The introduction next month of damages-based agreements (DBAs) – where how much a lawyer is paid relates to the level of damages awarded, rather than the amount of work they put in – introduces a new dynamic to the world of litigation.But they also raise some difficult issues for lawyers and their clients.

How DBAs work

We have now seen exactly how DBAs will work as Parliament has approved the Damages-Based Agreement Regulations 2013. England and Wales has adopted the contingency fee model from Ontario, which means that base legal costs and disbursements will be recoverable from the losing party in the usual way.

The amount recovered from the losing party will then be set off against the amount due to the lawyer under the DBA, thus reducing the amount deducted from damages. Further, the indemnity principle will apply; so if the fee due under the DBA is less than the recoverable costs, then the defendant would only have to pay what would be payable under the DBA.

The amount of damages that can be taken as the lawyer’s fee under a DBA is capped at: 25% in personal injury matters (the calculation must exclude the damages for future care and loss); 35% in employment tribunal matters; and 50% in all other cases.

Concern over hybrid agreements

There is concern that the way the regulations have been drafted will exclude ‘hybrid’ agreements, where lawyers agree that they should receive some costs even if the case does not succeed. It has to be ‘no win, no fee’ – or nothing.

This goes against Lord Justice Jackson’s original recommendations, as well as those of last year’s Civil Justice Council working party on DBAs. It also puts DBAs at odds with conditional fee agreements (CFAs), where the concept of ‘no win, some fee’ is firmly established, as well as the kind of arrangements prevalent in America.

The upshot is that DBAs could be stunted at birth; efforts to persuade the government to change the regulations appear to have failed. The prospect of taking on a heavy piece of commercial litigation on a complete risk basis will obviously be deeply unattractive to litigators – that is more than having ‘skin in the game’; it is playing with their practice’s future.

Legal Services Board intervention

Another unexpected development has come from the Legal Services Board, the England and Wales (LSB) ‘super regulator’. It has written to all the regulators it oversees – such as the Solicitors Regulation Authority and Bar Standards Board – to tell them to consider whether action is needed to ensure that DBAs are not mis-sold to consumers.

The LSB said it had “some doubts about the ability of unsophisticated consumers to choose and use DBAs or compare different DBA agreements in all circumstances”, meaning “targeted and proportionate regulation may be needed to minimise any danger of either deliberate or inadvertent mis-selling”.

In particular, there needs to be transparency and consistency in the way the costs of DBAs are presented to allow consumers to choose between different providers, it said: “It is arguable that, at least for unsophisticated consumers, providers should have to offer DBAs on an ‘all in’ fee – ie, including disbursements and VAT alongside a clear and consistent presentation of their approach to recoupment.”

The letter continued: “Law firms are likely to be able to assume the risk on disbursements across volume and price risk into the success fee. The success fee cap in the regulations includes VAT and counsel’s fees, but this does not avoid the risk that advertised prices will exclude it, and nor does it include disbursements beyond counsel fees. The risk with such an approach is, of course, that disbursement-heavy cases are likely to be difficult to take on for smaller firms.”

The LSB argued that though such transparency may initially push DBA fee levels down, “in the longer term a more competitive market facilitated by this level of transparency may see the need for a statutory cap disappear.” It also acknowledged that such regulation is not needed for sophisticated consumers as they are able to compare providers, so long as there is transparent pricing in place.

Inauspicious beginnings

While nobody can argue with the need for transparent pricing, regulators need to be careful not to intrude too far into an area which, let us not forget, is ultimately controlled by the courts. Intrusive regulation will only make lawyers even more cautious about experimenting with DBAs, which are facing an inauspicious enough start as it is.

DBAs undoubtedly have their appeal in certain circumstances – such as the big case that settles quickly – but this also raises a potential conflict problem because in that situation the client would have been better off financially on a conditional fee agreement (CFA). Yet if the case instead runs to trial, the client would probably be better off with a DBA and the lawyer with a CFA.

It would depend, I suppose, on what the prospects were at the start of the case, but it is no wonder professional negligence lawyers see DBAs as potentially opening up a new source of work.

The only question then would be whether they take the case on under a DBA or CFA themselves.

Nick Rowles-Davies is consultant with Isle of Man-based litigation funder Vannin Capital.