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Contingency fees and access to justice in Australia.

IMPROVING access to justice is a perennial issue in Australia, and internationally. As an Australian jurist has noted: (1)
   At almost any given time in Australia,
   there is an inquiry under way into access
   to justice or consideration is being given
   to the latest report on the subject.


Budgetary constraints in most developed countries have led, in recent years, to the issue becoming more controversial and the subject of broader community debate. In February 2013, a Victoria Supreme Court Judge, Lex Lasry, took the highly unusual step of staying a trial for attempted murder following the decision by Victoria Legal Aid to provide only a barrister, and not a solicitor, to the defendant. The funding body took the step in response to what it considered to be chronically inadequate government funding. (2) In May of 2013, the Victorian Office of Public Prosecutions was aware of forty-seven applications for stays in other criminal proceedings that had already been made or were being made on the basis of inadequate funding of the defense. (3)

Victoria Legal Aid prioritizes funding criminal proceedings, (4) and so difficulties in the civil arena may be considered even greater. In response to those difficulties, the Australian Productivity Commission was recently asked by the Commonwealth to enquire into how access to justice may be improved in civil matters and has received more than eighty submissions in response to its issues paper released in September 2013. (3) A submission on behalf of one of Australia's largest plaintiff law firms, Maurice Blackburn, suggested that "Allowing lawyers to charge contingency fees would substantially improve access to justice." (6) This is not the first time such a change has been proposed, but we suggest that it is unlikely to enhance access to justice significantly in Australia and carries risks that far outweigh any possible benefit.

I. Arguments in Favor of the Proposal

Laws in every Australian State and Territory prohibit lawyers from entering into costs agreements which provide for the payment of a contingency fee--that is, a fee calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceeding to which the fee relates. Proponents have suggested recently that the existing prohibition on contingency fees be lifted. Advocates for this proposal tend to rely on three arguments, namely:

* contingency fees will improve access to justice;

* in the context of other possible funding arrangements, and changes in other jurisdictions, the prohibition can no longer be justified; and

* contingency fees provide greater certainty, clarity and proportionality than other fee structures.

We address each argument in turn and then discuss the significant risks lifting the prohibition would entail.

A. Access to Justice

Proponents often assert that allowing lawyers to enter into contingency fee agreements would provide potential litigants with an additional source of funding and, in doing so, promote access to justice for persons otherwise unable to afford legal representation. It is not clear to us, however, that contingency fees are capable of addressing the areas in which there is greatest unmet legal need.

In 2012, the Law and Justice Foundation of New South Wales conducted a survey aimed to identify the prevalence of all types of legal problems in Australia (the LAW Survey). (7) According to the LAW Survey, the most common legal problems are consumer, crime, housing and government problems. (8) These are also the most common legal problems for which people do not seek legal advice. (9) By contrast, the legal problems for which people most often seek legal advice are family law, personal injury and money problems. (10)

In our view, the unmet legal need identified by the LAW Survey is unlikely to be addressed by allowing lawyers to enter contingency fee agreements. Criminal law matters are generally (and correctly, in our view) excluded from any proposal to allow lawyers to charge contingency fees. Consumer, government and housing matters are generally less likely to result in large awards of damages or compensation, and would therefore be less likely to attract lawyers wiling to act on a contingency fee basis. There appears to be sufficient access to legal advice for personal injury and money matters, which do result in larger awards of damages.

B. Contextual Arguments

Proponents make a number of contextual arguments in favor of removing the prohibition on lawyers charging contingency fees, including: lawyers in Australia can enter into costs agreements providing for the payment of conditional fees (conditional fee agreements)-, the abolition of the torts of maintenance and champerty and the more recent development of a litigation funding market in Australia; and the availability of contingency fees in the United States, Canada and the United Kingdom.

The first of these contextual arguments depends on emphasizing similarities between conditional fee agreements and contingency fee agreements to the point of conflating these two types of fee arrangements. In our view, any similarities should not obscure the fundamental difference between these two types of fees.

