DAMAGES BASED AGREEMENTS AND CONTINGENCY FEES. Colm Barry

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1 DAMAGES BASED AGREEMENTS AND CONTINGENCY FEES Colm Barry Both CFAs and DBAs are a type of contingency fee. Contingency fees generally are unlawful for contentious business except where permitted by statute. As far as CFAs are concerned, the relevant statute which permits them is S58 CLSA 1990 as amended now by S44 LASPO. S44 also makes Success Fees irrecoverable on a party and party basis except for diffuse mesothelioma cases, insolvency and defamation proceedings for all CFAs entered into on or after 1 April DBAs have, until now, been permitted only for employment matters (under DBA Regulations 2010(6)). Now, however, S45 of LASPO permits DBAs for all other contentious business. Such DBAs are governed by the DBA Regulations 2013 (2013/609). The major difference between a DBA and a CFA is that a DBA provides for the payment of a fee to the solicitor by the client, which is calculated as a percentage of the damages recovered by the client. The percentage payable under a DBA cannot be more than 25% in PI cases and 50% in other cases (with the exception of employment cases where the cap is 35%). The Damages-Based Agreements Regulations 2013 (2013/609) Regulation 1(2) contains a number of definitions: Costs is defined as the total of the representative s time reasonably spent, in respect of the claim or proceedings, multiplied by the reasonable hourly rate of remuneration of the representative Expenses means disbursements incurred by the representative, including the expense of obtaining an expert s report and, in an employment matter only, counsel s fees The regulations apply to all DBAs entered into on or after 1 April 2013 in contentious business Regulation 2 revokes the Damages-Based Agreements Regulations 2010(6)(dealing with DBAs in employment matters) save in relation to DBAs signed before 1 April Regulation 3 specifies the requirements of all DBAs. The DBA must specify: 1

2 (a) the claim or proceedings or parts of them to which the agreement relates; (b) the circumstances in which the representative s payment, expenses and costs, or part of them, are payable; and (c) the reason for setting the amount of the payment at the level agreed, which, in an employment matter, shall include having regard to, where appropriate, whether the claim or proceedings is one of several similar claims or proceedings In employment matters, significant further information must be imparted to the client and contained in the DBA (see Regulations 5,6,7 and 8 of the DBA regulations). Failure to include the specified matters may result in the DBA being unenforceable. This would be likely to mean that the solicitor would be unable to recover any costs, rather than, as in some other jurisdictions (e.g. Ontario), that costs would be assessed on a quantum meruit basis. Regulation 4 provides as follows: 4(1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the client other than (a) the payment, net of (i) any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and (ii) where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel s fees, that have been paid or are payable by another party to the proceedings by agreement or order; and (b) any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order. Regulation 4(2) specifies the heads of damages from which the payment by the client under the DBA can be made in a claim for personal injuries as follows: (a) the only sums recovered by the client from which the payment shall be met are (i) general damages for pain, suffering and loss of amenity; and (ii) damages for pecuniary loss other than future pecuniary loss, net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions; and 2

3 (b) subject to paragraph (4), a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 25% of the combined sums in paragraph (2)(a)(i) and (ii) which are ultimately recovered by the client. Regulation 4(1) gives effect to the so-called Ontario model for DBAs, under which the representative s fees are limited to the percentage of the damages agreed with the client in the DBA. In other words, the client only pays the difference between the party and party costs recovered and the agreed percentage. Regulation 4(2) deals with Personal Injury cases only and limits the percentage of damages which can be specified in a DBA to 25% of the damages (generals plus specials excluding future loss, and net of CRU) By way of illustration of the Ontario model, consider the following scenario: - solicitor and client enter into a 25% contingency fee arrangement under a DBA - Client recovers 100,000 in damages from the Defendant - Client recovers 10,000 in costs from the Defendant Under the Ontario model, the solicitor can recover a maximum of 25,000 (i.e. 10,000 from the Defendant and the balance of the 25%, which is 15,000, from the client). The solicitor does not recover 25,000 (25%) plus 10,000 (costs recovered from the Defendant). To put it another way, the Indemnity Principle applies to DBAs by virtue of Regulations 4(1). The solicitor cannot recover more on an inter partes basis than the payment agreed under the DBA with the client. If the percentage agreed with the client is 25% and the solicitor recovers 25% from the Defendant, then the client pays nothing. If the solicitor recovers 10%, the client pays 15% (as in the scenario outlined above). Note that Regulation 4(1) refers to DBAs in any claim or proceedings, other than an employment matter, to which these Regulations apply, whilst Regulation 4(2) only deals with Personal Injury cases. Regulation 4(3) deals with any other claim or proceedings to which this regulation applies. As we have seen, the immediately preceding Regulation (4(2)) deals only with personal injury claims and it would appear, therefore, that Regulation 4(3) must deal with any claim other than a personal injury claim. Regulation 4(3) states: Subject to paragraph (4), in any other claim or proceedings to which this regulation applies, a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client. 3

