(June 19, 2013) — Could a new way of paying litigation fees make it easier for UK pension funds to take errant fund managers to court?
The question is being posed after the introduction of a new contingency fee arrangement (CFA) method, known as Damages Based Agreements (DBAs).
Brought into being on April 1, 2013, DBAs are a type of “no win, no fee” arrangement, designed to provide a fairer way of helping claimants bring cases against corporations when they have little or no money to pay for litigation.
CFAs are not a new concept, and indeed still exist and are widely used in some areas of law-typically areas such as public liability-but there was a feeling that the traditional CFAs were encouraging so-called ambulance chasing lawyers and not really getting to the heart of the real problem.
Enter DBAs: Under this arrangement the lawyer is paid with a percentage of the compensation or damages the client receives on winning. If the client loses, the lawyer isn’t paid, although the client could still be liable for the costs on the other side.
The percentage fees creamed off in the event of a win are substantial. Under the new legislation fees are capped at 50% of the damages awarded for ordinary civil litigation, 35% for employment and 25% for personal injury. The DBA will include counsel’s fees and VAT but excludes any other experts’ fees.
Pension funds have traditionally been hesitant about entering into (potentially expensive) litigation. They are able to use the pension fund’s assets to pay the legal fees, but they don’t want to be seen to be putting that money at risk.
Some have used what is known as a Beddoe Order, where trustees apply to the courts for their blessing to use pension fund assets in this way, but could DBAs provide a new way forward?
“The DBA approach is potentially very attractive to claimants as it means they remove the risk of having to pay their lawyers to pursue a claim which is ultimately unsuccessful,” says Jason Shaw, senior associate at Allen & Overy.
“A DBA can also, in the right case, be attractive to the lawyers. For example, a 25% slice of £30 million in damages equates to £7.5 million for the lawyer. This would dwarf any fees the lawyer would normally expect to recover.”
Indeed, DBAs become attractive the larger the amount of damages being sought. This, according to Shaw, makes claims involving pension funds a prime area for DBAs, particularly for trustees seeking to bring claims against fund managers where they believe performance has fallen below par.
“In the past, the cost of investigating and pursing such claims has been a deterrent to pension fund trustees but if they can now find law firms willing to pursue that claim on a DBA basis, then such claims become much more attractive,” he says.
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“Trustees (or any other claimant using a DBA) will still need to be alive to the fact that a DBA does not give them an entirely free ride because if they lose their case or discontinue it part way through, they are still potentially liable to pay the other side’s legal costs.”
Not everyone’s convinced DBAs will take off though. Gary Ginnaw, costs lawyer at Norton Rose, tells aiCIO: “We haven’t entered into any of them just yet and I haven’t seen any to date. But we will probably look at the going forward.
“It’s not yet clear on several issues…and I think there’ll be several examples of good and bad drafting over the next few months until further guidance is issued.”
Claire Carroll, partner and pension litigation specialist at Eversheds, says many law firms are still trying to work out what DBAs mean for them, and whether they are any better than other funding models.
“There’s a lot of uncertainty (around DBAs), and you’d need to make sure it wouldn’t fall foul of the regulations. If it did fall foul, the agreement would be unenforceable, and nothing would be paid under it.
“And trustees would still have to think about obtaining after the event insurance in order to cover them for the other side’s costs if they lost,” Caroll says.
Most of the lawyers questioned say it is unlikely the introduction of DBAs will result in a wave of litigation-fund managers may want to breathe a sigh of relief at this point. But CIOs should be aware that trustees aren’t the only ones who can use the agreements. Disgruntled members can too.
“I don’t see the implementation of DBAs bringing a sea change to the pension world, but there is an increasing awareness of tools like this from trustees and the members themselves,” says Peter Murphy, partner at Sackers.
“We’ve seen a number of action groups bringing claims against the employer or the pension scheme, typically for changes to the accrual rate or something similar. In these situations DBAs might be considered for use by the membership.”
Pension funds are far more likely to continue to use a Beddoe Order, Murphy continues. Many trustees would look at the amount they’d have to hand over as a success fee and the after the insurance premium as quite a significant premium, compared to what they’d be paying if they just took on the risk themselves, he said.
“Also, they may have concerns over being put under pressure to accept an early settlement so their lawyer gets paid, when in fact they might prefer to fight for a higher settlement, or even go to trial.”
There is one thing which could drive a take-up of DBAs however: the court.
“Up until now, especially if the scheme is in wind-up and there’s no employer around to provide indemnity, trustees would ask for a Beddoe Order, effectively a blessing from the court to use the scheme assets,” says Murphy.
“One potential reason why we could see DBAs is if the courts ask them to consider them rather than grant a Beddoe Order. They might have to make a case to explain why they have rejected the idea of using a DBA.”