Legal Cost Specialists

Damages Based Agreements and consumer protection

The Damages Based Agreements Regulations 2013 provide for a maximum percentage (by way of fees) that may be taken from the sums recovered by the client (25% for personal injury and 50% for other claims) for claims or proceedings at first instance.

The maximum percentage is clearly designed to provide some form of consumer protection, and to prevent “unscrupulous” lawyers from taking an excessive amount of the client’s damages.

The percentages contained within the Regulations are clearly arbitrary and it is questionable whether they achieve their intended aim.

There will be cases where the risks are relatively low and/or the amount of work likely to be required to achieve success will be relatively limited, meaning that the 25% or 50% caps are too high. It might be possible to challenge the amounts in those circumstances by way of a solicitor/own client detailed assessment, but that rather undermines the purpose of the Regulations if they do not, in themselves, provide adequate protection.

Conversely, there may be cases where the client, properly advised, would be willing to pay more than 25%/50%. If a case will be sufficiently risky/time intensive and the client has no other means of funding the matter, it is preferable to obtain a smaller percentage of something rather than recover nothing at all.

The relevant maximum percentages are inclusive of VAT. This means that a lay client who is not VAT registered is in a worse position when compared with a VAT registered business client. Assuming the maximum percentage is charged, the lay client will only be left with 50% of the damages for non-personal injury claims (less those disbursements that can be charged in addition to the maximum percentage). On the other hand, although the VAT registered business will, in the first instance, have paid VAT on their lawyer’s fees, they can then recover the VAT element by way of input tax. The VAT registered business will therefore be left with 58.33% of their damages in the same situation (again, less those disbursements that can be charged in addition to the maximum percentage).

Of course, the lay client would also be in a worse position if the maximum percentages excluded VAT. The lay client would then pay VAT on top of the 50% fee whereas the VAT registered business would be able to reclaim any VAT paid on top of their 50%.

There is something inherently odd in a set of consumer regulations that provide greater protection to most business clients when compared to lay clients.

It would have been possible to draft the Regulations so that VAT was not included within the maximum percentage where the client is able to recover VAT as input tax. That would have left lay clients and VAT registered businesses in the same position in terms of the percentage of damages they were left with.

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