DAMAGES BASED AGREEMENTS (T8)

What is a damages-based agreement (DBA)?

An agreement under which payment depends on the client obtaining a specified financial benefit, with the payment calculated by reference to that benefit-usually a percentage of damages recovered.

Example: The solicitor receives an agreed 20% of compensation if the claim succeeds.

How does a DBA differ from a CFA?

Under a DBA, the contractual payment is linked to the recovery. Under a CFA, payment of legal fees is conditional, with any success fee ordinarily calculated as an uplift on basic fees.

Example: “20% of damages” differs from “hourly charges plus a 50% uplift.”

What change did LASPO 2012, s.45 introduce?

It amended Courts and Legal Services Act 1990, s.58AA, extending the statutory framework for DBAs beyond their previous limited use, particularly in employment matters, into civil litigation.

Example: A qualifying commercial litigation claim could be funded through a DBA.

What legislation governs DBAs?

Principally CLSA 1990, s.58AA, and the Damages-Based Agreements Regulations 2013.

Example: Check both the statutory definition and the Regulations’ payment and drafting requirements.

What requirements arise under s.58AA(4)?

The agreement must be in writing, concern permitted proceedings, comply with applicable payment limits and prescribed terms, and satisfy any prescribed requirements for information before agreement.

Example: A written agreement can still be unenforceable if it exceeds the applicable cap.

Can a DBA fund criminal or family proceedings?

It cannot relate to proceedings excluded by s.58A(1)–(2), as incorporated into s.58AA. These include specified family proceedings and criminal proceedings, subject to the statutory exception for Environmental Protection Act 1990, s.82.

What three matters must a DBA specify under regulation 3?

The claim or proceedings covered; when payment, expenses and costs become payable; and why the payment was set at the agreed level.

Example: Identify the claim, the success trigger and the explanation for selecting 20%.

Why must the claim or proceedings be identified?

Regulation 3(a) requires the agreement to specify the claim, proceedings or relevant parts covered.

Example: An agreement covering a contractual damages claim should make clear whether related proceedings are included.

What payment circumstances must be specified under regulation 3(b)?

When the representative’s payment, expenses and costs—or any part of them-are payable.

Example: Explain whether settlement triggers the percentage payment and when expert expenses become due.

What explanation does regulation 3(c) require?

The agreement must state the reason for setting the payment at the level agreed. Merely recording the percentage is insufficient.

Example: Explain the relevant financial risk, anticipated work and other actual reasons for the chosen percentage.

What does regulation 4(1) permit the client to be charged in non-employment cases?

The DBA payment, with the required credit for costs and relevant counsel’s fees paid or payable by the opponent, plus permitted expenses, themselves reduced by corresponding opponent recovery.

Example: The solicitor cannot simply add the full percentage payment to recovered legal costs without applying the required credit.

Can expenses be payable in addition to the DBA percentage payment?

Yes, where permitted and provided for by the agreement. The Regulations distinguish expenses from the percentage payment.

Example: An expert-report expense may remain payable separately, after crediting any amount recovered for it.

How are counsel’s fees treated in ordinary non-employment DBAs?

Counsel’s fees are included within the regulated payment, rather than treated as an additional expense outside it. Employment matters have different treatment.

Example: A solicitor cannot automatically add counsel’s fees on top of the permitted percentage as though they were ordinary expert expenses.

What is the PI payment cap under regulation 4(2)?

At first instance, the payment cannot exceed 25% of the specified damages, including VAT.

Example: Specified damages of £40,000 produce a maximum payment of £10,000 inclusive of VAT.

Which damages count towards the PI cap?

PSLA damages and past pecuniary losses, net of relevant Compensation Recovery Unit sums. Future pecuniary losses are excluded.

Example: Past lost earnings count; future care costs do not.

What is the cap for other non-employment claims under regulation 4(3)?

At first instance, 50% of the sums ultimately recovered, including VAT.

Example: A £100,000 commercial recovery gives a maximum regulated payment of £50,000 inclusive of VAT.

Do the regulation 4 percentage caps apply to appeals?

Regulation 4(4) limits the prescribed 25% and 50% caps to first-instance claims or proceedings. Do not automatically carry those caps into appeal arrangements.

Example: Check a separately funded appeal against the applicable provisions and contractual terms.

What is the payment cap for employment matters?

Under regulation 7, the payment must not exceed 35% of the sums ultimately recovered, including VAT. Regulation 4 does not govern employment matters.

Example: A £20,000 recovery produces a maximum regulated payment of £7,000 inclusive of VAT.

Does a DBA prevent the client obtaining a costs order?

No. CPR 44.18(1) provides that entering a DBA does not affect a costs order which would otherwise be made in the party’s favour.

Example: A successful claimant funded by a DBA may still obtain an order that the defendant pay costs.

How are inter-partes costs assessed where the receiving party has a DBA?

Under CPR 44.18(2)(a), recoverable costs are assessed in accordance with CPR 44.3. The opponent does not automatically owe the contractual percentage of damages.

Example: A 30% DBA does not itself require the defendant to pay costs equal to 30% of the recovery.

What ceiling does CPR 44.18(2)(b) impose?

The party cannot recover costs exceeding the total amount payable under the DBA for legal services provided under it.

Example: If that liability is £20,000, an otherwise higher assessment cannot produce recovery beyond the applicable contractual ceiling.

What happens if a DBA fails to satisfy the applicable statutory conditions?

Under s.58AA(2), a non-compliant DBA is unenforceable. Identify the precise defect rather than assuming that the agreement’s title establishes validity.

Example: Omitting a required explanation for the percentage payment can defeat enforcement.

What did Stoop v Johnson [2024] decide about regulation 3(c)?

The agreement failed to specify the true reason for setting the payment at 50%. The breach was material and rendered it unenforceable.

Example: A generic risk clause cannot substitute for the actual explanation where the percentage was chosen for a different reason.

What did PACCAR v Competition Appeal Tribunal [2023] decide?

Litigation funding agreements providing a funder with a percentage of damages fell within the statutory DBA definition because the funding constituted claims management services for that purpose. The relevant agreements were unenforceable because they did not comply with the DBA requirements.

Example: A funder receiving 10% of damages must consider the DBA framework even though it does not conduct the litigation.

Does PACCAR mean every litigation funding agreement is a DBA?

No. Its application depends on the agreement satisfying the statutory definition, including how the return is calculated.

Example: An agreement calculated solely by reference to a multiple of funding requires separate analysis; it is not automatically identical to a percentage-of-damages arrangement.

What reform point should be remembered when revising PACCAR?

The Government has announced an intention to legislate to clarify that LFAs are not DBAs. An announced intention is not itself an amendment: check enacted legislation and commencement before treating PACCAR as reversed.

Example:A proposed reform cannot alone establish that an existing agreement is enforceable.

What did Zuberi v Lexlaw [2021] decide about termination clauses?

A clause requiring the client to pay time charges and expenses on early termination did not make the whole agreement unenforceable merely because it contained that obligation.

Example: A DBA may provide for hourly charges if the client ends the retainer before the claim concludes.

Does Zuberi establish that every termination clause is enforceable?

No. It rejects the argument that this type of termination payment necessarily invalidates the agreement. The particular clause must still satisfy applicable contractual and statutory requirements.

Example: An excessive or unfair termination provision is not automatically protected merely because the agreement is a DBA.