Damages-based agreements (DBAs): promising proposals for reform

A proposed redrafted version of the regulations governing DBAs was presented yesterday at a conference at The Old Hall, Lincoln's Inn. The 2019 draft regulations have been prepared by Professor Rachael Mulheron and Nicholas Bacon QC, who were invited by the Ministry of Justice to conduct an independent review of the 2013 DBA Regulations in light of the government's recognition that they “would benefit from additional clarity and certainty” (see this post). The 2019 draft regulations and explanatory memorandum, and some worked spreadsheets for illustrative purposes, are available here.

The 2019 draft regulations address the key problems with the 2013 Regulations, which have been widely criticised. Many of the issues with those regulations were identified in a review conducted by a Civil Justice Council working group chaired by Prof Mulheron in 2015 (see this post) but the recommendations made by that working group were never implemented. It is hoped that the 2019 draft regulations will receive a different reception, as the Ministry of Justice has indicated that it will give careful consideration to the proposals, though it has re-emphasised the importance of ensuring that any amended DBA regime includes proper protections for clients to avoid any potential for abuse.

Some of the main changes proposed in the 2019 draft regulations are set out below:

• "Hybrid" DBAs are permitted, so that the lawyer can recover a reduced fee (up to 30% of irrecoverable solicitor and counsel costs) if the claim fails. This is a welcome change, as the previous ban on hybrids was seen as a significant factor in the low take-up of DBAs and reduced the flexibility for lawyers to meet client demands for alternative fee arrangements.
• Costs recovery is based on the "success fee" model, rather than the so-called Ontario model, which means that recoverable costs are paid to the lawyer in addition to the DBA percentage payment (rather than being set off against the DBA payment as currently). This is likely to make DBAs more feasible in lower value cases and removes the potential for a "windfall" reduction in the opponent's costs liability.
• The quid pro quo for the introduction of the success fee model, where recoverable costs are added to the DBA percentage payment, is a recommendation to reduce the maximum percentage from 50% to 40% (in non-personal injury cases - a lower cap applies in the personal injury context).
• The DBA percentage payment is applied to the "financial benefit" received by the client, rather than (necessarily) a sum recovered by the client. This means that DBAs should be available in a broader range of claims, such as those involving recovery of a valuable asset rather than damages, and also for defendants based on the financial benefit represented by avoiding a potential liability.
• There is flexibility for the lawyer and client to agree terms regarding payment where the DBA is terminated - a point that is far from clear in the 2013 DBA Regulations (see this post on Practical Law's Dispute Resolution Blog). The default position under the draft regulations is that the lawyer can charge costs, expenses and counsel's fees if the client terminates, or if the lawyer terminates where the client has behaved unreasonably - but that is subject to alternative terms being agreed in the DBA.
• The draft regulations preclude the possibility of entering into DBAs for representative actions under CPR 19.6 which proceed, in effect, on an opt-out basis. The aim is to achieve consistency with the position in relation to "opt-out" class actions in the Competition Appeal Tribunal, as DBAs are prohibited in that context.

Feedback on the draft regulations is requested by 15 November 2019. We will be reviewing the draft regulations in greater detail and feeding into that process.