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Damages Based Agreements

As previously discussed (see “Damages Based Agreements: A Capital Idea!”), Damages Based Agreements (“DBAs”) will become available to a whole new array of clients from 1 April 2013 and Conditional Fee Agreement (“CFA”) success fees and after-the-event insurance premiums will no longer be recoverable from the other side in the event of a win.

It is said that these changes will: (a) maintain a route to justice; and (b) make the market more competitive since clients will now have an interest in lowering the amount that the lawyers will receive.

DBAs raise new issues for clients.  To pursue the DBA path to justice, clients will have to become a lot more informed about the legal market.  In this blog, I explore some of the issues they will face.

DBA, CFA – it is all the same to me

Most individuals and small businesses (and even some larger corporate bodies) will, generally, not have extensive knowledge about the litigation process or, specifically, litigation funding options.  They may be familiar with the “no win, no fee” formula through regular advertising, but beyond that they will know little more.  They’re at a disadvantage from the get-go.  How will clients become aware of their funding options and how well will they understand?

Clients should receive certain key information when seeking initial legal advice (a little like the “Key Facts” that Financial Advisers have to share with their clients).  Solicitors are bound to act in the best interests of their clients and, in particular, under Outcome 1.12 of the SRA Code of Conduct 2011, to make sure that clients are “in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them”.  When a client seeks legal advice in relation to a dispute they should be advised about the different funding routes open to them.  Clients should be informed that they have the option of funding the case themselves, of a DBA or CFA, or of third party litigation funding.  They will be told that the latter three will mean that in effect, if they win, they will pay more in the long-run for the legal advice.

Still, will unsophisticated clients be likely to step back and consider what option is best for them?  Whether they should push for a CFA (which will be a percentage uplift of base costs) or to have a DBA (a percentage of the sum the client recovers)?  Will they consider the fact that base costs can add up to more than the amount of damages retrieved (and so whilst a layman might assume that a percentage of costs would work out as less to lose than a percentage of damages, this may well not be the case)?  Will the lawyers explain this to them and to what extent will the client be able to absorb the minutiae of the detail in order to translate it into and understand the real cost consequences?

It is clear that the lawyer’s role in informing the client of funding options is going to become a lot more burdensome if clients are to truly understand.  The LSB’s strategy director, Crispin Passmore, clearly had doubts about how this would work in practice when he wrote to the regulators (SRA, BSB etc.) stating that “targeted and proportionate regulation may be needed to minimise any danger of either deliberate or inadvertant misselling” of DBAs to clients.  Time will tell.

Shopping around for funding deals

Even if the client understands what sorts of funding options are available, what happens then?  Presumably, for competition in the market to be introduced, clients will be savvy enough to question the funding offer made.  They will ring different law firms providing them with the relevant information.  They will negotiate with these selected firms to ensure that they get the most competitive deal.  Is this realistic or will most clients accept the first offer made to them, on the basis that:

(a) winning seems a long way away and something will be better than nothing;

(b) they trust in the advice of their legal advisor implicitly;

(c) they are anxious not to cause delays waiting for other solicitors to consider the merits of their case; and/or

(d) they simply do not understand the litigation funding market well enough to consider their other options or to assess the merits of the offer in front of him or her?

After all, how will clients know what terms are reasonable/competitive in a DBA?

If clients do shop around, will they be well-prepared enough to submit their case to several lawyers concurrently so that they can receive various offers at the same time or will they end up delaying work on the case by obtaining consecutive opinions?  How will the client even know which firms offer DBAs?  Will the Law Society be introducing a new tickbox to its ‘Find a Solicitor’ page so that clients can quickly see which lawyers are prepared to take the DBA investment risk?

With no MoneySupermarket.com equivalent, clients are going to find it very difficult to assess what DBA offer is a good one and especially difficult to assess this in a timely way.  The challenge in replicating the “objective analysis” of an online comparison service for litigation is to synthesise the process by which a lawyer assesses the merits of the case and the tactics to take.  That degree of difficulty should not stop the intrepid from seeking to build a comparison platform for some types of litigation….surely its “simples”!!

Here today, gone tomorrow – where is my DBA?

DBAs, unlike CFAs, offer law firms a stake in the “prize” at the end of a piece of litigation.  Law firms invest or gamble time on the case knowing that if the case loses, they will receive nothing.  As we’re all aware by now, the danger is that law firms back too many unsuccessful DBAs and that this, in turn, will lead to firm instability. The client will need to do due diligence.  Now they will not only have to consider whether the law firm has:

(a) the best expertise;

(b) sufficient human resources;

(c) satisfactory client care standards; and, possibly,

(d) the necessary focus on business objectives.

They have to assess whether the law firm has the financial stability to be able to take on the role of investor.  We need only look at Cobbetts, the top 100 firm that went into administration in January, to see how any firm can be affected by, amongst other things, cashflow pressures. Law firms will also need to consider the fact that there may be a delay in receiving sums while enforcement action might need to be taken to secure payment for the client.

So, with all these factors to be considered by the lawyers, how can the client hope to make a good choice in a law firm?  Clients’ cases can sometimes take years to draw to a conclusion.  How can a client assess whether a firm is financially strong enough to weather its DBA investments and see its case through until the end?  Will firms start to release financial information to clients so they can at least attempt to assess their financial stability?  This is unlikely.  Without this, clients are in a poor position to make a sound choice as to who should undertake their DBA.  If the law firm folds midway through a client’s case, the client is left without representation and in the worst of all worlds.

Unless the client is well-informed, it appears that the DBA will be a gamble for them as well as for law firms.

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