For some time now concerns have been raised about the costs of litigation. Various forms of funding have been made available including Conditional Fee Agreements (CFAs), also known as “no win, no fee” agreements which permit the solicitor to recover a success fee by way of an agreed percentage uplift to the solicitor’s hourly rate and insurance policies that provide cover for any adverse costs awarded.
Both of these increase the costs of litigation for the losing party as the losing party is likely to be ordered to pay the Claimant a sum in damages, its costs, its solicitor’s success fee under a CFA and the premium of the insurance policy.
A change in the law will be implemented on 1 April 2013 which restricts the recovery of CFA success fees and insurance policy premiums and introduces the concept of “damages based agreements” (DBAs) as an alternative way of funding civil and commercial litigation. The changes mean that the success fee and the insurance premium will no longer be paid by the other side, but will be paid out of the amount of damages the client is awarded.
DBAs are similar to CFAs in that a fee is only charged if litigation is successful, but the fee levied is a proportion of the damages recovered.
DBAs are already used in employment claims, and the amount of damages that a solicitor can call on is capped to 35% of the total damages awarded to the client. In civil and commercial litigation, this cap will be increased to 50% of damages, and in personal injury claims reduced to 25% of damages.
Example 1 – CFAs
The Claimant and the claimant’s solicitor enter into a CFA providing for a 50% success fee. The solicitors costs net of success fee are £60,000 and it is assumed on detailed assessment the Court would award £50,000 in costs to the Claimant net of the success fee.
Prior to 1 April 2013, the Claimant would recover £500,000 in damages and £75,000 in costs (£50,000 costs plus £25,000 success fee) from the Defendant, being £575,000 in total. The Claimant’s legal fees have actually cost the Claimant £90,000 (£60,000 and uplift) and the Claimant therefore recovers £485,000.
After 1 April 2013, the Claimant would only recover £50,000 in costs from the Defendant but would still be charged £90,000 by the solicitor, giving a total recovery after costs of £460,000.
Example 2 – DBAs
The Claimant and the Claimant’s solicitor enter into a 50% DBA.
The Claimant recovers £500,000 in damages and £50,000 in costs from the Defendant, being £550,000 in total.
The Claimant’s solicitor can recover a maximum DBA total fee of £250,000 (being 50% of damages). The solicitor may not recover the full £250,000 DBA fee in addition to the £50,000 in recovered costs. The Claimant therefore retains £300,000.
DBAs and Defendants
Looking at DBAs from the side of a Defendant in a claim, if the Claimant is successful the Defendant will no longer have to pay the Claimant’s solicitor’s success fee on top of the usual fees and the damages. This is because the Claimant will have to pay the success fee out of its own damages. This is attractive to Defendants as it reduces the Defendant’s potential liability in litigation.
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