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Damages-based agreements - Are you at risk of being sued?

Damages-Based Agreements (“DBAs”) became lawful on 1 April 2013 thanks to the Jackson reforms and more particularly the Damages-Based Agreements Regulations 2013. A DBA is a contingency fee arrangement whereby the lawyers can take a percentage of the damages (up to a maximum of 25% in personal injury cases, 35% in employment cases and 50% in most other cases).

Dead on arrival or alive and kicking?

Whilst leading Jackson reforms commentator, Kerry Underwood, has described DBAs as being “dead on arrival”, but illustrated the same by reference to injury cases, it would appear that in commercial litigation some major city firms are gearing up for the use of DBAs with Lewis Silkin announcing the launch of a new DBA product combined with ATE insurance through The Judge. Others however draw attention to the apparent inability to have a DBA combined with a CFA or an ordinary retainer as limiting the attractiveness of DBAs in substantial commercial litigation.

Professional duties

Under the mandatory principles found in the Solicitors Regulation Authority handbook a solicitor must act in the best interests of each client. When it comes to fee arrangements the solicitor must only enter into fee agreements with his clients that are legal and which he considers suitable for the client’s needs and take account of the client’s best interests. It is therefore not open to a solicitor to recommend a funding arrangement that is likely to be the most profitable to the firm unless it is also suitable for the client’s needs and is in accordance with the client’s best interests. The solicitor cannot just recommend the funding arrangement likely to be the most profitable for his firm.

Quick big wins

Commercial lawyers with a commercial outlook will be looking for the quick big win cases. The quick big win under a DBA will nearly always provide greater rewards for the solicitor than any other form of retainer.  Criticism of commercial solicitors cherry picking cases is a little misplaced (as indeed it was in relation to CFAs) – why would a solicitor choose a losing case?  The real issue is not whether the cases have been cherry picked but whether the client has made a properly informed decision about the funding of its case and whether the method of funding recommended to the client was in the client’s best interests. The fact that the DBA turns out to be profitable or indeed unprofitable for the solicitor is not the test as to whether the same was in the client’s best interests at the time that it was entered into. It would only ever be the gift of hindsight that would enable the solicitor or client to know which fee arrangement in fact would end up being the best one (and it is most unlikely with the benefit of hindsight that the fee arrangement that turns out to be the best for the solicitor will have also been the best arrangement for the client).

The cases that settle for substantial sums early will provide generous reward for the solicitor who is taking up to 50% of the settlement sum. The early settlement means that only relatively small sums will have been incurred by way of costs. The solicitor is the winner but the client may query whether he has done quite so well out of it. Some clients will of course be perfectly happy with a big quick win but others may query the sums received by the lawyers. To take an extreme example what will the client who has recovered £4m through his lawyers in less than a month feel about paying them £2m (including VAT of course)?

Independent legal advice?

Lord Justice Jackson recommended that clients should receive independent legal advice before entering into DBAs but following the consultation period this requirement did not become part of the Regulations. The Legal Services Board somewhat belatedly wrote to the Solicitors Regulation Authority and other regulators on 7 February 2013 expressing concern that “consumers are protected and understand the products that they are sold to finance their litigation” and querying whether “targeted and proportionate regulation may be needed to minimise any danger of either deliberate or inadvertent miss-selling”.

Solicitors may be very reluctant to put in place measures that ensure that their clients take independent legal advice about the proposed DBA as that advice is likely to be from another solicitor who may see an opportunity to offer the client a 30% DBA rather than the 50% DBA proposed by the existing solicitor. There have been some suggestions that the Bar could have a role to play in the provision of advice about proposed DBAs.

The risk of under-settlement

It is this risk of miss-selling and the real likelihood of conflicts of interest that are of concern to professional indemnity lawyers. The clients who are most likely to be aggrieved are those who feel that their claims were settled for less than their true worth on the one hand and on the other those clients who consider that the lawyers have received a disproportionate amount of the sum recovered bearing in mind the amount of work actually done by the lawyers.

There is concern that solicitors may be inclined to advise that claims be settled for less than their true or at least their potential worth in order to ensure that they exclude the risk of loss and no payment, and get paid whilst incurring the minimum level of costs necessary. Whilst under CFAs there could also have been the temptation to settle for less than the true worth of the claim in order to avoid the possibility of a loss and no payment at least with a CFA the more work that was done the more the solicitors would be paid and the greater the amount recovered by way of uplift. Furthermore so long as the uplift was recoverable from the other party the client had no real interest in questioning the amount of the uplift. Under a DBA the longer the case goes on the lower the reward for work or effort ratio becomes. Indeed under many DBAs the prospect of the matter going to trial will be of real concern to solicitors who may see any possible recovery under the DBA as being less than the costs incurred on a traditional time-cost basis and much less than the amount due to the solicitor under a CFA with an uplift, yet continuing with the case to trial may be in the client’s best interests. The possibility of under-settlement is likely therefore to be a source of professional negligence claims in the new DBA world.

What to do

In order to avoid possible claims from clients in relation to DBAs solicitors will need to put in procedures that ensure that a full explanation (both oral and written) is given as to the various funding arrangements discussed and why the DBAs was considered suitable. If a solicitor is not, either generally or in relation to a specific case, willing to undertake a case under a particular type of funding arrangement then that should be explained and the reasons recorded. Defence of the claims referred to above will, as is so often the case, be dependent on the adequacy of the records kept by the solicitor of the advice given and the reasons for the same.