Damages-based agreements – usable with care?

Conflict of interest

There is a considerable conflict of interest issue where a firm is prepared to offer both conditional fee agreements (CFA) and DBAs. The conflict arises because the financial advantage to the client of the choice between these two methods is an exact mirror image of the financial interest to the firm. Where costs match or exceed the claim value, the firm will gain from using a CFA. Conversely, where claim value significantly exceeds costs, the firm will benefit from a DBA. That basis of choice however is the most costly for the client. The least costly for the client is to reverse that choice but that is the least financially beneficial for the firm.

The risk of an impecunious opponent

One reading of Regulation 4 of the DBA Regulations 2013 leads to the conclusion that the client cannot be required to pay any part of the contingency fee that would be met by a costs order against the opponent, even though the opponent fails to pay those costs. Under Reg. 4, you can only require a client to make a payment net of any costs and disbursements that 'have been paid or are payable by another party'.

The words 'or are payable' appear to mean that where an opponent has agreed to pay or been ordered to pay costs but fails to do so, credit must still be given to the client for that payable sum and only the remainder of the contingency sum (if any) can be sought from the client.

That interpretation seems to convert a damages based fee into a recovered costs based fee.

A similar position is reached where there is an award of damages which is unmet. Section 58AA(2) Courts and Legal Services Act 1990 defines a DBA in terms of the client who 'obtains a specified financial benefit'. It is difficult to see how a client with an unenforced award has obtained a financial benefit. If that is correct then the lawyer is taking the risk that the opponent is impecunious, where that leads to a failure to recover either or both damages and costs.

Hybrid DBAs

The general view is that the DBA regulations prevent any form of hybrid agreement whereby only some of the client's liability is contingent. Regulation 4 limits the DBA to the 'payment' - a client under a DBA cannot be required to pay anything other than the 'payment' and 'payment' means the sum specified as a part of damages. This is in stark contrast to the flexibility of CFAs where it is permissible for some but not all of the costs to be subject to the CFA and some costs to be funded conventionally. So a DBA is only usable in a case where the solicitor and counsel are willing to take the risk of no fee at all in return for a damages based fee if damages are recovered.

David Chalk is a consultant for DAS LawAssist. He is a senior fellow in the Faculty of Business, Law and Sport at the University of Winchester. David was the University's founding Head of Law from 2006 to 2009 having joined from Anglia Ruskin University where he was Principal Lecturer in Law. He has taught law at undergraduate level for over 30 years and has also taught at Masters level and at the vocational stage for both barristers (BVC) and solicitors (LPC).