Damages-based agreements (“DBAs”) – a form of contingency fee arrangement, whereby the legal representative’s fee is dependent on the success/outcome of the case – were introduced in April 2013 by virtue of the DBA Regulations 2013 (the “2013 Regulations”). However, as a result of a lack of clarity and/or understanding as to how DBAs work in practice, uptake has been slow. This is especially so in relation to commercial litigation cases, and has been attributed – at least in part – to the inability of firms to offer hybrid DBAs (where additional forms of funding, such as an hourly rate, are coupled with a DBA).

The Government has therefore been looking at ways to clarify the regulations governing DBAs and commissioned the Civil Justice Council (“CJC”) to carry out a review. As part of that process, the Government provided the CJC with draft 2015 DBA Regulations (the “2015 Regulations”).

In September 2015, the CJC Working Group issued its report and recommendations. It makes 45 recommendations in total which relate to technical drafting and governmental policy issues, the purpose of which is to make the statutory regime relating to DBAs simpler and clearer, and to encourage a greater use of DBAs. Some of the key issues that have been considered by the CJC are as follows:

Use of hybrid DBAs: concurrent vs sequential Following some debate as to whether hybrid DBAs are permissible under the 2013 Regulations, it was announced in November 2014 that the Government had ruled out hybrid arrangements. At present, therefore, the only permissible form of DBA is a “no win, no fee” type arrangement, which appears to be of limited commercial interest to many firms.

However, the CJC review highlights a distinction between “concurrent” and “sequential” hybrid DBAs. A concurrent hybrid would involve two forms of retainer being in place at the same time (i.e. a DBA and some other form of retainer, such as a discounted hourly rate) so that, in the event the claim succeeds, the law firm would receive funding via the DBA and, in addition, its discounted hourly rate. If the claim fails, the firm would recoup only its discounted hourly rate. A sequential hybrid, on the other hand, would involve different types of retainer for different stages of a case.

The terms of reference for the CJC review clarify that the Government’s objection to hybrid DBAs was limited to concurrent hybrid arrangements. The Working Group was divided on the question of concurrent hybrid DBAs, but has recommended that the Government properly evaluates the arguments in their favour before the 2015 DBA Regulations enter into force.

By contrast, it is the CJC’s understanding that the Government does not object to sequential hybrids. However, the Working Group recommends that the 2015 Regulations ought to specify whether or not monies receivable by a legal representative pursuant to the non-DBA part of a sequential hybrid are to be offset against the DBA fee, once paid.

Defendant’s use of DBAs Under the 2013 Regulations, it was contemplated that only Claimants (or perhaps Defendants with a sizeable counterclaim) would enter into DBAs, given the repeated reference to the contingency fee payment being a part of the sum recovered by the client. However, the draft 2015 Regulations expressly permit defendant-DBAs, with the contingency fee being payable by reference to the ‘financial benefit’ to the Defendant – i.e. by reference to the damages that the Defendant would have had to pay to the Claimant, had the Claimant been successful in its claim. The Working Group has noted that it may be difficult to assess the level of the financial benefit, as this will probably vary significantly over the course of the litigation (for example, there could be differences between the amount claimed at the outset of a case and the amounts sought during settlement discussions). The Working Group therefore suggests that the 2015 Regulations provide for a methodology by which the Defendant’s ‘financial benefit’ is to be calculated.

Counsel’s fees – inside or outside of the DBA cap? The 2013 Regulations state that a DBA must not require a client to pay anything other than the contingency fee and any expenses (such as expert and court fees, but not – apparently – Counsel’s fees) incurred by the representative (net of any amount that has been paid or is payable by another party.) The Working Group has recommended that Counsel’s fees should always be treated as an ‘expense’ – i.e. payable outside of the DBA fee (subject to solicitor and Counsel’s DBAs not exceeding the statutorily-set DBA cap).

The Master of the Rolls has welcomed the CJC report and urges the Government to consider further modifications to the DBA Regulations to promote confidence in, and increased use of, these types of funding arrangements.

We await the Government’s response to the recommendations of the CJC.