The decision in PACCAR Inc & Ors, R (on the application of) v Competition Appeal Tribunal & Ors [2023] UKSC 28 has left many third party funders scrabbling around looking for a solution to keep their business models intact.
The Supreme Court ruled that litigation funding agreements (LFAs) whereby the third party funder took a percentage of any damages recovered amounted to Damages Based Agreements (DBAs). It was not in issue that the LFA in question did not comply with the Damages Based Agreement Regulations 2013. (It would almost certainly be impossible for any LFA to comply with the Regulations as they are clearly designed for agreements made between lawyers and their clients.) The consequence of this finding meant that the LFA in question, and a great many others besides, was unenforceable.
The easiest way to solve this problem, whilst retaining the original business model, is to change the payment to the third party funder to, say, a multiple of the amount advanced by the funder but with the payment capped by reference to the damages recovered. So long as the multiplier is set sufficiently high, the cap will always bite. The amount the funder will receive will therefore be exactly the same as if the original agreement had still been in place.
Would this type of agreement be upheld if challenged in the courts? Surely the courts would not permit such an obvious method to sidestep the Regulations. s58AA of the Courts and Legal Services Act 1990 defines a DBA as:
“For the purposes of this section –
(a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—
(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained”
If, because the cap has bitten in any given case, the payment is a percentage of the damages recovered, does this not fall within the definition “the amount of that payment is to be determined by reference to the amount of the financial benefit obtained”? The actual payment is the percentage specified in the cap, not the amount that would have been payable but for the cap.
However, if a funding arrangement (whether LFA, CFA or other) that contains a cap is a DBA, this causes serious problems.
Firstly, the old Law Society model Conditional Fee Agreement contained an optional clause:
“Overall cap on your liability for costs
We will limit the total amount of charges, success fees, expenses and disbursements (inclusive of VAT) payable by you (net of any contribution to your costs paid by your opponent) to a maximum of [x%] of the damages you receive.”
Any CFA that contained this, or a similar, provision would therefore be a DBA (and inevitably be unenforceable) if a cap makes an agreement a DBA.
It gets worse.
s58(4B)(c) of the Courts and Legal Services Act 1990 provides that the Lord Chancellor may set a maximum permitted success fee in relation to certain proceedings. The Conditional Fee Agreements Order 2013 sets such limits in relation to personal injury matters. Those limits are set as a cap calculated by reference to the damages. It is therefore a mandatory requirement that the CFA contains a cap. If a cap equates to a DBA, then all CFAs complying with the Conditional Fee Agreements Order 2013 would almost inevitably then fail to comply with the Damages Based Agreements Regulations 2013.
It may be thought that the PACCAR decision has caused problems for third party funders, but this would fall into complete insignificance when compared to the consequences for personal injury solicitors (and other besides) if the courts decided a cap equated to a DBA. That is simply not going to happen.
Interestingly, the Court of Appeal in Belsner v CAM Legal Services Ltd [2022] EWCA Civ 1387 seemingly approved of a CFA with a global cap calculated by reference to the damages, although heard no argument as to whether this might be DBA. Further, the Legal Ombudsman’s latest View of Good Costs Service guide positively recommends:
“One possible approach is capping your client’s liability to a certain proportion of damages, such as by saying, ‘You remain liable to pay any costs which we cannot recover from your opponent, but we will limit your liability to [x] per cent of the compensation you recover’.”
It would be unfortunate, to say the least, if the Legal Ombudsman is inadvertently recommending an unlawful funding method.
However, if a cap is not a DBA, what is to stop a solicitor entering into a retainer whereby they set the hourly rate at £5,000 or apply a fixed fee of £5,000,000 but say the amount payable is capped at x% of damages? The cap would inevitably bite. A solicitor could have all the benefits of a DBA without having to comply with the DBA Regulations (such as the maximum % that can be taken). The client would obviously have to give informed consent to this, but there may be many cases where this would happen. The question of whether something is a DBA cannot depend on whether the pre-cap costs have been based on a reasonable figure/calculation.
The courts are going to have to be very careful navigating this problem so that they neither inadvertently strike down a very large number of retainers (that provide consumer protection by including a cap) nor open the gates to retainers that are DBAs in all but name but which circumvent the consumer protections the DBA Regulations envisage.
