The impossible rise of damages-based agreements

District Judge Monty Trent, ?speaking at last month's SJ Live conference, asked the question: ?"Is it time to suggest the unthinkable and move away from hourly billing to ?fixed-cost pricing?"

Yes, is the short answer and lawyers ?have already done that in virtually all ?non-contentious areas, such as conveyancing, wills, powers of attorney, contract-drafting etc.

DJ Trent also said: "New retainer ?models such as DBAs should also work more efficiently now that we have ?costs budgeting."

The problem in litigation is not with the lawyers but with the Civil Procedure Rules and the judges who always, but always, assess recoverable costs on the basis of the amount of work done and the level of fee-earner, something which many of us hate.

I would love to be confident of submitting a bill to the court consisting of just the following: "My firm and my client agreed a fee of £10,000 for this case and seek recovery from the defendant of that sum".

As long as courts assess recoverable costs by reference to time spent, then we have no choice but to charge by the hour. This leads to the absurd artificiality of a conditional fee agreement with a substantial hourly rate, and a success fee, but where all of the charges to the client are capped at 25 per cent of damages over and above the sum recovered from the other side. That is why it has been necessary to introduce Fixed Recoverable Costs.

Contingency fees are the purest form of fixed costs and, being a percentage of damages, are proportionate too, but contingency fees put power in the hands of individuals and their lawyers and so are distrusted by most of the old guard.

Ludicrous rule

Hence the ludicrous damages-based agreements rules. Applying the indemnity principle to DBAs was wholly unnecessary and destructive, giving a windfall to the tortfeasor and acting as a massive disincentive for solicitors to act under such arrangements. There comes a point in a case, often very early on, when a solicitor is working for nothing as the indemnity total has been hit.

It gives the client no protection at all over and above that given by the Ontario model whereby the claimant's solicitor must give credit pound for pound to the client in relation to costs received from the other side, something which does not apply to a non-recoverable conditional fee agreement success fee.

DBAs are a lawbreaker's charter and encourage defendants to starve out claimants' solicitors by forcing them to do work for which they will not get paid. It also renders a claimant beating its own Part 36 offer meaningless as far as costs are concerned as everything is capped at the DBA limit.

In a personal injury case the DBA is capped at 25 per cent of damages, that sum includes VAT and counsel's fees. Maximum recovery, after a trial, is limited to that sum, which net of VAT is 20.83 per cent profit costs, less counsel's fees.

Winning is losing

Take an employer's liability (EL) case where £15,005 is awarded at court.

Act on an hourly rate basis, getting paid win or lose, and the fixed recoverable costs (FRC) are £12,517.80 including advocacy fees and VAT.

In addition you are free to charge the client extra non-recoverable solicitor and own client costs and you are free to charge the client full solicitor and own client costs in the event of defeat, although I accept that the market will not bear that.

Have a conditional fee agreement with the client and in the event of a win you can have all of the above and a success fee.

Here is how it works on a DBA:

Maximum fee (25% of £15,005)	£3,751.25
Less: Counsel fixed advocacy fee including VAT	£1,980.00
=	£1,771.25
Less: Counsel’s fee for conference, advice, etc. £1,500.00 + VAT	£1,800.00
Fee to solicitor for taking risk and winning =	- £28.75

 

So you take all of the risk - and win.

Recovery is limited to £3,751.80, all of which - and more - is spent on counsel's fees. The defendant gets a windfall of £8,766.55 (FRC of £12,517.80 minus maximum DBA of £3,751.80). You lose £12,546.55 (FRC of £12,517.80 plus -£28.75).

Actually it is likely to be worse than that as the pool of damages on which the notional 25 per cent can be levied excludes future loss and any Compensation Recovery Unit deductions, meaning that the gap between FRC and the DBA contingency fee will usually be greater.

Alternatively act by the hour and charge what you want.

I am a big fan of contingency fees. The Ontario train crash is bad enough, that is having to give credit for costs recovered when you have to do no such thing with a CFA success fee.

Adding the indemnity principle ?wrecks DBAs for all but small claims ?track cases.

I should add that I agree with ?virtually everything else District Judge Monty Trent said.