Percentage-Based Contingency Fees: Position Paper

Transcription

1 Percentage-Based Contingency Fees: Position Paper LAW INSTITUTE OF VICTORIA Date: 25 May 2015 Released: 17 February 2016 Contact: Irene Chrisafis, Lawyer, Litigation Lawyers Section Andrew Tabone, Paralegal, Litigation Lawyers Section & Projects (03)

2 TABLE OF CONTENTS Introduction... 2 What are percentage-based contingency fees?... 2 Glossary... 3 Executive Summary... 3 Recommendations... 4 Recommendations of the LIV... 4 Recommendations and submissions of other bodies... 4 Advantages of removing the prohibition on contingency fees... 7 Increasing access to justice and addressing unmet legal need... 7 Enhancing Victoria s economic performance... 8 Proportionality and transparency of contingency fees billing method... 8 An alternative to third party litigation funding... 9 Arguments against contingency fees Conflicts of interest Unmeritorious claims Safeguards Percentage cap on contingency fees Limitation on contingency fees according to areas of law Costs disclosure requirements under contingency fee arrangements and professional obligations Examples of unmet legal need which could be addressed by removing the prohibition on contingency fees Consultation... 19

3 INTRODUCTION Law practices in Victoria are currently prohibited from charging contingency fees (also known as damages - based billing) in relation to matters involving disputes or litigation. Given the recommendations of the Productivity Commission following its Inquiry into Access to Justice Arrangements, it is timely to consider whether the prohibition on contingency fees should be removed. A competitive and progressive legal environment is enhanced when consumers of legal services are provided with a choice of legal cost options which best suit their particular circumstances. Having access to a range of legal cost alternatives enables consumers to make more informed assessments as to whether or not engaging those legal services will benefit them. Removing the prohibition on law practices charging contingency fees would facilitate access to justice by providing another method by which legal costs can be agreed upon, thus enabling some claims to be brought which would otherwise not be brought due to lack of funding. Permitting law practices to charge contingency fees would encourage early resolution of disputes as it presents an incentive to law practices to more efficiently deal with legal matters in which they are acting. This is because the earlier a dispute is resolved, the earlier the law practice will receive its legal fees. The Law Institute of Victoria (LIV) has long advocated for the introduction of contingency fees. The cost of accessing justice within Australia has reached the level where many middle - income earning Australians, individual traders, partnerships and small and medium enterprises cannot afford to pay up front or at all to litigate matters. Legal aid resources are limited, and face record levels of demand. Legal aid is rarely available in civil proceedings. The LIV contends that alternative billing methods are required so clients who do not qualify for legal aid can access the services of private law practices. What are percentage-based contingency fees? A contingency fee agreement means that the law practice is paid a percentage of the amount recovered by the client in a dispute or litigation. In matters which do not involve a dispute or litigation, such as commercial or property transactions, contingency fees would usually be a percentage of value (such as the value of property in a joint venture agreement) upon a specified outcome occurring or being achieved. Law practices are prohibited from charging contingency fees in all Australian jurisdictions. Litigation funders operating in Australia often charge on a contingency fee basis. This is permitted as private litigation funders are not subject to the same regulation as law practices. Contingency fee arrangements are commonly used in the United States of America and Canada, and have recently been permitted in the United Kingdom. There is variation in the regulation of contingency fees in overseas jurisdictions. 2

4 Glossary Conditional fee agreement Agreement for costs between a client and law practice whereby payment is conditional upon a successful outcome and calculated by reference to the law practice s usual fee for the work. In Australia such agreements may include an additional amount, a premium or uplift fee, which: a) operates as a success fee in addition to the law practice s ordinary base fees; or b) in circumstances where the law practice and their client had agreed to a discounted fee, entitle the law practice to claim the usual full fee amount. Contingency fee agreement Agreement for costs between a client and law practice pursuant to which the costs of the law practice are calculated as: a) a percentage of any damages or settlement monies recovered (in matters involving disputes or litigation); or b) a percentage of an agreed factor (in matters which do not involve a dispute or litigation) upon a specified outcome occurring or being achieved. Third party litigation funders Commercial litigation funders pay the cost of litigation and indemnify the litigant client against the risk of paying adverse costs if their case does not succeed. Where a case is successful, the litigation funder will be entitled to receive a contractually agreed percentage of the court awarded lump sum or settlement. Uplift fee Additional legal costs (which exclude disbursements) payable under a conditional costs agreement on the successful outcome of the matter to which the agreement relates. Executive Summary The LIV has long held the view that contingency fees should be one method of billing available to law practices and clients as it: 1. shares the risk of litigation between the law practice and the client in matters involving disputes or litigation; 2. facilitates access to justice, enabling meritorious matters that are not able to be funded by the client alone to be funded under a contingency fee arrangement; 3. provides value - based billing to clients, as costs are aligned to outcomes rather than hours spent working on the matter (as occurs in the hourly rate billing method); 4. provides to clients clarity about the legal costs which they will be liable to pay; 3

