Damages Based Agreements: The Basics

Transcription

1 Damages Based Agreements: The Basics The main provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) came into force on the 1st April 2013 and promise to herald a major change in the way personal injury claims are funded in the future. One element of the new environment is the option to use Damages Bases Agreements (DBA) in personal injury claims for the first time and practitioners need to be aware of this new funding animal before advising their clients of the merits or otherwise of this strange beast. Definition DBA (previously known by Lord Justice Jackson and nearly everybody else as Contingency Fees) are defined by the Courts and Legal Services Act 1990 (CLSA), Section 58AA(3): 'For the purposes of this section (a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that (i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and (ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained;' In common parlance, a DBA is a no-win no-fee agreement where the solicitor gets a slice of the Claimant's damages. Due to the widespread use of such agreements in the United States legal system, they are also commonly known as US style contingency fees. History Prior to 1st April 2013, DBA were only allowed to be used in noncontentious work and in employment matters, CLSA Section 58AA(1). This was based on a long standing general distaste amongst lawyers and policy makers for solicitors having a direct financial interest in their

2 client's case (reflected in the common law doctrine of champerty). However, Lord Justice Jackson, in his Review of Civil Litigation Costs: Final Report, after considering the various arguments for and against a more liberal use of DBA, concluded that: 'Having weighed up the conflicting arguments, I conclude that both solicitors and counsel should be permitted to enter into contingency fee agreements with their clients on the Ontario model. In other words, costs shifting is effected on a conventional basis and in so far as the contingency fee exceeds what would be chargeable under a normal fee agreement, that is borne by the successful litigant.' (Chapter 12 - paragraph 4.1) The gloss provided by the 'Ontario model' (after the similar system used in Ontario, Canada) was that where costs under a DBA were higher than would have been the case under an alternative funding arrangement, the costs payable by a losing party would be limited to that lower amount, with the balance payable by the client (similar to the manner in which Conditional Fee Agreements will now operate with the client being responsible for the extra costs associated with their choice of funding, namely the success fee). This recommendation was fully accepted by the Ministry of Justice its enthusiastic response to the proposal: Damages-based agreements (DBAs/contingency fees) will be allowed to be used in civil litigation. DBAs are another type of no win no fee agreement, but the lawyer s fee is related to the damages awarded, rather than the work done by the lawyer. The Government will lift the restriction on their use in civil litigation. DBAs will provide a useful additional form of funding for claimants, for example in commercial claims. Successful claimants will recover their base costs (the lawyer s hourly rate fee and disbursements) from defendants as for claims, whether funded under a CFA or otherwise, but in the case of a DBA, the costs recovered from the losing side would be set off against the DBA fee, reducing the amount payable by the claimant to any shortfall between the costs recovered and the DBA fee. DBAs will be subject to similar requirements for parties to the agreement as for CFAs. For example, the amount of the payment that lawyers can take from the damages in personal injury cases will be capped (at 25%

3 of damages excluding for future care and loss). However, the Government is not persuaded that there should be a requirement for a claimant to obtain independent legal advice in respect of a DBA. (Reforming Civil Litigation Funding and Costs in England and Wales - Implementation of Lord Justice Jackson's Recommendations, The Government Response - March 2013) And so it came to pass with LASPO Section 45 which removed the limitation on DBA only being available for employment cases, subject to a provision for regulation by subordinate legislation. That regulation was then enacted in the form of The Damages Bases Agreements Regulations 2013 (DBAR) which came into force with LASPO on the 1st April Requirements The rules regarding DBA are relatively simple (at least in theory). A DBA must be in writing, CLSA s58aa(4)(a), and must not relate to family or criminal cases, LASPO s45(5). The agreement must set out details of the claim to which it relates, the situations when the additional costs will be payable and the reasons for setting the amount of the additional costs at the given level DBAR s3. In personal injury cases the additional costs payable by the client (including VAT) must not exceed 25% of the total damages recovered for pain, suffering and loss of amenity and other pecuniary loss (but excluding future loss). In other (non personal injury) cases, the limit is 50% and, in both cases, these figures are net of any CRU repayments and only apply to claims or proceedings at first instance. DBAR s4. There is no requirement for the client to take independent legal advice before entering into a DBA. This was one of the recommendations of Lord Justice Jackson (Chapter 12, s5.1(ii)) which has not made it into the final rules. There are additional regulations governing DBA is employment matters and set out at DBAR ss5-8. Recoverability

4 The indemnity principal will continue to apply such that a winning party (acting under a DBA) cannot recover more in costs than they are liable for pay their solicitor under the DBA (DBAR Explanatory Memorandum 7.11). Therefore, if the costs which would ordinarily be payable between the parties exceed the amount payable under the DBA, then only the lower sum payable under the DBA (and therefore capped by reference to the damages recovered) will be payable by the losing party. However, in keeping with the Ontario model upon which the rules were based, the reverse does not apply in that in the event of the amount payable under a DBA exceeding the costs that would have been payable absent the DBA, only the lower amount is payable by the paying party. Summary DBA provide a whole new wilderness for the majority of personal injury lawyers to navigate through. Conditional Fee Agreements (CFA) were confusing enough when they were first introduced but now we have new style CFA (with unrecoverable success fees and ATE premiums) sitting alongside DBA with their own limits on recoverability and interplay with the indemnity principle. It is no surprise that many are confused as to how these 2 systems will sit side by side and how solicitors can be expected to explain the nuances of the same to their clients. A CFA where the client is told they will not have to pay any shortfall is fairly simple to explain, but new style CFA and DBA are much less straightforward. That there will be satellite litigation on DBA (and CFA) is near certain. Of less certainty is the extent to which DBA will actually be utilised by Claimants in the new landscape. Will they replace CFA? Will they be offered as an alternative? Will they become the poor relation of funding options, only to be used out in small claims or other cases where a traditional CFA might not be in the interests of the solicitors or their clients. On the other side, there are fears from the Defendant side that giving Claimant Solicitors a palpable and direct stake in the damages will lead to inflated claims, more expert evidence being obtained to support additional heads of claim and more cases proceeding to assessment of damages hearings so as to maximise recoveries. All of this, it is said, will lead to higher costs and more problems than it solves.

5 The reality is likely to be a combination of all of the above and practitioners on both sides are in for a potentially bumpy ride in this brave new world of funding options. Paul Jones Technical Director LCN March 2013