With the starting gun for contingency fees in commercial litigation due to fire in April 2013, interest in how the new damages-based agreements (DBAs) will work has been building in recent months. Now, with the publication of a set of recommendations from the Civil Justice Council’s DBAs working group, a clearer picture is emerging of just how attractive - or otherwise - the new fees may be.
The group, which comprised a range of experts from the solicitors’ profession, the bar, and the regulatory and insurance sectors - and spanned commercial and personal injury litigation - has done a great job in coming up with a clear set of recommendations in what has been a relatively short space of time. The government is under no obligation to follow its conclusions, but seems likely to do so.
From the commercial litigation perspective, one of the key questions hanging in the air since Lord Justice Jackson first proposed the introduction of DBAs has been whether or not the fees will be capped. This is an important issue, because many felt that if a low cap were introduced - such as the 35% cap in place in employment cases, the only area of law in which DBAs are currently permitted - this might kill off any interest in DBAs from many law firms.
In considering the issue of a cap in the commercial arena, the group identified three categories of case: i) those commercial cases which are likely to involve sophisticated purchasers of legal services; ii) those involving consumers; and iii) those involving ‘micro enterprises’ with fewer than 10 employees and less than €2m (£1.57m) turnover.
Sensibly, it recommends that there should be no cap for those cases in category i), where the parties involved can be expected to be sophisticated purchasers of legal services. That opens up the prospect of law firms entering into some very lucrative DBA agreements where they are taking on a high level of risk.
In the other two categories, the working group could not agree on whether or not a cap was needed to give protection to the parties signing up to DBAs. But if a cap is introduced, it recommended that this should be at a level of 50%.
Incidentally, the group saw no reason to alter the current 35% cap in place in employment cases, and recommended sticking to Jackson’s 25% cap in personal injury - but suggested widening the damages which can fall under the scope of a DBA, to include damages for future care. This would make DBAs more attractive to personal injury lawyers than had initially been envisaged.
While commercial litigators will be pleased that the working group has not sought to cap their DBA arrangements, its recommendations are still not as favourable as some would have liked. There was considerable debate within the group over how the costs awarded to a winning claimant (to be paid by the losing side) should fit into the contingency arrangement.
Where the claimant who has funded his litigation under a DBA wins his case, the court will order their ‘base costs’, calculated on a standard hourly rate, to be paid by their opponent. Some in the working group felt that, to reward lawyers properly for the risk they are taking and make DBAs attractive to firms, the DBA should be payable as a percentage of damages, in addition to the base costs recovered. In that sense, the DBA would operate in the same way as a success fee in conditional fee agreements.
But the working group has instead recommended following the ‘Ontario model’ initially envisaged by Jackson. That means that base costs recovered from the other side will be deducted from the contingency fee first, and any shortfall will then be made up out of damages. Anything else would have been a significant departure from what Jackson had intended.
The group also recommended that, as with CFAs, solicitors should not be liable for adverse costs when they act under a DBA, unless they have agreed with their client that they will bear the risk of the other side’s costs if they lose the case. It also said that partial DBAs should be permitted, meaning that we are likely to see arrangements where, for example, a lawyer receives a reduced hourly rate as a case proceeds, but with a contingency fee on top if they win.
The group said there should be no obligation to notify opposing parties where a lawyer is acting under a DBA.
A full analysis of the working group’s recommendations and the impact on commercial and personal injury litigation will appear in the October edition of Litigation Funding.
Rachel Rothwell is editor of Litigation Funding magazine, providing in-depth coverage on costs and the financing of litigation.
Follow Rachel on Twitter