What is a damages based agreement (DBA)?
A DBA is an agreement whereby a solicitor and a client can agree to share the risk of litigation. Payment of solicitors’ fees, counsel fees and VAT by a client under a DBA is dependent on achieving defined success criteria agreed when the DBA is entered into, and is based on a percentage of the sum recovered from the losing party/opponent.
To compensate the risk of not being paid fees in the event of losing the case and the success criteria not being achieved, save for appeal proceedings, the DBA fee payable for solicitors’ fees, counsel fees and VAT from monies recovered from the opponent will equate to a sum of up to 50% of the sum recovered (excluding employment claims). In respect of any appeal proceedings, there is no limit on the DBA percentage fee payable.
The DBA percentage fee for solicitor's fees, counsel fees and VAT is paid by way of deduction from the sum recovered (damages) from the losing party. In employment claims the DBA fee is up to 35% of the sum recovered for solicitors’ fees and VAT. All other disbursements (including expert fees) and expenses are payable by the client in any event, and in addition to the DBA percentage fee.
Where a client obtains an entitlement to costs from an opponent, they will not be entitled to recover a fee directly based on the DBA percentage fee, but may be entitled to recover solicitors’ fees based upon time spent and applicable hourly rates, plus all disbursements, reasonably and proportionately incurred and VAT if applicable. In any event, the receiving party cannot recover greater costs than incurred under the DBA.
Having regard to the rules relating to recovery of costs from an opponent, where a client enters into a DBA with a solicitor, there may potentially be an increase in irrecoverable costs from the opponent, in particular where disputes are settled at an early stage.
Can you protect against the potential costs payable to an opponent?
It may be possible to purchase 'after the event' legal expenses insurance (ATE).
What are the advantages for a client of entering into a CFA or DBA?
Entering into a CFA or DBA with a solicitor will enable a client to share the risk and costs of litigation.
If a CFA is entered into and the case is lost, or predetermined success criteria are not achieved, a client may only have to pay reduced solicitors fees (and possibly no solicitors’ fees), and disbursements and expenses.
If a DBA is entered into and predetermined success criteria are not achieved the client should have no liability for solicitors’ and counsel fees, but will have to pay disbursements and expenses.
If a DBA is entered into and the predetermined success criteria is achieved (i.e. the case is won), but the recovery from the losing party is relatively low, the DBA percentage fee from recovered monies may be a sum significantly less than that which would have been payable by the client on a normal retainer basis or pursuant to a CFA.
What are the disadvantages for a client of entering into a CFA or DBA?
If a CFA is entered into and predetermined success criteria are achieved (i.e. the case is won), in addition to normal costs the client will have to pay the CFA success fee.
If a DBA is entered into and the predetermined success criteria is achieved (i.e. the case is won), depending upon the sum recovered from the losing party, the DBA percentage fee from recovered monies may be a sum significantly greater than that which would have been payable by the client on a normal retainer basis or pursuant to a CFA.
Benefits of funding arrangements
CFAs and DBAs potentially enable a client to pursue good claims and facilitate access to justice.
Before entering into a CFA, DBA, or any funding arrangement it is necessary for a client to consider the financial implications of “sharing the risk”, what costs may be recoverable from an opponent (assuming any settlement or award includes an entitlement to costs), and add to the potential net proceeds from the litigation.