Damages Based Agreements: A Handy Tool for Funding Legal Services
Resolving Disputes & Key Considerations
We know that disputes arise from time to time in the course of business. However, to avoid a situation where the positions of the parties become entrenched, it is key to aim to resolve these disputes as early as possible and where possible pre-litigation through ADR or a negotiated settlement. (See our article on the key considerations for resolving legal disputes during the COVID-19 Pandemic click here).
Where full blow legal proceedings cannot be avoided, then a key consideration will be how to fund legal fees and expenses particularly in the current climate as the mop up of the current crisis begins. In such instances, a Damages Based Agreement (DBA), which is currently regulated by the Damages Based Agreement Regulations 2013, the solicitor’s fees are contingent upon the success of the case can be a useful toolkit to consider.
What exactly is a Damages Based Agreement?
This form of legal funding is an arrangement between a solicitor and their client whereby the solicitor’s legal fees are payable if the case is successful. The level of success fee will be determined within the agreement. The fees owed to the solicitor – providing the instruction has been successful – will usually be a pre-determined percentage of the compensation received by the client.
As a result, a DBA offers the opportunity to access legal services and support which may otherwise not have been available to that person.
Although the concept has been a very popular funding model in the US for many years, it was only introduced into the UK’s legal system in 2013.
How does a Damages Based Agreement work?
After agreeing on what determines a successful case, and the percentage, the solicitor’s fees will become payable after the case has concluded. We would receive no fee during the case, and if the case is lost, we also would not receive any fees. In the rare instance where a case is lost, insurance protection can be sought to prevent the client from having to pay the legal costs of the opponents. Expenses such as barristers’ costs would be paid out of the percentage given to the solicitor.
In terms of the fee, we will agree with you beforehand what is considered a success and when we will be paid. We will also agree the percentage of damages owed to us. There is legislation in place which outlines the maximum percentages that can be charged for certain cases.
Most fees are subject to a maximum cap of 50%. However, employment tribunal cases have a 35% cap whereas personal injury and clinical negligence claims have a 25% cap.
The 50% cap includes VAT and counsel fees if these are incurred by the solicitor as a disbursement. The employment tribunal cases, with the 35% maximum cap, includes VAT but not counsel fees or disbursements. Finally, the personal injury and clinical negligence 25% cap includes VAT and applies only to damages apart from future pecuniary loss.
When is a DBA appropriate?
Damages Based Agreement is only appropriate for:
- Money claims – it is not appropriate for any claims when an alternate remedy to damages is sought;
- Claimant’s legal costs – it is not appropriate for the legal costs incurred by a Defendant in proceedings, as nothing is recoverable. However, this is to be reviewed in the current draft of the new Damages Based Agreement Regulation soon to be published.
- Legal costs incurred in non-contentious proceedings – for example negotiations to exit a company or any other circumstance where the client has a position which the solicitor can assist in resolving to the client’s financial benefit.
- Third Party Funding Arrangements – where financiers/funders agree to fund a client’s legal costs in exchange for an agreed share or the sums recovered.
Advantages of Damages Based Agreement?
This form of agreement, the risks mainly fall with the solicitor. Due to fees not being payable until there has been an outcome of the claim or settlement of negotiations, this can leave solicitors waiting months or even years to receive payment.
Conventionally, a Claimant would need to fund substantial costs before a return is made. As such a DBA can be handy tool or means by which an individual or company with a strong legal claim or an interest that they cannot otherwise pursue due to the cost of obtaining legal advice on such matters is able obtain legal assistance.
To conclude, Damages Based Agreements offer an alternative way to fund commercial claims and litigation as the pressure is off the individual as they share the risk with the solicitor.
This form of legal funding is particularly suitable for where the case has a high monetary value and high chances of recovery. This also includes where a client has a strong interest (shares being an example), that they would not otherwise be able to pursue due to the costs involved in a litigation or dispute matter.
Although not available nor suitable for all cases, the solicitor does have professional obligations to advise on whether this form of legal funding is appropriate according to your circumstances. The solicitor cannot allow their personal interests to influence their advice to the client at any stage.
If you think you have a case, we can instruct on whether a Damages Based Agreement will be suitable. This will be very much dependent on the level of risk involved. Call us today on 01482 616 616 or 0800 037 1305 to see if a Damages Based Agreement could be an option to assist you with financing your litigation claim.
Please note that this article is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this article.