Journal

Virtual Roundtable with Benjamin Williams QC - Damages Based Agreements


Damages Based Agreements

[Begins at 18:30]

Ben provides his views on the reform of Damages Based Agreements (DBAs) and considers why the position is different for defendants and whether that will ever change.

The current Damages-Based Agreement Regulations 2013 (the Regulations) are not working as well as they could. That much was acknowledged by the government in the 2019 Review of the Jackson reforms – “DBAs are rarely used and […] the current DBA regulations are not effective”.

An independent review of the Regulations was undertaken by Nick Bacon QC of 4 New Square and Professor Rachael Mulheron of Queen Mary University. The result of their hard work was a set of draft regulations produced in 2019, which addresses the main issues identified in relation to the Regulations – providing for ‘hybrid’ DBAs, moving to a success fee model, providing clarity when a DBA is terminated and making DBAs available in a broader range of claims as well as permitting them to be used by defendants.

So far, so good. Feedback on the draft regulations was sought by mid November 2019 and it was reported in the legal press at the time that the Ministry of Justice would consider the proposals for reform carefully.

And then … nothing.

Why has progress stalled?

Ben emphasises that it is unclear whether there was ever any indication, formal or informal, that the MOJ was committed to progressing the new draft regulations. Was it an MOJ formally sponsored project at all – or was it born out of the difficulties which practitioners identified with the Regulations?

Ben’s view is that there has been no official encouragement for DBAs to be made more user-friendly and that there is no real appetite in the MOJ for DBA reform. He suspects that a discussion is taking place in Whitehall between two separate factions. Some stakeholders in Whitehall have an ‘access to justice’ focus. They encourage innovation in the way that litigation is funded, with a view to broadening the litigation base. Others, and they are a powerful faction, do not want to encourage anything which makes it easier for claimants to sue businesses or for lawyers to speculate on the outcome of litigation and potentially receive very large returns.

This probably explains why we are beginning to see judicial intervention like last year’s Court of Appeal decision in Zuberi v Lexlaw, which clarified that DBAs can provide for payment of costs in the event of early termination.

The courts are beginning to clear away some of the issues which have been preventing the wider adoption of DBAs under the Regulations.

Another example is a case that Ben has been involved in. In Tonstate Group Ltd & Ors v Candey Limited, Mr Justice Zacaroli ruled against recovery under a DBA where payment to the solicitors was linked to the preservation of an asset by a defendant. We know that the Court of Appeal has upheld the first instance decision, but we do not yet know the details of the judgment – click here. At first instance it was conceded that the primary legislation permitted defendant DBAs, but the Regulations themselves did not deal with them.

In the Court of Appeal that concession was withdrawn, and Ben’s view is that the Court of Appeal may well say that the primary legislation does not permit defendant DBAs. It is certainly right to say that the primary legislation stresses recovery rather than preservation.

The situation is straightforward for a claimant. A pot of money moves from defendant to claimant and the claimant solicitor can intercept a portion of that money which has come into the claimant’s hands as payment for legal fees pursuant to a DBA.

It is not as straightforward for a defendant. To take an extreme example, a client is sued for £10M, but the claim against the client was never realistic and the case was dismissed completely. Does the solicitor ask for 30% (or whatever percentage has been agreed) of £10M from the successful defendant under the DBA?

What about when a client is pursued for a sum of money which may or may not have a real-world risk? Or a client who is sued for £10M and there is a real-world risk as to £500,000, but not as to the remaining £9.5 million? Or a client receives a tangible benefit because a potential loss is mitigated to the level where it feels like a ‘win’?

These types of situations can be provided for perfectly adequately when the defendant and the solicitor enter into a conditional fee agreement with a definition of a ‘success’ which is a tailored to some form of preservation or mitigation. A DBA could also work perfectly well when the trigger for payment is the preservation of an asset, but a mindset shift would be needed to reflect that in redrafted regulations.

When the Regulations were introduced, there was plenty of pressure in the market to allow solicitors to have skin in the game through a DBA for claims which are being brought. DBAs are popular with clients and solicitors. For solicitors, the potential appeal is obvious. In big money cases there may be very large returns.

Clients like the fact that DBAs are simple to understand. The client is entering into a joint venture with their solicitor who is sharing risk, and, in the commercial world, this leads to cases being pursued which probably would not have been pursued if DBAs didn't exist.

There are significant numbers of DBAs coming on-stream around alleged false prospectuses in share dealings. Investors might not bother if they had to pay their solicitors in the conventional way, but if solicitors are taking risk, financing the disbursements, and deducting 40%, say, if the client wins, that is quite appealing to clients who are able to litigate effectively risk-free.

When the current Regulations came into force there was no equivalent pressure from the defendant side. No one applied their minds to the concept of DBAs and asset preservation.

It is also telling that when the regulations for collective actions were amended to enable opt-out claims to be brought in the Competition Appeal Tribunal, at a relatively late stage an amendment was slipped in to say that DBAs are unlawful in such proceedings. An opt-out collective action is a classic big money claim which would be perfect for a DBA, yet the government ignored this opportunity. The government’s actions are even more bizarre given that DBAs are allowed for every other kind of civil litigation apart from family cases [for obvious policy reasons].

Perhaps this shows us who the winner in the stakeholder battle at Whitehall is likely to be. If that is the case, the hard work which went into preparing draft amended regulations may well be wasted.

[Ends 28: 55]