1. Introduction
1.1 Who should read this practice note?
Solicitors who undertake work before employment tribunals on behalf of clients, where professional fees for all or part of any claim is covered by a Damages Based Agreement (DBA) (also known as a contingency fee agreement).
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1.2 What is the issue?
On 9 April 2010 the Damages-Based Agreements Regulations 2010 (the Regulations) came into force governing the use of DBAs in employment tribunal work. If you use or intend to use a DBA in any employment tribunal matter you must comply with the Regulations which impose specific requirements on the content and limits of any agreement and stipulate the nature of the information that should be provided to your client/s.
The agreement will be unenforceable if you do not comply
The new duties are complemented by the existing duties set out in chapter 1 on client care of the SRA Code of Conduct 2011 (SRA Code). Solicitors should also consider principle 4 in the SRA Handbook. You should be aware of both sources in drafting any DBA, and in advising your clients as to its effects.
This practice note advises on the relevant legislation, the content of the Regulations themselves and relevant rules and guidance already contained within the SRA Code, together with additional guidance to assist with compliance.
1.3 Professional conduct
The following chapters of the SRA Code are relevant to this issue:
Chapter 1 on Client Care
1.4 Terminology
Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view.
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
2007 Code - Solicitors' Code of Conduct 2007
OFR - Outcomes-focused regulation
SRA - Solicitors Regulation Authority
IB - indicative behaviour
1.5 Status of this note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
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2 SRA Principles
There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.
You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.
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3. Damages-based agreements (DBAs)
S154 Coroners and Justice Act 2009 (inserting s58AA Courts and Legal Services Act 1990) provides for the Lord Chancellor to make provisions with regard to the use and scope of DBAs in employment matters. A DBA is defined as:
"(a)...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 to be obtained;
(b) a damages based agreement relates to an employment matter if the matter in relation to which the services are provided is, or could become, the subject of proceedings before an employment tribunal."
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4 The Regulations
The Regulations:
- apply to any person providing advocacy services, litigation services or claims management services in employment tribunal work.
- prescribe the requirements with which an agreement between a client and his or her representative must comply. An agreement which does not comply with the provisions of the regulations will be unenforceable and you will not be able to sue clients for any fees that are owed.
- came into force on 9 April 2010 and apply to all DBAs signed on or after that date concerning employment tribunal matters, whether proceedings are issued or not.
4.1 Regulation 2 - Requirements of an agreement
Regulation 2 stipulates that the terms and conditions of a DBA must specify:
"(a) the claim or proceedings or parts of them to which the agreement relates
(b) the circumstances in which the representative's payment, expenses and costs, or part of them, are payable; and
(c) the reason for settling the amount of the payment at the level agreed, including having regard to, where appropriate, whether the claim or proceedings is one of several similar claims or proceedings."
These points should be set out in the agreement or client care letter and you must ensure that they have been properly discussed with your client.
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4.2 Regulation 3 - Premiums
Regulation 3 stipulates the information you must provide to clients as
"(a) information, to be provided to the client in writing, about the matters in paragraph 3(2); and
(b) such further explanation, advice or other information about any of those matters as the client may request."
Those "matters" referred to above are contained in paragraph 3(2) of the Regulations and are as follows:
"(a) the circumstances in which the client may seek a review of the costs and expenses of the representative and the procedure for doing so;
(b) the dispute resolution service provided by the Advisory, Conciliation and Arbitration Service ( ACAS ) in regard to actual and potential claims.
(c) whether other methods of pursuing the claim or financing the proceedings, including –
(i) advice under the Community Legal Service
(ii) legal expenses insurance
(iii) pro bono representation, or
(iv) trade union representation, are available, and, if so, how they apply to the client and the claim or proceedings in question.
(d) the point at which expenses become payable; and
(e) a reasonable estimate of the amount that is likely to be spent"
You should therefore:
- provide your client with the prescribed information regarding the client's right to challenge your costs under Part III of the Solicitors Act 1974 (non-contentious costs)
- discuss with your client other methods of funding which may be available to the client including any public funding and/or pro bono help. This would also include funding by a conditional fee agreement or on an hourly rate, depending on what would be in the client's best interest and on your willingness to undertake the case on that basis.
- make it clear to your client what expenses and disbursements are likely to be incurred which are not included in your costs and when and in what circumstances those disbursements are payable. Solicitors should consider principle 4 in the SRA Handbook when discussing methods of funding available to the client.