Like traditional lawyers' fees, conditional fees are charged by reference to the work undertaken by the lawyer and cannot be charged by reference to the value of the claim. This is true even where a conditional fee agreement provides for the payment of an uplift fee: under existing law, the uplift fee must not be calculated by reference to the value of the claim. By contrast, contingency fees are charged as a percentage of any award or settlement, effectively giving the lawyer a purchased share in the litigation. This direct financial interest in the litigation, and not the fact that the fee is charged on a "no win, no fee" basis, gives rise to the conflicts of interest described below.

Proponents have suggested in broader debate that there is a need to "level the playing field" between lawyers and third party non-lawyer litigation funders, and they have asserted that increased competition that lawyers might bring is a good in itself. (11) Such statements risk obscuring the differences between these two groups and may undermine, in part, the policy basis on which third party non-lawyer litigation funding has been considered appropriate. A number of recent decisions, (12) and, in particular, the High Court's decision in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (13) (Fostif), make it clear that the courts are willing to accept third party, non-lawyer litigation funding on the basis that it may improve access to justice. However, as noted by the minority in Fostif, it is important to ensure that solicitors remain independent if the risks associated with third party funding are to be managed appropriately.

Unlike lawyers, litigation funders do not have control of the conduct of litigation. A client assisted by a lawyer has access to an independent adviser with no financial interest in the litigation, who is required to act in the client's best interests. If lawyers were permitted to enter into contingency fee agreements, clients would only have access to legal advice from a source with a direct financial interest in the litigation. For this reason, the Australian Securities and Investments Commission's Regulatory Guide 248, which deals with conflicts of interest in relation to litigation funding schemes, requires litigation funders take steps to maintain their distance from the conduct of litigation, and litigation funder Claims Funding Australia has had to seek advice from the Federal Court concerning its relationship with plaintiff law firm Maurice Blackburn. (14)

C. Certainty, Clarity, Efficiency and Proportionality

Proponents also argue that allowing lawyers to enter into contingency fee agreements will provide clients with greater certainty and clarity about legal costs, encourage early assessment of claims and pursuit of meritorious claims and encourage lawyers to work more efficiently. Further, some have suggested that contingency fees are "proportionate", (15) presumably in the sense of representing a proportion of the damages claimed.

Although contingency fee agreements may be simpler in form than conditional fee agreements and other costs agreements, they disguise the actual work required and performed by the lawyer. In our view, lawyers' fees should be proportionate to work undertaken--in the case of uplift fees, taking into account the risk incurred by the lawyer and the time value of money. Charging fees without reference to the work undertaken gives rise to the potential for lawyers to accrue windfall profits, and the risk of lawyers selectively taking on only high-value cases.

II. Arguments Against the Proposal

A. Conflicts of Interest

Academic commentators have observed that allowing lawyers to enter into contingency fee agreements heightens the scope for conflicts of interest. (16) In our view, the possibility of such conflicts is an important argument against lifting the prohibition on lawyers charging such fees. There are a number of ways in which a lawyer's independent financial interest in litigation may conflict with the lawyer's duty to the client and the court, including:

* encouraging the lawyer not to inform the client that the contingency fee is too high in light of the work involved;

* encouraging the lawyer to seek inappropriately early settlement of the claim (generating the greatest fee for the least work);

* discouraging the lawyer from pursuing viable causes of action or interlocutory steps, on the basis that these will increase legal costs; or

* giving the lawyer an increased incentive to engage in 'greenmailing' (pursuing large claims to the point where it is uncommercial for the defendant to continue, forcing the defendant to settle regardless of merit).

By increasing the risk of these kinds of behavior, contingency fees also risk negatively affecting the public perception of the role of lawyers, which may damage public confidence in the administration of justice.

The potential for conflicts of interest affects barristers as well as solicitors. In its submission to the Victorian Law Reform Commission's Civil Justice Review in 2008, the Victorian Bar asserted that contingency fees "would act as a grave threat to the independence and detached objectivity of the Bar, which is one of the basal justifications for its existence." (17)

B. Erosion of Compensation

A further concern is the fact that contingency fees erode awards of compensatory damages. In Australia, damages are awarded by reference to the loss suffered by the plaintiff, with a view to "making the plaintiff whole." Allowing lawyers to charge a percentage of any award or settlement leaves plaintiffs without compensation for the whole of their recoverable loss. This possibility is particularly acute in most personal injury matters, where damages are capped by State and Territory legislation that limits recovery. (18)

In the United States, where damages are often determined by juries and punitive damages are frequently awarded, this is less of an issue. There are additional amounts from which lawyers' fees can be drawn without eroding compensatory damages. Contingency fees are capped or otherwise restricted in many United States jurisdictions particularly in personal injuries matters. In the United Kingdom, not only are contingency fees capped, they also cannot be charged on a plaintiff's damages for future care and loss. In addition, it is notable that when the United Kingdom introduced contingency fees, it increased awards of general damages for non-pecuniary loss--such as pain, suffering and loss of amenity--by 10%.

