DBAs AND COSTS BUDGETING: CURIOUSER AND CURIOUSER
The Civil Procedure Rules dealing with costs management and costs budgeting are entirely silent on the interplay with Damages-Based Agreements (DBAs).
I simply have no idea how a solicitor acting under a DBA is meant to prepare a costs budget.
There are at least three options, the apportionment one and the ordinary one, and the fixed fee one.
Let us take a case worth £100,000 with a DBA with a figure of 50% of damages recovered as the fee, that being the maximum allowed in a non-personal injury or non employment matter.
Thus the maximum fee is £50,000. For simplicity’s sake let us assume ten relevant sections of Form H and where the solicitor estimates the costs of £10,000 for each stage, but knowing that, due to the indemnity principle, no more than £50,000 can ever be recovered.
One approach – the apportionment one – is for the solicitor to halve each component, so that although the court may have awarded £10,000 for pre-action work, the solicitor will only be able to claim £5,000. That would be unwise as obviously the claim may settle before £50,000 worth of between the parties costs have been incurred, so why artificially limit yourself to less than that sum?
By putting in the full amount the solicitor will get paid the correct sum if the case settles within the first five stages. Of course it means that if the case goes beyond Stage 5 the solicitor is earning nothing, but that is the reality anyway – once the solicitor has done work equal to half of the damages he or she is working pro bono.
Furthermore if the apportionment method is used one’s own client has an obvious complaint against the solicitor. Let us assume that the case settles at the end of Stage 5 and thus the solicitor, limited by the costs budget, receives £25,000 from the losing side and charges the client the balance of £25,000. The client has every right to point out that he is £25,000 out of pocket compared with the situation if the solicitor had put the full, arguably correct, sum in for each stage.
An alternative is to put the full sum in for each stage, accepting that however much that comes to the actual recoverable costs will never exceed £50,000.
Obviously it would be entirely wrong artificially to front load costs to ensure maximum between the parties costs whenever the matter settles……….
The third option is to state that whatever stage the case reaches the fee is a sum equivalent to 50% of the damages and that that is the sum sought from the other side. I advise against this as generally the judiciary are wedded to hourly rates, in spite of the clear will of Parliament that other funding options should be available. Strictly, in my view, this is the correct option. The client is paying a fixed lump sum and the indemnity principle means that the claimant solicitor should neither seek £5,000 or £10,000 for any given stage as the client is not liable for any sum for any given stage.
What seems to me to be crystal clear is that a claimant who matches or beats its own Part 36 offer at trial gets the full 50% DBA fee, that is he or she gets costs on the indemnity basis.
The solicitor and own client costs are unquestionably 50% and thus costs on the indemnity basis are 50% of damages.
A paying party has no prospect of arguing that a method of payment approved by Parliament, with Parliament fixing the maximum percentage, is unreasonable.
A matter is approaching trial. The costs budget, regularly updated, shows that the winning claimant’s costs will be £300,000 on £1 million claim.
Can the claimant and solicitor switch to a 50% DBA, thus triggering costs of £500,000 if the claimant’s Part 36 offer is matched?
Yes, in my view, and there is nothing to stop parties entering in to a DBA at any stage. In all cases there will have been some investigative work before a DBA is entered in to.
Supposing, very early on in a DBA case a claimant succeeds in obtaining summary judgment with an order for indemnity costs. The same principle applies, that is a sum equal to 50% of damages for what may have been relatively little work, all fully recoverable.
Costs Management and Budgeting and Damages-Based Agreements
Supposing, in a personal injury case funded by a DBA and with costs limited to 25%, including VAT, of damages, the claimant puts in a high costs budget and subsequently the defendant finds out that the matter is being conducted under a DBA and therefore the maximum that they would ever be liable for, including costs, is 125% of damages.
Could a defendant, having fought the matter to trial, argue that if it had known that the matter was conducted under a DBA it would have settled much earlier as it would know the limit of their costs?
Suppose in a DBA case the claimant has made an offer under Part 36 to settle the whole claim for, say £100,000, and that offer remains open; is it acceptable for the claimant to put in a budget of say, £75,000, knowing full well that s/he is valuing the claim at a sum which will result in far lower costs, a matter that the defendant cannot refer to at that stage because of the Without Prejudice nature of a Part 36 offer?
Can the defendant subsequently argue that if they had known that the claimant was acting under a DBA, then they would have accepted the Part 36 offer, knowing that the claimant’s costs would be limited to 25% in personal injury cases and 50% in all other cases, including VAT and counsel’s fees?
An obvious answer is to amend the Civil Procedure Rules to provide that a claimant should notify the defendant within seven days of the signing of a DBA that the matter is being conducted under a DBA.
Even these scenarios are not clear. A personal injury claimant, knowing full well that the full value of the claim is £100,000 may nevertheless want the costs budget to give a figure of well over £25,000 as the court might decide to make an award based on the claimant getting only 50% of budgeted costs because s/he has exaggerated.
Arguably the correct order is to still allow the claimant’s lawyer the full 25%. Thus damages are in fact £100,000 where the claim was for £500,000, and the court penalizes the claimant to the extent of 50% because of this exaggeration.
Let us assume that the agreed budget was £50,000. 50% of that is £25,000 and the claimant therefore recovers costs of £25,000, which is the maximum that s/he could have recovered in any event under a DBA.
These are yet more another reasons why DBA means Don’t Touch with a Bargepole, although if you are a claimant you may fancy a late switch to a DBA.
Thank to Simon Gibbs – http://www.gwslaw.co.uk/blog/ – for drawing the general issue to my attention.
It would be so nice if something would make sense for a change
Alice in Wonderland – Lewis Carroll