A Court of Appeal judgment handed down this month delivers much-needed clarity over the enforceability of DBAs (damages-based agreements), a form of contingency fee arrangement. Steve Din, founder of Doorway Capital, gives his comments on what might turn out to be one of this year’s most important costs judgments.
A new dawn emerges for contingency fee arrangements
Commenting on the judgment, Steve Din said: “Doorway welcomes the much-needed clarity that the Court of Appeal has given with respect to the enforceability of DBAs [damages-based agreements], a form of contingency fee arrangement”. He added: “Not only will law firms feel considerably more confident about entering DBAs but by offering DBAs and hybrid DBAs to potential clients facing what would otherwise be unaffordable legal fees, these clients can now enter into litigation with a genuine sense of optimism they might secure most, if not all, of the compensation they are entitled to.”
On the basis that something is better than nothing, Doorway Capital predicts that commercial litigation practices should now see an early pick-up in instructions from clients willing to enter into a DBA. Recognising that there may already be a significant backlog of potential claims that can now be prosecuted under the terms of a DBA, Steve Din said: “Entrepreneurial law firms can now begin to reap the not inconsiderable economic rewards associated with prosecuting pre-existing commercial claims that still remain inside the relevant limitation period.”
The value of hybrid DBAs
Doorway Capital believes that most law firms, rather than enter into a vanilla DBA, will try to craft a form of hybrid DBA that offers the law firm all the upside arising out of the contingency fee but with downside protection should a particular matter result in, for instance, a drop hands settlement. Steve Din said: “Doorway expects practitioners should quickly see the superior economic protection that a hybrid DBA provides a firm and, in turn, try to capture that protection as part of a pro forma DBA.”
Who should prove to be the eventual winners and losers?
Steve Din added: “Recognising that an essential element of any DBA is that lawyers become entitled to a fee based on the level of damages they secure for their clients, litigation boutiques stand to benefit most from this judgment.” Instead of the external litigation funders taking a share of a client’s damages, it should now be the lawyer who does, consequently, he added: “Amongst listed companies, this judgment should prove particularly welcome news to the shareholders of firms like DWF, Gateley and Rosenblatt’s but equally disappointing to shareholders in litigation funders like Burford, which could now see a gradual reduction in new work, at least in the UK.”
In the wake of this judgment, it isn’t difficult to see some of the obvious benefits law firms and their clients have entering into a DBA rather than rely on external litigation funding at least if solicitors can sign up DBAs quickly and agree a level of contingency below what a traditional litigation funder demand. Steve Din says “Suddenly, law firms enjoy a real competitive advantage over external litigation funds.”
Understanding the funding pressures caused by DBAs
Steve Din said: “DBAs can place considerable short-term working capital pressures on law firms that have to wait, possibly several years, until a case settles before they are paid”. As a result of this judgment, Doorway expects to see demand for its funding, particularly amongst litigation boutiques, to grow strongly over 2021. He also said: “Any firm looking to offer its clients DBAs will need to pay particularly close attention not just to funding and case velocity but the amount of contingency fee it will require to at least cover the cost of prosecuting these cases.” Doorway Capital will happily help firms analyse the economics of charging contingency fees under both DBAs and hybrid DBAs.
What next for the Draft DBA Regulations 2013?
Steve Din says “As a result of this judgment, the political and economic imperatives for amending the existing DBA legislation have all but disappeared so I wouldn’t be surprised if law firms, instead of waiting for these latest draft regulations to pass through Parliament, now seek to rely on the current regulatory framework for the purposes of structuring DBAs.”
Simpson Millar LLP
Greg Cox, managing partner of Simpson Millar LLP and part of Doorway, acted for the Bar Council in Zuberi -v- Lexlaw Limited [2021] EWCA Civ 16
