Damages-based agreements – usable with care? Part II

DBAs and recovery of costs

The main point here is that the Regulations mean that the contingency fee is a cap on the costs that can be recovered. Where the costs based on conventional charging (and potentially recoverable from the opponent) exceed the contingency fee the recovered costs will be capped, producing a windfall for the opponent. Only where the contingency fee exceeds the costs that would have been payable on a conventional basis does the contingency fee provide any potential for a success fee element. So for example if in a claim valued at £1m the conventional costs would have been £600,000 the maximum contingency fee would be £500,000 and recoverable costs would be capped at that. The shortfall is carried by the lawyers.

DBAs and counterclaims

DBAs are defined in terms of fees based on financial benefits obtained and hence in most circumstances would not be open to a defendant. Where there is a counterclaim the question arises as to whether a DBA is available. That would seem to require some form of hybrid agreement to cover the costs of the counterclaim separately from the defendant costs of the claim. If that is the case it is doubtful under the current Regulations that this is permitted.

Deductions from damages

Clients can only be charged a sum that comes from damages (in personal injury) or 'the sums ultimately recovered' in other cases. A successful counter-claim or deduction for contributory negligence will therefore have a dramatic effect ton the contingency fee ultimately due and in the same way will affect the cap on recoverable costs.

DBAs and Counsel's fees

Other than in employment tribunal cases the combined effect of the definitions of 'expenses' and 'payment' contained in Reg 1(2) is that counsel's fee is included in the DBA itself - i.e. it forms part of the contingency fee: "expenses" means disbursements incurred by the representative, including the expense of obtaining an expert's report and, in an employment matter only, counsel's fees; "payment" means that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative, and excludes expenses but includes, in respect of any claim or proceedings to which these regulations apply other than an employment matter, any disbursements incurred by the representative in respect of counsel's fees.

At the time a DBA is entered into it may well not be known if counsel will be instructed still less at what point and whether counsel will at that point be willing to be included in the DBA. There is however not alternative - counsel cannot be retained on any other basis if the solicitor has a DBA. Suitability here is based on the combination of good prospects of success being maintained and a high damages to cost ratio.

Costs budgets, Precedent H and DBAs

An opponent's liability in costs is not based on the contingency fee but on costs charged on the basis of time. It is necessary therefore that any budget reflects that basis of charging. Precedent H requires a statement of truth which appears to present a problem where the client is not going to be liable on an hourly charging basis but on a contingency fee basis. It may be acceptable that the statement of truth is worded to reflect that the budget is based on an hourly rate but that the client has a DBA. Issues then arise as to disclosure of the fact of the DBA.

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).