Litigation focus | Broader funding opportunities: introducing damages-based agreements

Dramatic shifts in the funding of litigation are due when the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) comes into force in April next year.

Damages-based agreements (DBAs) are the Jackson equivalent of contingency fees and to date they are only permitted in employment matters. In April they become available in all types of civil litigation. It is open to question whether the latest recommendations of the Civil Justice Council (CJC) address the right issues with regards to DBAs.

The main policy consideration behind the extension was to compensate personal injury claimant lawyers for the loss of the recovery of CFA additional liabilities. A broader aim was to offer a wider choice of funding options to claimants.

The DBA regulations 2010 firmly established the principle of a maximum percentage of recovered damages that would be paid to a lawyer. The mandatory requirement in employment tribunal cases, that no more than 35 per cent may be recovered (non-compliance with which would render the DBA unenforceable) seems not to have troubled anyone in theory. The CJC working party therefore recommends that this concept should be continued in employment cases.

In personal injury cases the recommendation is that the maximum deduction for the lawyers should not exceed 25 per cent of the damages. The working party even accepted that there were strong arguments in favour of a cap of 50 per cent for consumer and small business claims. However, one has to search for the reasoning as to why on balance the recommendation is that there should be no cap at all in relation to the largest cases ?that exist.

Conflicts of interest

The issue is not the position of the paying party, because the recovery from that party will be subject to the usual existing principles of assessment. Rather, one key issue is the impact on the conduct of litigation and the professional independence of solicitors (on which of course the civil justice system is based) when even small percentage payments can, in the largest cases, produce astronomical payments to lawyers.

There is no shortage of cases where the damages claimed exceed £250m, £500m or £1bn. A 35 per cent recovery in those cases may seem modest in percentage terms but the payments would utterly fail to reflect any fair compensation to a lawyer for the work involved. Leaving the door wide open to recoveries of 50 per cent, or more, just brings the issue into even sharper focus. Even if the lawyer were to conduct the case entirely on a ‘no win, no fee’ basis, very serious financial and reputational burdens are placed on a lawyer, and law firm, ?acting on such terms in the modern professional environment.

Nowhere in the working party report do these considerations appear to have been addressed. Rather, the principle of a maximum appears to have been put to one side on the basis that, on balance, it is better to leave the negotiation in large commercial cases to the typically sophisticated clients involved in them. The logic appears to be that the parties should be free to reach any agreement they wished.

In my view, the starting point is that DBAs will be rewarding lawyers in large commercial cases by reference to principles which depart from anything known to date in that field. Even the CFA regime capped the uplift on base fees at 100 per cent. Notice had to be given so that the court and the other party could understand all the relevant considerations arising from an opponent being funded and represented on such a basis. Yet the CJC proposes that the potentially enormous burdens and risks, as well as pressures on independence that are inherent in a DBA, should be kept entirely secret from the opposing party and the court until after the outcome of the case.

The potential for such a system to create conflicts of interest is real and obvious. It must be acknowledged that in anticipation of a substantial award of damages and the need to address financial uncertainty in businesses and personal arenas, concerns about proportionality in relation to costs are likely to fall by the wayside in the pursuit of success in the litigation itself. The incentive to resort to the tactical, or to devote the maximum amount of resources at every stage, in order to win the case at all costs is bound to be compelling in more than the odd large case.

Of course this would be tempered somewhat by the costs management procedures also to be introduced in April 2013 to all multi-track cases commenced within the High Court and County Court. Parties will be required to file costs budgets for approval by the court with the recoverability of costs restricted to the budgeted amount unless it can be established that there is good reason to depart from it. But many practitioners have yet to be convinced that in the High Court there is effective management of costs in large commercial cases.