5 5. provides an incentive to law practices to resolve matters efficiently; and 6. is already being used by litigation funders who do not have the same ethical and professional obligations as Australian legal practitioners. RECOMMENDATIONS Recommendations of the LIV The LIV recommends that: 1. The prohibition on contingency fees be removed (with some exceptions, set out in recommendation 5) to allow law practices to charge legal fees on the basis of an agreed percentage of what is recovered by the client in the matter (award of damages or settlement monies), or on the basis of some other outcome specified in the contingency fee agreement. In assessing the amount recovered by the client: a) damages, interest and standard party/party costs would be included; and b) medical costs (past or future), amounts the client is required to pay to the Health Services Commission or Centrelink, or amounts awarded but not actually recovered would be excluded; 2. There be a cap of 35% on contingency fees for personal injury matters, i.e. law practices should not be permitted to charge contingency fees at a rate higher than 35% of damages or settlement monies received in personal injury matters; 3. In matters that do not involve a dispute or litigation, the prohibition on contingency fees be removed to allow law practices to charge legal fees on the basis of a percentage of an agreed factor (such as the value of the property in a joint venture agreement) upon a specified outcome occurring or being achieved in the matter; 4. In matters where a law practice charges contingency fees, they should not be permitted to also charge hourly rates for work done on that matter; and 5. Contingency fee agreements should not be permitted in family law, criminal law or migration law matters. Recommendations and submissions of other bodies The Productivity Commission and the Victorian Law Reform Commission have both considered the current legislative prohibition on contingency fees. The Productivity Commission in its Access to Justice Arrangements Report released to the Federal Government on 3 September 2014 recommended the removal of the prohibition on contingency fees, subject to certain exceptions and restrictions. 1 The Victorian Law Reform Commission in its Civil Justice Review Report released on 4 March 2008 recommended the current legislative prohibition on percentage contingency fees be reconsidered. 2 The LIV supports the following recommendations of the Productivity Commission and the Victorian Law Reform Commission: 1 Access to Justice Arrangements: Inquiry Report, Productivity Commission, 2014, Achieving Greater Access to Justice: A New Funding Mechanism, Victorian Law Reform Commission, 2008,

6 Productivity Commission Recommendation 18.1 The Australian, State and Territory Governments should remove restrictions on damages-based billing (contingency fees). This recommendation should only be adopted subject to the following protections being in place for consumers: the prohibition on damages-based billing for criminal and family matters, in line with restrictions for conditional billing, should remain. comprehensive disclosure requirements including the percentage of damages, and where liability will fall for disbursements and adverse costs orders being made explicit in the billing contract at the outset of the agreement. percentages should be capped on a sliding scale for retail clients with no percentage restrictions for sophisticated clients. damages-based fees should be used on their own with no additional fees (for example, lawyers should not be able to charge a percentage of damages in addition to their hourly rate). The Victorian Law Reform Commission Civil Justice Review Report Chapter 12 clause This Commission is of the view that the current absolute legislative prohibition on percentage contingency fees should be reconsidered (emphasis added), provided that proposed (regulated) percentage fee arrangements are subject to adequate safeguards to protect consumers and to prevent abuse Removal of the prohibition on percentage fees would not permit only Plaintiffs but also Defendants to engage lawyers on a percentage basis In many instances allowing fees to be calculated on a percentage basis will result in greater certainty and lower fees for consumers of legal services. The Victorian Bar made submissions relating to contingency fees in response to the Consultation Paper of the Victorian Law Reform Commission Civil Justice Review (2006). Insofar as the Victorian Bar s submissions below are concerned, for the reasons outlined in this position paper, the LIV does not agree with the view that the adoption of contingency fees would likely have perverse and unintended consequences for the civil justice system. Further, the LIV contends that removing the prohibition on contingency fees will go some way to addressing unmet legal need, and will not act as an incentive to initiate unmeritorious lawsuits see below under Unmeritorious claims. 5

