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What is a Damages-Based Agreement?

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If your business falls into a commercial dispute and takes court action, there will be a cost for civil litigation. There are different ways that commercial solicitors charge fees for their litigation services, both during court cases and whilst out of court. It is essential that you, as a business owner, understand litigation funding so that you can make an informed choice for your business’ financial benefit. A solicitor will usually charge their client an hourly rate in advance rather than a success fee. Alternatively, solicitors may charge the latter through a damage-based agreement (DBA) or contingency agreement. This article will explain damages-based agreements.

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What is a Damage-Based Agreement?

A damages-based agreement aims to improve legal funding arrangements. You may have an agreement with your commercial disputes solicitor when you proceed with litigation either in or out of court. This agreement allows you to share the risk of litigation in both contentious and non-contentious legal proceedings. It specifies that the solicitor’s legal fees depend on what damages you get following the court case.

Damages are the reward a court orders the other party to pay you. Therefore, you will only be required to pay your solicitor in the event of a successful outcome. If you lose the case, you will not have any legal fees to pay your solicitor.

The court judgement for your commercial case will detail any damages. When a court awards the winning party damages, they will usually account for solicitor’s fees. This helps to pay for the agreed-upon percentage of legal fees in the damages-based agreement. Your legal representative can specify a percentage of these, but it cannot exceed 50% of the damages for the proceedings, plus VAT. However, where you resolve your dispute out of court, your solicitor can charge any percentage for their fees in the agreement.  

Why Choose a Damages-Based Agreement?

A commercial solicitor will not always be open to a damages-based agreement. However, where they are, your business may choose a damages-based agreement when taking legal action in a dispute. There are specific reasons why you may do so, which include:

  • not having funds in your business for the upfront legal fees;
  • where it is likely your commercial case will be lengthy, so you accrue many hours of legal fees;
  • if you have a strong chance of winning the case, so it is in your and your legal representative’s interest to agree on one.

However, the law does not permit you to enter a damages-based agreement if you are the defence in a commercial dispute. Additionally, where you do select a damages-based agreement, you do not have to pay the percentage of legal fees to your legal representative until you actually receive the damages award. 

If you choose this form of agreement, you should note it will not cover your disbursement costs, such as court fees and expert fees. However, some solicitors will offer insurance to offset the expenses associated with your own legal costs and those of the other party in the event that you lose your court case. Where they do, this is referred to as After the Event Insurance (ATE). 

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Key Takeaways

If you fall into a commercial dispute during the course of your business, you may end up getting into litigation. If so, you must pay legal fees for a dispute solicitor or other legal representative. One way to pay their expenses is through a damages-based agreement or contingency agreement. This specifies a percentage of any damages you receive which you will pay them if you win the case. If you lose your case, you pay your lawyer nothing. You may wish to use a damages agreement for various reasons, such as not having funds in your business to pay upfront hourly fees. However, a commercial lawyer may not always be open to a damages agreement as there is a risk of no payment for them for their work. There are also rules about damages-based agreements, such as that they cannot be used for the defence of a commercial case.

If you need help understanding damages-based agreements, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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