Further, the new regime will not automatically apply to cases commenced in the commercial court, and even where estimates and budgets are required by the court, the quasi-binding effect of the figures will not apply (some see this as a good indication of the lack of opportunity for many commercial judges to engage in serious on-going costs management, or even of the relative disinterest of many judges in doing so alongside dealing with the complex legal issues that generally arise in such cases). Relying instead, as Jackson did, on the evidence that costs in such cases tend to be proportionate is arguably an unsound platform on which to judge whether unlimited recoveries by lawyers will or will not change behaviour.

The practical reality is that DBA funding arrangements are likely to be very, if not most, attractive in the context of commercial litigation. Therefore, where the Jackson reforms were intended to remedy the mischief created by CFAs in lower value litigation, the advent of DBAs may bring about an equivalent form of mischief in an area where previously disproportionality with regard to costs had not been an abiding concern.

What then will be the likely consequences in large commercial cases? How is the appropriate recoverable percentage in ?each case to be determined? In the inevitable disputes that will arise in relation to these agreements who will be the ?arbiter as to whether the recoverable percentage is reasonable?

Regulation

Rather than introducing a prescriptive regime, it appears at present that the government’s preferred method of regulation, apparently adopted by the CJC working party, will be by reference to the existing Solicitors Code of Conduct with disciplinary action to be the responsibility of the SRA. The argument in favour of such an approach is that solicitors are already a regulated community. The assumption relied upon is that the all-pervasive principles of the Code of Conduct will apply. They include acting with integrity, not allowing one’s independence to be compromised and running one’s business in accordance with sound financial and risk management principles – all in combination with the express obligations to treat clients fairly and only to enter into fee agreements with clients that are suitable for the client’s needs and best interests. But is it safe to assume that these general requirements alone will be sufficient to safeguard both the client and the public interest?

In circumstances where the fee earned may bear little (or indeed no) relation to the work done, the most obvious issue likely to arise between the client and solicitor is whether the solicitor has charged an excessive amount of money. The Code of Conduct does not deal specifically with DBAs. Beyond the general requirements it does not concern itself with the question of excessive fees; indeed it does not provide a framework against which such a dispute could be resolved. Even if framed as a disciplinary issue it is difficult to see how a charge that a client has been treated unfairly could be determined where, particularly in the context of complex litigation, the percentage recoverable was inevitably agreed at a point in time where the prospects of success were hard to read and the magnitude of the risk taken on by the firm in terms of exposure was (or was perceived to be) high.

Inevitably the issue will be approached through the prism of hindsight where the case has already succeeded. It thus seems doubly unsatisfactory for a disciplinary panel to make an assessment of fairness or suitability after the event, particularly because invariably the solicitor who took on the case will be best placed to justify the recoverable percentage. Similarly, costs judges are no better placed to make a retrospective assessment. Even Jackson himself rationalised that costs budgeting, properly enforced, would helpfully remove the need for ex-post facto analyses of whether costs had been incurred reasonably and proportionately.

The solution envisaged by Jackson whereby the client is protected by obtaining independent advice would be so unattractive as to be unworkable in the context of complex commercial litigation. A full consideration of the merits of the case would be necessary to determine whether the recoverable percentage was appropriate. The costs of such an exercise could be very considerable indeed given the nature of the issues arising in large and complex commercial disputes. In a market where specialist firms are competing for work, it is easy to foresee the pursuit of independent advice turning into something akin to a competitive tendering process.

Any future SRA guidance is unlikely to go so far as to impose limits on the extent to which firms may expose themselves to DBAs. Experience supports the concern that changes in litigation funding can result in changes to the conduct of solicitors

Even if the risks to the independence and integrity of the profession have been overstated, there is no obvious reason why any such risk should be tolerated when it can be mitigated by the introduction of a limit on recoverable percentages in large DBA cases. There is scope for an imaginative approach where the limit ?need not be absolute but could vary depending on the nature of the case or ?the stage reached in proceedings. To opt ?not to impose any control would be a missed opportunity to safeguard fundamental professional values from unnecessary pressures at a time of great change and uncertainty.