In 2018, we reported on the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 receiving Royal Assent. At that time, we discussed the principal features and main changes that the Act introduced, but it was unclear when its main provisions would come into force.
However, as of 28 April 2020, implementing regulations have enabled Scottish solicitors to enter into Damages Based Agreements with their clients for the first time. This introduces parity with the system that has been in place in England & Wales for a number of years.
Litigation funding: Damages Based Agreements
A Damages Based Agreement is a "no win, no fee" arrangement, which provides that the successful client will make payment of a “success fee” to their solicitor if they obtain a “financial benefit”. If the client is unsuccessful, they will not pay any fees or will pay a reduced fee.
The value of the success fee the solicitor receives is calculated as a percentage of the compensation awarded. The Scottish regulations provide for different “success fee caps” depending on the type of case. In a commercial case, the maximum success fee is 50% of the financial benefit.
Is there any difference between the regime in Scotland and the one in England & Wales?
The Scottish 2018 Act permits solicitors in Scotland to enter into “hybrid” Damages Based Agreements with their clients, except in personal injury actions. This means that the solicitor can receive a reduced hourly rate regardless of the outcome of the case and would also receive the “success fee”, if the client obtains a “financial benefit”.
The equivalent legislation in England & Wales appears to prohibit solicitors from entering into “hybrid” Damages Based Agreements because all the client has to pay is a maximum of 50% of what is recovered from the other side. Therefore, if nothing is recovered, the client has nothing to pay.
While that system may seem advantageous and desirable to the client, it transfers all of the risk to the solicitor because, in effect, it is a “no win, no fee” agreement. This possibly explains why uptake has been low in England & Wales and a reform project is underway. The Scottish system is more balanced in that it allows the solicitor and the client to share the financial risk between them.
What are the advantages for businesses?
The 2018 Act increases the options for a business to fund a commercial dispute in Scotland. Rather than being put off by the prospect of large upfront costs, a business with a good case can enter into a Damages Based Agreement with their solicitor to help finance the litigation. This means that the business can retain precious cash to fund its daily operations, transfer some of the risk to the solicitor and have more certainty over the cost of the litigation.
This is particularly true with the current economic situation as a result of the coronavirus crisis. As they try to adjust to the new normal, businesses are faced with difficult decisions about what they can do about existing commercial agreements impacted by COVID-19. Once businesses are able to get back to work and the restrictions are lifted, they may have cause to take action against a counterpart to enforce a contract or seek damages for a lack of performance. Damages Based Agreements will be an attractive option for businesses pursuing litigation that want to conserve cash whilst enforcing their legal rights.
If you would like us to help you on this or another related matter, please get in touch with a member of the team.