What are Damages Based Agreements?

Damages Based Agreements (DBAs) are also known as contingency fee agreements. They are a type of funding arrangement between a Solicitor and their Client and are used as a method of covering the legal costs for running a case. They are mainly used in Civil Litigation and as an alternative funding option to Conditional Fee Agreements.

Damages based agreements can be used in all types of legal matters, with the exception of criminal cases and family law cases.

The main factor of damages based agreements is that the representative’s fee will be based on the success of the case and will be a percentage of the damages recovered by the Client. If the case is lost, then the legal representative will not recover costs, and the Client will not be required to pay anything. The Client is therefore protected in that they will only be required to pay any legal costs based on the sum recovered and/or in respect of any adverse costs of their opponent (these could however, be offset by the obtaining of an After the Event Insurance policy to supplement the DBA).

The advantage to Damages Based Agreements is that the costs which are required to be paid by the Client will be set and proportionate to the financial outcome, as opposed to incurring costs on an hourly rate which are to be assessed in line with the indemnity principle, and could potentially spiral out of control. Furthermore, any additional fees incurred by the legal representatives for additional legal services such as Counsel’s fees or ATE insurance can be included in the percentage deduction, dependant upon the type of case and applicable cap, which also remains recoverable from the paying party.

The legal definition of a Damages Based Agreements is:

“(a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.”

The Differences Between a CFA and DBA

Both damages based agreements and conditional fee agreements can be used to fund a case on a no win, no fee basis, and they are both “risk-sharing” agreements.

For cases funded under a Conditional Fee Agreement, a client will be required to pay a fee if they win their case by reference to the costs incurred with the representing Solicitor. The success fee will be set without any reference to the total amount recovered. However, a Damages Based Agreement will focus on the degree of success when determining the amount owed by the Client. The more damages recovered by the Solicitor, the higher the fee.

It is important to note that a DBA does not increase a paying party’s liability for costs, in that when costs are to be assessed inter-partes, and is still subject to the same hourly rates assessment in line with the indemnity principle, save that there is a cap on recovery in line with the DBA percentage reduction.

Damages based agreements are simpler to understand than Conditional Fee Agreements, mainly because terminating a Conditional Fee Agreement can have numerous consequences, which are mainly consequences around costs. There was uncertainty surrounding termination of DBAs which has led to this type of funding having been unpopular since their introduction in 2013.  The Rules were not clear what consequences applied to the instructed Solicitor and if they were entitled to any payment, if the DBA was cancelled prior to a successful outcome being achieved.  This has however, been resolved in recent common law decisions.

Terminating a Damages Based Agreement: Zuberi v Lexlaw Limited

Zuberi v Lexlaw Limited [2021] EWCA Civ 16 provided clarification on the consequences of a client terminating a Damages Based Agreement.

The facts of this case were that Lexlaw Limited were acting for Miss Zuberi as their legal representatives in a financial mis-selling claim which was being pursued against Miss Zuberi’s bank. The matter was funded by way of a Damages Based Agreement, one which was entered into in 2014.

A settlement was reached whereby Miss Zuberi was awarded over £1 million. Miss Zuberi then argued that the Damages Based Agreement which was entered into between the parties was unenforceable and that it should be terminated, meaning no money was owed to Lexlaw Limited. The basis of this argument was that the Damages Based Agreement in question included a clause relating to a termination payment, and this type of clause was alleged to not be recoverable under the Damages Based Agreements Regulations 2013, Regulation 4, which states the following:

Regulation 4.—(1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the Client other than—

(a)the payment, net of—

(i)any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and

(ii)where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel’s fees,

Lexlaw Limited issued proceedings to recover their unpaid fees. In July 2020, HHJ Prafitt ruled that the termination clause did not mean that Damages Based Agreements were unenforceable. This ruling was also upheld by the Court of Appeal in January 2021, stating that a termination clause in Damages Based Agreements is permissible and does not mean that the agreement is unenforceable, ruling in favour of Lexlaw Limited.

Lord Justice Coulson held the following:

1. … “damages-based agreement” should be given a narrow meaning. It is the agreement between the parties relating to the payment as defined in the Regulations, namely that “part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative”. Other elements of the agreement between the Solicitor and the Client, such as at which of the solicitors’ offices the work will be done, or the level of expenses incurred (which is expressly excluded from the payment as defined) or, as in this case, the termination provisions, have nothing to do with the payment as defined in the Regulations, and are therefore not part of the DBA itself.

A decision such as this one may well encourage legal representatives to offer Damages Based Agreements more often, given the added protection should a client seek to not have the agreement enforced. While Damages Based Agreements were initially introduced to increase access to justice, they are not used as often as Conditional Fee Agreements due to the issues around termination.

In the aforementioned judgment, Lord Justice Lewison referred to Hybrid Damages Based Agreements whereby the legal representative is able to charge fees based on an hourly rate which is not dependant on the outcome of the case, and then a charge based on a percentage of the sum recovered if the case is successful.

However, Lord Justice Newey was not supportive of this idea, giving his reasons for this decision at paragraph 72 of the judgement and dismissing the appeal:

“While I respectfully part company from Lewison LJ on what a DBA is, I none the less agree that the appeal should be dismissed. In my view, regulation 4 of the 2013 Regulations does not bite on termination provisions and, accordingly, clause 6.2 of Lexlaw’s agreement with Mrs Zuberi does not fall foul of the 2013 Regulations.”

How Can ARC Costs Assist?

ARC Costs are a team of specialist Costs Draftsman and Costs Lawyers, trading in England and Wales. With extensive experience in Civil Litigation, we can assist you with advising on your funding agreements contents and their enforceability, and recovering costs on an inter-partes basis under any such agreement.

We can assist in your costs matters by preparing a detailed Bill of Costs to recover the costs you may be entitled to. We will also negotiate with the paying party on your behalf to ensure maximum recovery of your costs.

Should you be required to pay costs and have received a Bill of Costs which you deem to be unreasonable, we can assist in preparing legal Points of Dispute to the Bill.

Whatever your situation, we can assist with all costs matters and represent you at detailed assessment proceedings as your Costs Lawyer.

Should you wish to discuss your costs query with us, please call us on 01204 397302 or email us at info@arccosts.co.uk. Alternatively, you may complete our online enquiry form, and a costs expert will contact you to discuss your query further.