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The Ministry of Justice has now released the final Draft Regulations on Damages-Based Agreements (‘DBAs’).

The explanatory note accompanying the regulations states that a DBA is a “no win, no fee” agreement whereby the representative (see the defined term in the guidelines) can recover an agreed percentage of a client’s damages if the case is won, but will receive nothing if the case is lost.

Herbert Smith Freehills has recently commented that the effect of the final Draft Regulations precludes ‘hybrid’ or ‘partial’ DBAs whereby the firm charges a reduced fee as a retainer with a small contingency fee due if the case is successful.

These blended arrangements have been popular with many commercial firms when offering a hybrid Conditional Fee Agreement (‘CFA’). It is thought that many firms were expecting to offer their clients a similar blended arrangement in respect of DBAs. As Herbert Smith Freehills comments:

We had expected that the introduction of contingency fees for civil litigation would allow greater flexibility for firms wishing to meet the demands of commercial clients for more creative billing solutions. It appears, however, that the Regulations will leave little room for flexibility.”

Indeed, the DBA working party reports suggested partial DBAs would be allowable as they could see no harm in principle to the concept:

11. The response of the WP to the eight terms of reference set out by Lord Justice Jackson on:

(vi) To consider whether it should be possible to enter partial DBAs, analogous to the “no win, low fee” CFAs.

There is no reason why the situation in relation to so called blended fee arrangements which are sometimes used in CFA cases (mainly in commercial cases) should be any different for DBAs. In either scenario (CFA or DBA) the no win-no fee element would have to comply with the statutory framework, the CPR and the professional regulations, for example in relation to the cap on the contingency fee element. The WP does not feel it necessary to make any specific recommendation on this point.

See the Full Report here.

CREATIVE BILLING V GUARANTEED INCOME

These hybrid arrangements allow a firm to offer a variety of pricing structures to a client whilst also ensuring that a proportion of the fee earner’s time is being paid on an ongoing basis. This has taken the pressure off litigation partners internally to ensure that dispute resolution departments are generating monthly revenue but also pricing competitively. Without the option of hybrid DBAs, this may create difficulties for law firms, particularly those with significant overheads.

A law firm may be able to circumvent this problem with external funding. A third party funder can provide cash flow for a proportion of the solicitor’s own fees, or the “WIP” for all cases run on a DBA. This enables firms to offer competitive DBAs to clients but also guarantees the firm a monthly income for a proportion of its fees.

The funder would be entering into an agreement directly with the law firm, as opposed to with the claimant, so the firm is guaranteed payment for a proportion of the fees by the funder. If the case is successful, the firm would pay a percentage of its contingency fee to the funder; if the case is unsuccessful, the firm pays nothing and is not required to reimburse the funder in respect of the fees paid. The loss is not quite as catastrophic for the firm and has less of an impact on departmental finances – the same ethos that attracts firms to hybrid fee arrangements of course.

Many funders will be tying up with firms post April 2013 to offer these arrangements.

A WORD OF CAUTION

Law firms may find themselves giving away too much of the contingency fee to pay the funder’s success fee unless they fully research the market for the most competitive pricing.

Failure to carry out sufficient research will lead to the inevitable risk of being undercut by competitor law firms offering the same DBA retainer but at a lower cost to the client, simply because they negotiated better terms with their litigation funder.

If you would like to discuss how an arrangement of this nature could assist your firm, please contact us.