The Minefield of Damages-Based-Agreements
Author: Ben Chowdhury, Managing Associate and Costs Lawyer at Kain Knight
Damages-Based Agreements (“DBAs”) were introduced in 2013 as an alternative funding arrangement for litigation, allowing solicitors to share in the financial benefits of a successful claim. However, their uptake was initially slower than anticipated – partly due to their complexity and the risks associated with non-compliance but mainly due to the regulations not allowing any form of hybrid approach. A recent case where we were instructed by the Claimant, Reeves v Frain and McKinnon (2025) EWHC 185 (SCCO), highlights the potential pitfalls of DBAs and the severe consequences of failing to comply with the regulations.
The Claimant sought a declaration on the validity of a 2014 will made by her father (“the Deceased”), whose estate was valued at approximately £100 million. The Second and Fourth Defendants (the Deceased son and grandson respectively) argued the will was invalid, alleging it was executed without the Deceased’s consent. On 31 January 2022, following a trial, Green J ruled in favour of the Defendants, granting probate for a 2012 will and ordering the Claimant to pay 70% of the Defendants’ costs, to be assessed on the indemnity basis. The Defendants funded their case partly through Damages Based Agreements (DBAs) with LLP Solicitors (“LLP”), with their Bills of Costs split into parts reflecting an initial private retainer, the costs incurred under the DBA and a part for a subsequent “new” private retainer that was entered into after “success”.
The split in the Bill of Costs from the DBA to a subsequent Private retainer raised concern to us when preparing Points of Dispute to the costs claim. This brought into question whether a valid retainer was actually in place and this issue was detailed in the Points of Disputes. The Defendants maintained that they had a valid DBA, therefore, an Application was made (after instructing counsel, Robert Marven KC) by the Claimant for the retainer documents to be disclosed. Having persuaded the Judge as to the validity of the retainers, the court put the Defendants to their election to either disclose all retainers or to prove the terms of such retainers in some other way.
Following disclosure, supplementary disputes were filed, and a further hearing on 6–7 November 2024 addressed the recoverability of £2.19 million (recoverable at 70% under the terms of the order so £1.53 million) of the total £2.4 million (70%: £1.6 million) claimed by the Defendants in the relevant parts of the Bills of Costs.
The Defendants entered into two materially identical DBAs with LLP, differing only in their dates and the percentages payable on any award or settlement. Following Green J’s judgment on 31 January 2022 but before the consequential hearing on 4 March 2022, LLP informed the Defendants that a “win” had been achieved under the DBAs, triggering their fees, and that any new work post-judgment would be charged at £500 per hour. The Defendants argued this created fresh retainers.
The Claimant argued the DBAs were unenforceable for non-compliance with DBA rules: (Issue 1) a DBA must only provide for payment to the solicitors (“payment”) out of sums recovered and, it was said, the DBAs in this case did not do so; (Issue 2) payment to the solicitors under a valid DBA must include counsel’s fees, which may not be charged as expenses – in this case counsel’s fees were charged as an expense and in addition to the payment; and (Issue 3) payments were not “net of” inter partes cost recovery. The Defendants disputed this, asserting any non-compliance was immaterial and that offending terms, such as those on counsel’s fees, could be severed without undermining the DBA’s core bargain. Additional issues were also raised to include whether the DBAs were wrongfully repudiated (Issue 4) and whether LLP’s post-judgment communications created a new retainer (Issue 5).
On the first issue, the Claimant argued that the claim itself did not give rise to a financial benefit as it sought a declaration on the validity of the Deceased’s wills, ultimately affirming the 2012 will. The Defendants argued that LLP’s costs under the DBAs crystallized when the 2014 will was invalidated on 30 January 2022, before the consequential hearing on 4 March 2022. However, under s58AA(3) of the Courts and Legal Services Act 1990, a “specified financial benefit” must derive directly from the matter instructed, not from subsequent actions, with payment tied to the benefit obtained. The Damages-Based Agreement Regulations 2013 further clarify that recovery must stem from the claim or damages awarded. As such, the Judge ruled that DBAs were unenforceable.
On the second issue, the Claimant’s case was that the payment as defined in Regulation 1 must include counsel’s fees (and thus must be net of counsel fees). The 2013 Regulations expressly define “expenses” (outside employment matters) to exclude counsel’s fees. The DBAs in this case breached this requirement because they charged counsel’s fees as expenses which are payable in any event. It was submitted by the Claimant that an employment DBA was used inappropriately for litigation.
The Defendants, on the other hand, argued that they had a direct obligation to counsel which did not go via LLP. The Judge noted that the DBAs did not provide for the Defendants to be directly liable to counsel but rather they were liable to LLP for counsel’s fees. Ultimately, the Judge ruled that even if the DBAs were valid notwithstanding the first issue, he would consider them unenforceable for that further reason.
The third issue, as mentioned above, concerned whether the payment was “net of” any inter partes recovery of solicitor’s costs. However, given the decisions in Issues 1 and 2, the Judge did not need to make any decision on this point.
On the fourth issue, where LLP had stated that the DBAs had concluded after “success” and a new retainer was created, the Judge stated that it is well-established that the solicitors’ retainer is an entire agreement for the relevant matter. He provided the example that a conditional fee agreement or damages-based agreement does not end immediately upon a “win” otherwise there would always need to be a post-judgment conventional retainer. The Judge agreed that the DBAs covered the whole of the proceedings including steps taken after the handing down of judgment. However, the Judge did not go as far as to state that LLP’s representations amounted to a repudiation of the DBAs.
Finally, on the fifth issue as to whether there was a private retainer for work otherwise covered by the DBA from 16 January 2022 and, if so, did it give rise to a proper or reasonable claim for costs. The Judge held that there was an effective variation of the DBA to charge for work already covered by the DBA under a new private retainer. As such, the claim for costs pursued under the private retainer but which are covered by the terms of the DBA must fail. The judge reconfirmed that LLP were in error in asserting that their obligations under the DBA had come to an end and had misrepresented the terms of the DBA inducing the Defendants to enter a new agreement.
This judgment underscores the importance of ensuring that DBAs are drafted and implemented in full compliance with the relevant regulations. Failure to do so can result in significant financial losses, as demonstrated by the Defendants’ inability to recover over £1.5 million in costs. Solicitors must carefully consider the scope and terms of DBAs. At Kain Knight, we specialise in advising on all aspects of costs and retainers, helping clients navigate the complexities of litigation funding. Our expertise, combined with strong relationships with chambers and leading counsel such as Robert Marven KC in this case, ensure that our clients achieve the best possible outcomes.
The judgement can be found here.
