Damages Based Agreements
A Damages Based Agreement is also often referred to as a Contingency Agreement and, as with Conditional Fee Agreements, it is an arrangement between a client and their solicitor wherein the solicitor’s legal fees are only payable in the event the instruction is successful (as defined within the Damages Based Agreement). This can apply to both contentious litigated legal proceedings and non-contentious instructions to recover assets or realise interests existing in corporate disputes, property interests or any other commercial arrangement or dispute.
A Damages based Agreement has been a very popular legal funding model in the US for a number of years but was only recently introduced as a concept in the UK’s legal system.
In 2013, following a government review of legal funding arrangements, the government decided that the Conditional Fee Agreement was not fit for purpose and imposed too great a burden on losing parties, who my become liable to the Claimant for a judgment debt which will include, as a majority of such a debt, huge legal fees.
Accordingly, the Conditional Fee Agreement was replaced with the Damages Based Agreement. From 6 April 2013, a solicitor was entitled to enter into an agreement with his/her client that did not impose any greater costs burden on the Defendant other than the traditional order for standard rate legal costs, in compliance with the indemnity principle.
When is a DBA appropriate?
A Damages Based Agreement is an arrangement whereby the solicitor will share in the proceeds of a claim. Accordingly, a Damages Based Agreement is only appropriate for:
- (i) Money claims – it is not appropriate for any claims when an alternate remedy to damages is sought; and
- (ii) Claimant’s legal costs – it is not appropriate for the legal costs incurred by a Defendant in proceedings, as there is nothing recoverable that can be shared with the solicitor (other than, as conventionally occurs, an award for the solicitor’s standard legal costs).
- (iii) Legal costs incurred in non-contentious proceedings – for example negotiations to exit a company or any other circumstance where the client has a position which the solicitor can assist in resolving to the client’s financial benefit.
- (iv) Third Party Funding Arrangements – where financiers/funders agree to fund a client’s legal costs in exchange for an agreed share or the sums recovered.
A Damages Based Agreement is incredibly useful where an individual or company has a strong legal claim or an interest (such as shares in a company) that they cannot otherwise pursue or extract by reason of the cost of obtaining legal advice on such matters. A law firm, even a small one, is expensive to employ and conventionally a Claimant would need to fund these substantial costs before a return is made (which is not guaranteed).
With a Damages Based Agreement these legal costs are eliminated and as a result they seek to bring natural justice such that a client can use his/her legal claim or non-cash interests to finance their legal costs of realising this interest or claim.
Third Party Funding of a Claim
Damages Based Agreements do not necessarily have to be entered into directly with your solicitor. Instead, they can be used as a vehicle to obtain the necessary finance to pay for your legal costs via third party funding.
Whilst this may limit the likely higher costs of a solicitor under a Damages Based Agreement, this will add a further layer of costs. However, where (for example) the risk is too high for a solicitor to consider entering into a Damages Based Agreement or the possibly reward is sufficient to incentivise a funder, this may be a very useful solution for clients seeking recourse to solicitors without any ability to do so.
This is a particularly attractive option for Insolvency Practitioners, acting either as Liquidators or Administrators, who may otherwise not be able to issue any proceedings or obtain legal advice on asset recovery matters. More information about funding options for Insolvency Practitioners can be found here.
How does a Damages Based Agreement work?
A Damages Based Agreement, once entered into, will mean that the solicitor’s legal costs will only be payable upon the outcome of the matter s/he is instructed on (as defined within the Damages Based Agreement). The legal costs will then become due as a percentage of the sums sought.
The percentage agreed will usually reflect the risk taken by the solicitor, both in terms of the lack of cash flow (for what may be a substantial period of time) and the prospect of success, i.e. the risk of no recovery being made by the client (and therefore the solicitor).
The percentage charge will usually reflect legal fees that are higher than would otherwise be incurred on a standard basis, to allow for the risks including the lack of cash flow funding for this instruction, the risk of client disputes at the end of the instruction, the risk of failure and to provide for the general risk of the solicitor’s portfolio of similarly funded cases.
Upon the outcome as defined within the Damages Based Agreement, the solicitors’ fees will become payable as the percentage of the sums recovered or paid over. For example, in the event of a judgment being handed down, and upon the judgment debt being consequentially recovered, the solicitor will charge to the client the percentage as defined in the Damages Based Agreement.
The additional benefit for the client, where s/he is a Claimant in litigation proceedings, is that they remain entitled to claim their solicitors’ standard time costs recorded (in addition to the sums claimed) and the recovery of such costs from the Defendant may serve to partially underwrite the percentage payable their solicitor under the DBA.
What Risks exist within a Damages Based Agreement?
The risks of a Damages Based Agreement, once entered into, mostly lie with the solicitor. The firm of solicitors does not receive any payment for its fees until the outcome of the claim or settlement of any negotiations, both of which can take months or even years to conclude.
The main immediate risk to the client with a Damages Based Agreement is that the dispute/negotiations may be quickly resolved and, theoretically, this could lead to a position where a large fee becomes due to the solicitor for very little work.
In our experience this rarely occurs, but is nevertheless a risk that the client needs to be fully aware of at the outset.
The solicitor does have professional obligations to independently advise on whether a Damages Based Agreement is appropriate in such circumstances and equally the solicitor cannot allow his/her personal interests in the outcome to influence his advice to the client at any stage, including where a settlement of a claim or a valuation of an interest is being negotiated.
A Damages Based Agreement will usually be a more expensive way of obtaining legal services. However, conversely, it offers the opportunity to access legal services which may not otherwise be available and is a good way of obtaining a positive outcome where the alternative may be a nil return.
Damages-Based Agreement Insurance
It has been recognised that Damages Based Agreements are not attractive to solicitors because of the risk they face. This has led to a lower amount of agreements being entered into (with the resulting restriction on access to legal advice by individuals in business).
However, from May 2017, an insurance product has appeared (with no doubt many more to come) whereby solicitors who entered into a Damages Based Agreement would be reimbursed a substantial portion of their fees if the case was unsuccessful.
This has been announced as a “game changer” providing more solicitors with sufficient comfort to take on contingent arrangements on the basis that, as a minimum, a substantial proportion of their associated costs would be repaid.
To read more about Damages Based insurance please click here.
At Francis Wilks & Jones we often work on projects under the terms of a Damages Based Agreement and will always consider this option if it is appropriate to your circumstances.
Please call any member of our commercial litigation team for your consultation now on 020 7841 0390. Alternatively e mail us with your enquiry and we will call you back at a time convenient to you.