'No win, no fee' or 'No win, low fee'? That is question posed by law firms, say Ted Greeno and Maura McIntosh

From the beginning of April, for the first time, lawyers will be able to conduct litigation before the English courts in return for a share of any damages. The introduction of contingency fees, or damages-based agreements (DBAs) as they are now called, was recommended in Lord Justice Jackson's final report in January 2010 and is being implemented by section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012. 

Lord Jackson favoured the introduction of contingency fees in part because he considered it desirable that as many funding methods as possible should be available to litigants. He also saw particular force in the freedom of contract argument: if the client wishes to enter into a contingency fee agreement with their lawyer, they should be free to do so.

We agree, but it seems that the new regime will be hampered from the outset by unnecessary complexity and confusion. On 23 January, just over two months before the legislation is due to come into force, the Government published the draft Damages-Based Agreements Regulations 2013, which set out the requirements a DBA must meet in order to be enforceable. 

The Regulations as drafted appear to preclude partial or 'hybrid' DBAs, whereby a lawyer could receive a reduced hourly rate as the case proceeds, which is payable win or lose, plus a contingency fee in the event of success. In other words, it seems that if a lawyer agrees to act under a DBA, this must be a full 'no win, no fee' agreement, so that the lawyer receives no fee if the client recovers no damages. 

This has taken the profession by surprise as there had been no reference to any such restriction in prior communications from the Ministry of Justice (MoJ). We, like many practitioners, had therefore assumed that the Regulations would be drafted in line with the views of the Civil Justice Council working party set up to review practical and policy issues relating to DBAs. Their report last summer concluded that there was no reason to prevent the use of partial DBAs, analogous to 'no win, low fee' conditional fee agreements (CFAs). 

There has been some debate among the profession as to whether the draft Regulations do in fact preclude partial DBAs. On their face, the draft Regulations provide that a DBA must not require the client to pay anything other than the 'payment', which is capped at 50% of any recovery, and non-counsel disbursements. 

The obvious implication appears to be that if there is no recovery, the client cannot be made to pay anything apart from non-counsel disbursements. 

However, some have argued that it would be possible to have a side agreement for the payment of a reduced hourly rate, win or lose, together with a DBA. It seems to us that this would be surprising, not least because it would make the restrictions imposed on the DBA by the regulations entirely redundant. 

We wrote to the MoJ to point out the confusion that has been caused by the Regulations as drafted and to ask whether, as a matter of policy, the Regulations were intended to preclude partial DBAs. 

In response, the MoJ has stated that one of the requirements for a DBA to be enforceable is that "the payment is to be determined by reference to the amount of the financial benefit obtained" and that, ultimately, it will be for the court to decide whether any agreement is enforceable in light of the legislation. This is, in our view, less than helpful. 

Unless matters are clarified (the Regulations are, at the time of writing, still in draft form), it seems inevitable that this issue will give rise to satellite litigation, with defendants challenging the enforceability of DBAs entered into by claimants in an effort to avoid liability for costs under the indemnity principle. And this is not the only surprising feature of the draft Regulations. They require the solicitor to bear counsel's fees if the claim fails, where counsel is not acting under a DBA and those fees are incurred by the solicitor as a disbursement. This may lead to firms making greater use of in-house advocates, unless counsel will accept direct payment by the client rather than the solicitor. 

They also impose on the solicitor the enforcement/credit risk in recovering costs from an opponent, since the client can only be made to pay the solicitor the net of amounts paid or payable by another party. Arguably, this also means that the solicitor cannot require the client to pay until recoverable costs have been assessed or agreed between the parties, which can take some considerable time. It is not clear whether any of this was intended by those drafting the Regulations.

We had hoped that the Jackson reforms would herald a less restrictive regime, in which lawyers and sophisticated commercial clients would be free to agree alternative fee arrangements which they considered appropriate for the case at hand. What it seems we will be left with is two parallel regimes with highly complex, highly prescriptive rules and little logic as to how they fit together. 

If a CFA is agreed, the lawyer can be paid up to double the normal fee, even if this dwarfs the amount of any damages received by the client. If a DBA is agreed, the lawyer can be paid up to 50% of the damages, even if this is a huge multiple of the fee the client would normally have to pay. 

So long as the retainer fits within one or the other it will be valid; if there is a failure to comply it will be unenforceable. At best, this is puzzling. At worst, it is a recipe for a whole new 'costs war'.

Ted Greeno is a senior dispute resolution partner and Maura McIntosh is a professional support consultant in the dispute resolution department at Herbert Smith Freehills.