This month, Royal Assent was granted to the unpromisingly named “Legal Aid, Sentencing and Punishment of Offenders Act”. Although you would not guess it from the title, aspects of this new Act have the potential significantly to alter the landscape for commercial litigation funding in the UK.
For the first time, claimants’ lawyers in mainstream litigation will be able to charge contingency fees as a method of funding litigation. The Act will come into force in stages over the next 12 months.
Prior to the enactment of this new law, claimants’ lawyers were only permitted to enter into “conditional fee agreements” with their clients under which the maximum upside for them in the event of a successful claim, was a doubling of the fees they would normally have charged. (The downside was that they would potentially have got nothing in the event that the claim was unsuccessful).
Now for the first time, lawyers will be able to enter into so-called “damages-based agreements” (“DBAs”) where the lawyer’s fee is related to the damages awarded rather than the work done by the lawyer.
Will Government Try to Limit DBA Payments?
As matters stand, the only two requirements that exist in relation to a DBA are (i) that it must be in writing, and (ii) that it must relate to proceedings which could have been the subject of a conditional fee agreement under the old regime (i.e. in effect, all civil litigation).
Whether the government will introduce regulations limiting the percentage of the amount of payment that may be made to a lawyer under a DBA remains to be seen. For personal injury type loss for example, the maximum percentage of damages payable by way of fees to the lawyer will probably be set at 25%. In employment tribunals (which have operated DBAs for some time) the relevant cap is 35%.
Professionals & Boards in the Firing Line
The significance of the ability for the first time to take what will, in effect, be a much larger slice of the cake, is unlikely to be lost on claimants, their lawyers and the increasing number of commercial litigation funders. Plainly, those cases with a potentially large recovery are likely to be the most attractive. Large corporate collapses, restatements of financials and share value drops following fundraising in capital markets are all likely to be fertile areas for DBAs. Professionals as well as boards of directors are likely to be among the first in the firing line.
To make matters worse, the Legal Aid, Sentencing and Punishment of Offenders Act also contains new incentives for parties to commercial litigation to reach early settlements of commercial litigation well short of trial. This will put defendants and their insurers under more pressure to pay up early in the process.
Under the current civil litigation regime, it is open to a claimant to make what is known as a “Part 36” offer. This is a formal offer to settle civil litigation. If a defendant fails to accept a claimant’s offer and the claimant ultimately obtains judgment in a money claim for an amount equal to or better than its original offer, the defendants have to pick up the damages awarded plus indemnity costs and interest.
Under the new regime and in addition to these penalties, it seems to be envisaged that the defendants will now have to pick up a further 10% of the damages awarded. Quite how this will work in practice remains to be seen, but things should become clearer when the new civil procedure rules are introduced. One obvious question is whether and to what extent this additional 10% of damages can be extracted by a claimant from a defendant as the price of settlement of a claim after the time for accepting a Part 36 offer has expired but before judgment has been given.
Although the UK remains a relatively benign regime for claims against directors (absent insolvency), the new costs reforms outlined above will not appear remotely benign to those directors or professionals (and their insurers) unlucky enough to find themselves at the wrong end of a negligence, breach of fiduciary duty or other type of liability claim.