Litigation Funding: A Possible Return of the Damages-Based Agreement

In July 2018, the U.K. Ministry of Justice (MoJ) published its initial assessment of the post-implementation review (PIR) of Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which is currently being undertaken. The PIR aims to examine whether the legislation has met its objectives. Specifically, the initial assessment considers the introduction of Damages-Based Agreements (DBAs). DBAs are seemingly gaining some traction again in the world of commercial litigation. But, given the hiatus since 2013 and the contemporaneous growth and development of the third-party funding market, it remains to be seen whether DBAs will ever be a viable tool for litigation funding.

Damages-Based Agreements

DBAs are a form of ‘no win, no fee’ arrangement between a representative and a client, which provide that the client will make a payment to the representative if the client obtains ‘a specified financial benefit’ (usually damages paid by the losing side). The amount of the payment is determined as a percentage of the compensation received by the client. If the client is unsuccessful, the representative is not paid for work done under the DBA. The client will still be potentially liable for adverse costs, which may be covered by After The Event insurance.

DBAs were proposed as an additional form of funding to increase options available to litigants without driving up costs. They were introduced by section 45 of LASPO with effect from 1 April 2013. The DBA Regulations 2013 provided a framework for the requirements for DBAs. However, there was a low take-up of DBAs in the industry because of uncertainty surrounding practice and procedure.

In light of that, the Government commissioned the Civil Justice Council (CJC) to assess whether the DBA Regulations could be improved within the existing policy framework. The CJC published a report in September 2015, and the Government plans to consider the next steps on that report in the context of the findings of the PIR.

Initial Assessment

The overall aims of the costs and litigation funding reforms in Part 2 of LASPO were to reduce the costs of civil litigation and rebalance the costs liabilities between claimants and defendants, whilst ensuring that parties with a valid case can still bring or defend a claim. The initial assessment of the PIR specifically emphasises the need for caution in introducing a new form of DBA funding because of the potential for substantial and costly unintended consequences.

DBAs were originally intended as an additional form of funding in appropriate cases, rather than an alternative form of funding in every case. They are therefore more suited to niche areas, where damages are high relative to the costs, or where costs are not recoverable. One of the risks associated with DBAs as an alternative to conditional fee arrangements (CFAs) is highlighted by the difficulty in considering which arrangement is better financially for the lawyer or the client until the end of the case; what seemed preferable for the client at the start of a case with uncertain prospects, may result in a substantial early windfall for the lawyer, at the client’s expense.

A further risk with hybrid DBAs (i.e. where a law firm charges a discounted hourly rate which is payable win or lose, as well as a contingency fee in the event of success) is that they may be particularly attractive for lawyers in very high value, speculative litigation. It is not yet certain what the potential consequences of allowing hybrid DBAs for these cases would be, particularly when CFAs can be arranged in the alternative.

Request for responses

In relation to DBAs specifically, the MoJ asks the following:

• Should the DBA Regulations be revised in line with Part 1 of the CJC Report
• What are the advantages, disadvantages and risks in changing the policy (e.g. allowing hybrid DBAs)
• What could be done to mitigate any risks
• Does the guidance to lawyers on funding arrangements need amendment

Stakeholders are encouraged to complete an online survey by 24 August 2018 to provide evidence and substantiated views.