You should record this information and include it in your client care letter.
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4.3 Regulation 4 - Additional causes of action
Regulation 4 states as follows:
"If you intend to make any amendment to a damages based agreement to cover any additional causes of action. Any such amendment/s must be in writing and signed by your client and you."
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4.4 Regulation 5 - The Payment
Importantly, the regulations now place a cap on the percentage of costs deductible from the amount recovered on behalf of the client in settlement of his/her claim, whether or not proceedings were issued or completed.
Regulation 5 states:
"The amount prescribed for the purposes of section 58AA(4)B of the Act is the amount which, including VAT, is equal to 35% of the sum ultimately recovered by the client in the claim or proceedings."
The cap of 35 per cent applies to the amount recovered by the client and not the award. Consequently, you will not be able to recover any costs from the client without first recovering all or part of the award from the unsuccessful opponent.
This figure need not include counsel's fees or other disbursements but if these are to be charged separately you must state this in the agreement. In this case, your bill should show separate amounts for your costs and VAT, the total of which must not exceed 35 per cent of the amount recovered for the client, and for disbursements. Where applicable, VAT should be shown separately in the usual way.
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4.5 Regulation 6 - Terms and Conditions of termination
Regulation 6 restricts the circumstances in which either you or your client may terminate a DBA.
It provides:
"(1) The additional requirements... ... ...are that that the terms and conditions of a damages-based agreement must be in accordance with paragraphs (2),(3) and (4).
(2) If the agreement is terminated, the representative may not charge the client more than the representative's costs and expenses for the work undertaken in respect of the client's claim or proceedings.
(3) The client may not terminate the agreement –
(a) after settlement has been agreed; or
(b) within seven days before the start of a tribunal hearing
(4) The representative may not terminate the agreement and charge costs unless the client has behaved or is behaving unreasonably.
(5) The conditions on termination of a DBA do not prejudice the right of either party under the general law of contract to terminate the agreement."
You should ensure that the agreement provides full details of how your charges will be calculated and when those charges are to be paid if the client terminates the agreement. In practice, this is likely to be the relevant hourly rate for the work together with any disbursements.
The definition of 'unreasonable' is likely to include circumstances in which a client refuses to accept an appropriate settlement, and requires you to act in a way which is contrary to the SRA Code. There are many other examples of 'unreasonable' behaviour and it may be appropriate for you to explain these to the client at the start of the case.
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5. Alternative funding arrangements
If you consider that the cap on the success fee for a DBA is unlikely to enable you to conduct the work in the client's best interests you are free to suggest alternative methods. For example, a conditional fee agreement is a further form of 'no win no fee' agreement under which you may specify an hourly rate which is subject to uplift on success. Such an agreement is not covered by these regulations because it is not related to the amount of damages recovered.
5.1 Non-contentious business
Tribunal proceedings are non-contentious business under the Solicitors Act 1974 ('the Solicitors Act') and, so far as solicitors are concerned, a non-contentious business agreement compliant with Section 57(1) of the Solicitors Act could be used for Employment Tribunal matters.
A conditional fee agreement (as opposed to a DBA) would be enforceable and would not be caught by the Regulations. Such an arrangement might enable you to achieve a greater success fee than would be possible under the Regulations, and still avoid your client risking liability to you if the claim fails.
You should be aware, however, that a conditional fee agreement may amount to a DBA for the purposes of the Act where the amount of the costs and/or of any success fee payable under the agreement is to be determined by reference to the amount of any financial award obtained. This would be the case if a conditional fee agreement provided for different levels of success fee dependent on the size of the financial award or capped the costs and/or success fee by reference to the level of that award.
Such agreements will be caught by the new regulations and failure to comply will mean they are unenforceable.
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5.2 Complying with the Code of Conduct
Chapter 1 of the SRA Code on client care is important. Chapter 1 is designed to provide a proper standard of service, which takes into account the individual needs and circumstances of each client. This includes providing clients with the information they need to make informed decisions about the services they need, how these will be delivered and how much they will cost. Chapter 1 should be interpreted in reference to the ten mandatory principles in the SRA Handbook. These principles apply to all those the SRA regulates and to all aspects of practice.
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6. More information
6.1 Further products and support
6.1.1 Practice Advice Line
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
6.1.2 Law Society publications
6.1.3 Training and events
6.2 Acknowledgements
The Law Society acknowledges the help of the Civil Justice Committee and Employment Committee with this practice note.
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