ fees. Therefore, even if hybrid DBAs are deemed unlawful, this product may effectively allow hybrid DBAs through the backdoor, albeit at the risk of insurers rather than clients.

Comment

As the boundaries of DBAs are expanded, it is likely that more DBA-funded claims will soon follow. One concern is that claimant lawyers have potentially very large financial incentives to win claims. Those incentives conflict with lawyers’ duties to the court, for example in relation to the disclosure of documents that adversely affect their client’s case, which is one of the reasons why DBAs were traditionally unlawful and remain so outside of the confines of the DBA Regulations.

Claimants funded by DBAs, who have promised a significant share of any winnings to their lawyers, may be reluctant to settle at an early stage before they perceive that their lawyers have actually earned their fair share. Strategically pitched Part 36 offers will therefore be more important than ever.

As the take-up of DBAs increases, defendants and their insurers should remain vigilant.

Read other items in the Professions and Financial Lines Brief - March 2018