It was reported yesterday that the Ministry of Justice has asked the Civil Justice Council to set up a working party to propose long overdue “technical revisions” to the much-maligned Damages Based Agreements Regulations. However, in so doing, the MOJ has “ruled out” the possibility of allowing partial or ‘hybrid’ DBAs.
A hybrid DBA would enable lawyers to charge a reduced proportion of their normal hourly rate as the case progresses, together with a success fee based upon a percentage of damages if the case succeeds. This type of hybrid or “no win, low fee” arrangement is commonly used in Conditional Fee Agreements (especially in commercial disputes) and it was the lack of clarity over the permissibility of hybrid DBAs that is most often cited as the primary barrier to law firms offering DBAs to their clients, accounting for their woefully poor availability and uptake since April 2013.
Lord Dyson, the Master of the Rolls, has soberly expressed his “disappointment” at the news, whilst Lord Justice Jackson, has spoken darkly of “powerful vested interests” opposing the introduction of hybrid DBAs. (Presumably he refers to different “powerful vested interests” to those that lobbied so successfully for the end of recoverable CFA success fees and ATE premiums.)
Rather surprisingly, the MOJ’s recent announcement implies that it had always intended not to allow hybrid DBAs, whereas at the time, the restriction seemed to be rather more accidental in nature. When the Regulations were first published, it was left to the likes of Herbert Smith Freehills and the Bar Council to spot in the explanatory notes, the words “no win, no fee” and “nothing if the case is lost”, teasing out the tentative conclusion that this might prohibit partial DBAs. At the same time others argued that the Regulations did allow room for hybrid DBAs, rightly pointing out that the CFA Regulations contained similar language and yet partial CFAs had been universally accepted. The assumption was therefore that it would be for brave pioneering law firms and the courts to establish and determine the scope of the Regulations.
The last 18 months have been filled with whispered and conflicting rumours about whether or not the DBA Regulations would be clarified, with many firms (especially the larger City practices) opting to wait and see what would happen before dipping their toes in the water.
The MOJ’s rather vague and whimsical justification for today’s announcement is that hybrid DBAs might “encourage litigation behaviour based upon a low risk/high returns approach”, which seems rather counter intuitive. A hybrid DBA doesn’t magically remove risk – it simply shares the risk more evenly. If the law firm is being paid something as they go along, then presumably that must mean that either the client is funding the balance and/or there is a third party funder involved. If the concern is that a hybrid DBA allows a law firm to collect an unreasonably high return for the risk taken, then the same concern must surely apply to an early settlement on a full DBA and indeed to full DBA on an unusually high value case.
As a litigation funding and insurance broker involved in some of the largest and most complex funded cases in recent years, we have found that in many cases, the law firm, client, funder and insurer all have radically different commercial interests, driven by the rules and markets that each operates within.
A well-worn structure in a typical high value funded case might involve a client with little or no risk, a law firm on a private fee paying retainer (or lightly discounted CFA), adverse costs insurers (either on an upfront premium and/or a deferred, contingent premium basis) and a third party funder carrying the lion’s share of the risk but taking the largest return. In this scenario, the law firm may be unwilling to increase its risk share, because all it can hope to achieve is a maximum of 1x its fees at risk (i.e. a 100% uplift under a discounted CFA), whereas the funder can happily charge 3x or more the amount of their investment or a percentage of the total recovery, whichever is the greater.
In banning hybrid DBAs, the MOJ has ensured that law firms cannot compete for business with funders, as they are not sufficiently incentivised to take more risk. However, the vast majority will also simply not be able to take all of the risk, especially in a large case where the total fees could run into the millions and take several years to be recovered. After all, they are primarily providers of legal services and have significant internal partnership pressures to collect fees.
It seems therefore that we are destined, at least in the short term, to continue largely ignoring DBAs as a realistic possibility for funding high value cases.
Should we be grateful, at least, that the MOJ has finally injected some clarity into the long-running debate about hybrid DBAs? As the answer is so disappointing and regressive in equal measure, I think not.
James Blick, Director, TheJudge Ltd