Damages Based Agreements in Commercial Disputes – Risk or Reward?

On 27 April 2020 the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Arrangements) Regulations 2020 came into force.

The regulations implement the provisions of the 2018 Act, allowing both individuals and businesses to enter into enforceable damages-based agreements (DBAs) - a type of no win no fee or success fee arrangement – with their solicitors.

While Scottish solicitors were not expressly prohibited from entering into DBAs prior to the regulations coming into force, such agreements were unenforceable. Indeed, until the regulations came into force the only success fee arrangements typically offered by Scottish solicitors were speculative fee arrangements. Under such an arrangement a solicitor acts on a no win no fee basis and, in the event of success, charges a percentage uplift to their base fee (not of the damages awarded).

By contrast in a DBA, if the case is successful, the solicitor’s fee is calculated as a percentage of the damages recovered. If the case is unsuccessful, there is either no charge (no win no fee) or a pre-agreed lower fee is charged (depending on the terms of the DBA).

Under the regulations, in commercial actions the solicitor’s fee is subject to a 50% cap (inclusive of VAT) on the monetary award recovered. A solicitor’s share of the winnings is therefore potentially significant (depending on the terms of the DBA) but so too is the risk.

Hybrid damages-based agreements

No win no fee DBAs have been permitted for commercial disputes in England and Wales since 2013 but are not widely used, the risk to the solicitor being seen as too high. Crucially however, unlike in England and Wales, the regulations allow the use of partial or hybrid DBAs  - this means that a solicitor could receive, for example, a guaranteed hourly rate sufficient at least to cover the costs of conducting the case, plus a percentage of the damages in the event of success.

Hybrid DBAs therefore promote a risk-sharing approach between client and solicitor, allowing solicitors to maintain cash flow and mitigate their exposure to risk rather than taking on all of the risk inherent in a traditional no win no fee arrangement.

Comment

On the face of it, a DBA offers greater transparency and certainty on costs, allowing a client to budget effectively from the outset of the litigation.

Time will tell whether damages based agreements will become the game changer in the Scottish litigation sphere that many practitioners are predicting. However, the benefits of such agreements to clients with cash flow pressures or those of limited means are obvious. In a post COVID-19 world where many previously financially sound businesses may struggle, DBAs will inevitably be an attractive proposition, allowing businesses to conserve cash while simultaneously offering more certainty in relation to litigation costs. From a solicitor’s point of view, the ability to offer a hybrid DBA to clients helps to mitigate their risk, providing a flexibility that should ensure a wider use of this type of funding than has been seen in England and Wales.