Proposals put forward in the Australian debate provide no equivalent protection for plaintiffs. In the absence of any agreed cap or limit on the percentage figure, there is a risk that awards of compensatory damages in Australia would be significantly eroded. While this may not be an issue for sophisticated clients in a strong position to negotiate costs agreements with their lawyers, it is likely to affect vulnerable plaintiffs--particularly if lawyers become unwilling to conduct personal injuries litigation on any other basis.

III. Other Issues

There is a host of other issues that would need to be addressed if lawyers were to be permitted to charge contingency fees in Australia. The following matters provide a representative sample of the issues to which the change would give rise.

* Whether lawyers should be permitted to charge contingency fees in all contexts. Criminal, family law and migration law matters would seem to be particularly ill-suited to such arrangements, and there may be others.

* Whether contingency fees should be capped. As noted above, the danger that contingency fees will erode awards of compensatory damages is particularly acute in the absence of any cap or limit on the percentage figure that could be agreed between a lawyer and a client. We suggest that caps might therefore be appropriate for particular types of matters or types of loss and damage.

The precise regulation of contingency fees would also require further attention. In our view, it would be necessary to consider:

* How the regulation of contingency fees would interact with the regulation of conditional fees, and the regulation of professional ethics and costs more generally (for instance, what disclosure obligations should apply and whether clients should be required to obtain independent advice);

* How different contingency fee agreements in the same matter would interact with each other (for instance, separate contingency fee agreements entered into by solicitors and barristers);

* How the regulation of contingency fees would interact with the regulation of financial services (for instance, whether law firms would be required to hold Australian Financial Services Licenses, register as managed investment schemes, or maintain minimum capital reserves);

* How contingency fee agreements will interact with applications for security for costs (in particular, whether a lawyer acting under a contingency fee agreement should be required to contribute to security for costs if so ordered, on the basis that, if successful, the lawyer will share in the damages awarded); and

* How contingency fee agreements would operate in representative, or class action, proceedings. Contingency fee agreements are available in class action proceedings in both Canada and the United States, but present a number of complex issues when applied in this context.

In Australia, in general, the "loser pays" rule applies. We have assumed that adverse costs orders would continue to be made on a party/party or indemnity basis (as appropriate), so that an unsuccessful party would not face any greater costs exposure if the prohibition on lawyers charging contingency fees were lifted. If this is not the case, it will also be necessary to consider how adverse costs orders will be handled in cases involving contingency fee agreements--in particular, whether they should be a matter for the courts, regulation, or agreement between the parties.

Proponents of change, if the proposal is to be taken seriously, need to address all of these issues. Even if they are addressed, the problems identified in Section II above will remain and, in our view, continue to outweigh any perceived benefits.

(1) Ronald Sackville, Access to Justice: towards an integrated approach, 12 (2010).

(2) Sarah Farnsworth, "Trial on hold over Legal Aid row," ABC News, February 15, 2013, available at http://www.abc.net.au/news/2013-02-15/trialput-on-hold-over-legal-aid-row/4521058 (last accessed March 22, 2014); Jane Lee, "Simplistic Rules for Legal Aid won't work," The Age, September 27, 2013, available at http://www. theage.com.au/victoria/simplistic-rules-for-legal-aid-wont-work-20130927-2uj2z.html (last accessed March 22, 2014).

(3) Jane Lee, "Legal Aid funds stoush halts trials," The Age, May 2, 2013, available at http://www. theage.com.au/victoria/legal-aid-funds-stoushhalts-trials-20130502-2ivej.html#ixzz21hzF 1GQ3 (last accessed March 22, 2014).