4 This is interesting because there is no reference (as in Regulation 4(1)(a) and (b) to the payment being net of any costs and disbursements. This would suggest that a possible interpretation is that in cases other than personal injury cases, the solicitor may be entitled to recover not only the percentage agreed in the DBA but also may keep the party and party costs. By way of illustration: - solicitor and client enter into a 50% contingency fee arrangement under a DBA in a non-personal injury matter - Client recovers 100,000 in damages from the Defendant - Client recovers 10,000 in costs from the Defendant The solicitor would now recover 50,000 from the client and 10,000 from the Defendant, a total of 60,000. Regulation 4(4) (i.e. paragraph (4) referred to above states: The amounts prescribed in paragraphs (2)(b) and (3) shall only apply to claims or proceedings at first instance. In other words the caps of 25%(PI) and 50% (non-pi) only apply to cases at first instance. Regulations 5, 6, 7 and 8 deal exclusively with employment matters. Regulation 5 sets out the information required to be given before an agreement is made in an employment matter. Regulation 6 covers amendment of the DBA in employment matters to include additional causes of action. Regulation 7 specifies that, in an employment matter, the DBA must not provide for a payment above an amount which, including VAT, is equal to 35% of the sums ultimately recovered by the client in the claim or proceedings. Finally, Regulation 8 deals with termination of the DBA in an employment matter. The Conditional Fee Agreements Order 2013 (2013/689) A CFA provides for an uplift on costs which is a percentage of the costs recoverable, not of the damages. Confusingly, however, under the new regime, the CFA cannot exceed 25% of the damages at first instance, i.e. 25% of costs must not exceed 25% of damages. Regulation 1 deals with citation, commencement (1 April 2013), interpretation and application. It defines diffuse mesothelioma and publication and privacy proceedings which are excluded from the ambit of the regulations. CFAs are permissible in all civil litigation cases and the Success Fee cannot exceed 100%. (Regulations 2 & 3) 4

5 As already adverted to, in PI cases, the Success fee is limited to 25% at first instance, whilst in non-pi cases, it can be up to 100%. Damages are defined by Regulation 5(2) as: (a) general damages for pain, suffering, and loss of amenity; and (b) damages for pecuniary loss, other than future pecuniary loss, Regulation 6 deals with transitional and saving provisions. It excludes any CFA entered into before 1 April 2013 from the ambit of Regulations 4 & 5: 6.- Articles 4 and 5 do not apply to a conditional fee agreement which is entered into before the date upon which this Order comes into force if (a) the agreement was entered into specifically for the purposes of the provision to a person ( P ) of advocacy or litigation services in connection with the matter which is the subject of the proceedings; or (b) advocacy or litigation services were provided to P under the agreement in connection with those proceedings before that date. Regulations 6 also excludes CFAs in diffuse mesothelioma cases, publication and privacy proceedings and insolvency proceedings from the operation of Regulations 4 & 5. Finally, Regulation 7 revokes the Conditional Fee Agreements Order 2000 (8). DBA or CFA: how do you advise your client? The original proposal in the Jackson report was that clients should be advised to obtain independent legal advice before entering into a DBA. That requirement was subsequently dropped. Nevertheless, solicitors who do not offer DBAs should make the client aware of the availability of such funding and give an outline of it. If the solicitor offers both CFA and DBA, then a detailed explanation should be given of both with an account of the pros and cons so that the client can make an informed decision. DBAs will yield significantly higher profit costs but lower client retention in cases where the damages are high and the case concludes quickly. If the damages are high and the case goes to trial, then the solicitor will do better under a CFA and the client will do better under a DBA. If the damages are small and the case settles quickly, then the solicitor will do better under a CFA and the client will do better under a DBA If the damages are small and the case takes a long time to settle, then the solicitor will do better under a CFA and the client will do better under a DBA. 5