Third-party litigation funders hoping to avoid liability for adverse costs decisions under damage-based agreements (DBAs) by investing in law firms look unlikely to succeed, according to a new report from the Civil Justice Council (CJC).

Final recommendations on DBAs, a form of contingency fee included in the Jackson reforms of civil litigation funding due to come into effect in April 2013, were published last week by the CJC's contingency fees working party, led by former Irwin Mitchell chairman Michael Napier QC.

They suggest funders will continue to be liable for adverse costs up to the value of their investment. In contrast, lawyers – who will be able to claim a portion of the claimant's damages as a success fee in contentious cases – will not be liable for adverse costs.

The recommendations come after some questioned whether funders would be able to use the introduction of alternative business structures (ABS) to claim the same immunity offered to lawyers if they held a stake in a law firm.

The decision is consistent with the Court of Appeal's 2005 Arkin ruling, a shipping case involving a conditional fee agreement (CFA) in which funders were held liable for adverse costs up to the value of their investment, with the CJC report recommending "the Arkin principle also applies to a third-party litigation funder who provides commercial finance in a DBA case".

Other recommendations in the report include that there should be no obligation to notify the opposing party that lawyers have entered into a DBA, and that the damages from which the contingency fees can be taken in personal injury cases should not be limited.

The working party, which met for the first time in April this year, was set up to explore issues around the forthcoming changes to contingency fees and DBAs.

Commenting on the recommendations, Harbour Litigation Funding's head of funding Susan Dunn (pictured) said: "It feels like a very uneven playing field and something which no doubt the Association of Litigation Funders will be seeking to address – I can see no justification for this unequal position."

James Delaney, director of third party litigation funder TheJudge commented: "Whether law firm acting under a DBA should have an immunity from a third party cost order is a hotly debated issue with all funders. Their feeling is that this gives law firms an additional advantage over the funding market.

"Ultimately the introduction of DBAs will potentially increase competition between funders and law firms. Like the US, there will clearly be cases where lawyers will be in direct competition to funders, for example, cases where law firms want to retain the upside in-house rather than sharing with external third parties.

"This could encourage adverse selection within the market – for example, where law firms only offer the riskier cases to the market of third party funders. For funders this is less attractive, particularly if they face the extra risk of third party cost orders."

The publication of the report comes after third-party litigation funder Burford Group last week announced the hire of its first in-house counsel. Melissa Sobel has joined Burford as GC from magazine publisher Time Inc, where she had been associate GC for the last eight years.