(4) Victoria Legal Aid release, "Victoria Legal Aid annual report tabled," October 15, 2013, available at http://www.legalaid.vic.gov.au/about-us/ news/victoria-legal-aid-annual-report-tabled (last accessed March 22, 2014).

(5) Productivity Commission, Access to Justice Arrangements, Submissions received, available at http:// www.pc.gov.au/projects/inquiry/access-justice/ submissions (last accessed March 22, 2014).

(6) Maurice Blackburn, Response to Access to Justice Arrangements Issues Paper, November 8, 2013, p 6, available at http://www.pc.gov.au/projects/inquiry/ access-justice/submissions (last accessed March 22, 2014).

(7) Christine Coumarelos, Deborah Macourt, Julie People, Hugh M McDonald, Zhigang Wei, Reiny Iriana and Stephanie Ramsey, Legal Australia-Wide Survey: Legal Need in Australia, Law and Justice Foundation of NSW, Sydney (2012).

(8) LAW Survey, at 59.

(9) LAW Survey, at 102.

(10) LAW Survey, at 102.

(11) Consumer Action Law Centre, Response to Access to Justice Arrangements, November 4, 2013, at 27, available at http://consumeraction. org.au/wp-content/uploads/2013/11/Consumer-Action-Law-Centre-submission-PC-access-to-justice-inquiry-November- 2013.pdf (last accessed March 22, 2014).

(12) See Clairs Keeley (a firm) v Treaty & Ors [2005] WASCA 86; Spatialinfo Pty Ltd v Telstra Corporation Ltd [2005] FCA 455.

(13) (2006) 229 ALR 58.

(14) See Alex Boxsell, "Full Federal Court invoked on law firm's class action funding," Australian Financial Review, May 17, 2013. Claims Funding Australia has since withdrawn its application because the Commonwealth Attorney-General has indicated the government intends to introduce further regulation of third-party litigation funding: Maurice Blackburn, Update on funding of equine influenza class action, available at http:// www.mauriceblackburn.com.au/areas-of-practice/ class-actions/current-class-actions/equine-influenzaclass-action/update-on-funding-of-equine-influenza-class- action.aspx (last accessed March 27, 2014).

(15) Maurice Blackburn, Response to Access to Justice Arrangements Issues, November 8, 2013, pp. 6, 13-14, available at http://www.pc.gov.au/_data/ assets/pdf_file/0007/129337/sub059-access-justice. pdf (last accessed March 22, 2014).

(16) G Dal Pont, Lawyers' Professional Responsibilities, 14.120 (Thomson Reuters, 5th ed. 2012).

(17) See Victorian Law Reform Commission, Civil Justice Review, Report No 14, at 642 (2008).

(18) See, for example, Wrongs Act 1958 (Vic), Part VB.

Peter O'Donahoo is a Partner at Allens. Peter is expert at undertaking large-scale, multi-jurisdictional disputes both in Australia and abroad. He has extensive experience in commercial disputes, class actions, constitutional litigation, products litigation, regulatory investigations and inquiries and arbitrations (commercial and investment treaty) and defamation/media related work. For several years now, Peter has been ranked by Chambers Asia Pacific as one of the leading litigators in Australia. In 2010, Peter was recognised as the Australian litigator of the year' at the International Law Office (Client Choice) Awards. Since 1997, Peter's expertise has been recognised in the International Who's Who of Product Liability Defence Lawyers and in 2013, Best Lawyers Australia named Peter 'Product Liability Lawyer of the Year' Melbourne. Tim Maxwell is a Senior Associate at Allens. Tim has experience in a wide range of commercial litigation matters including regulatory investigations (involving the ACCC, the ASIC and the U.S. S.E.C.); regulatory, administrative and constitutional litigation; general commercial and insurance contract disputes; and large scale discovery. Tim has assisted multi-national clients in these areas in a number of jurisdictions, both within Australia and in New Zealand, the Asia Pacific, the United States and the Middle East. Tim's work has involved litigation (in the County, Supreme, Federal and High Courts), mediation and international arbitration.
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Author:O'Donahoo, Peter; Maxwell, Tim
Publication:Defense Counsel Journal
Date:Jul 1, 2014
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