7 Victorian Bar Submission in response to the Consultation Paper of the Victorian Law Reform Commission Civil Justice Review 2006 The [Victorian] Bar supports the existing prohibition of contingency fees contained in s of the Legal Profession Act 2004 for the following reasons. First, the Bar believes that the adoption of contingency fees, a fortiori in the case of class actions and representative proceedings, would likely have perverse and unintended consequences for the civil justice system. The U.S. experience is demonstrative of the deleterious consequences that contingency fees can have on the cost and prevalence of litigation. While care needs to be taken not to unthinkingly condemn the use of contingency fees because of the images it conjures in one s mind of unscrupulous ambulance chasers in personal injury, medical malpractice, and similar types of cases, the overwhelming viewpoint of informed observers in the U.S. is that contingency fees have systematically contributed to an unhealthy fixation with lawsuits that has put great strain on the civil justice system and the economy. Indeed, some states have responded by introducing statutory limits on the contingency fee percentages a lawyer can exact in certain types of cases. The American Association has introduced ABA Model Rule 1.5 that cautions clients that contingency fees may not be in the client s best interest. Moreover, because contingency fees are seen as creating perverse incentives they do not form part of the billing practices for the top tier U.S. law firms. Second, although the Bar treats access to justice issues very seriously, it believes the present system of conditional fees strikes the appropriate balance between such concerns and the broader interests of the civil justice system. Contingency fees give lawyers too much of an incentive to initiate an otherwise unmeritorious lawsuit on the chance that they may stand to recover a disproportionately large fee in the event the client succeeds at trial or is able to negotiate a large settlement sum. Finally, the Bar believes that the introduction of 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. In each case that independence plays a vital role in enabling the barrister to serve the ends of justice in an adversarial system that is, by fearlessly pursuing the client s interest to the exclusion of any other within the boundaries circumscribed by the duty owed to the court, professional ethics and the law. In the United States there is, of course, no equivalent dichotomy between an independent barrister and solicitors. In its response dated 5 September 2014 to a Law Council of Australia Percentage Based Contingency Fee Working Group, the Victorian Bar Council indicated it does not support percentage based contingency fee arrangements, and raised additional considerations. This position paper broadly addresses those considerations. However, if the Victorian Bar Council maintains its opposition to removing the prohibition on percentage based contingency fee arrangements because of ethical concerns, an alternative approach might be to abolish the prohibition in respect of law practices charging contingency fees but retain it in respect of barristers. 6

8 ADVANTAGES OF REMOVING THE PROHIBITION ON CONTINGENCY FEES The arguments in favour of removing the prohibition on contingency fees are addressed in the Productivity Commission s Inquiry into Access to Justice Arrangements report. If permitted, contingency fees would: a. increase access to justice by allowing law practices to act on a contingency fee basis for clients with meritorious claims that the clients could otherwise not fund upfront or at all. This is particularly important for people without government funded legal assistance who cannot afford private legal representation. The Productivity Commission has described this group as the missing middle 3 ; b. address unmet legal need. Research indicates that many individuals and legal entities such as owners of small businesses have legal needs or rights, but do not take action because they cannot afford the legal costs; c. have the potential to enhance economic performance. A well-functioning justice system and the ability to enforce legal rights gives the community confidence to enter into business relationships and to invest; d. be directly proportionate to the outcome of the matter, remunerating law practices for the results they achieve for clients rather than on an hourly rate basis; e. provide a transparent and understandable method for consumers to assess the cost of legal action. Predicting the time likely to be required to undertake a matter in order to determine the likely fees under time - billing agreements can be difficult. Contingency fee agreements present a simpler option for consumers; f. provide an additional choice for consumers, allowing clients to choose the billing option that best meets their needs; g. encourage efficient use of court time by incentivising the early resolution of cases. Contingency fee agreements would encourage law practices to be selective in deciding in which matters to accept instructions and to deal with those matters efficiently, as the law practice is paid on the basis of results, not on time spent working on the matter; and h. provide an alternative to engaging third-party litigation funders, who typically use contingency fee agreements in what are regarded as relatively unregulated circumstances. Increasing access to justice and addressing unmet legal need There is strong qualitative evidence to indicate there is unmet legal need in different areas of law and amongst different groups in society. There are two main reports on unmet legal need in Australia which are based on data and analysis, namely: The Legal Australia Wide Survey, undertaken by the Law and Justice Foundation (NSW) and released on 20 February 2014; and The Productivity Commission Inquiry into Access to Justice Arrangements (2014). The Legal Australia Wide Survey reported that: 3 Above n 1, 20. 7

9 of 20,716 households surveyed 55% reported a substantial legal problem in the last twelve months; of these, only 51% obtained advice from a legal or professional adviser and of those who did not, 27% did not proceed because it would cost too much 4 ; this figure was significantly larger in relation to substantial civil matters, with 39% of survey respondents taking no action or advice due to the cost of accessing justice. 5 Unmet legal need is not restricted to individuals. There is some evidence to suggest that owners of small businesses are often dissuaded from undertaking legal action or seeking legal advice because of legal costs or uncertainty about what the legal costs might be. A survey examining disputes and dispute resolution involving small businesses, commissioned by the then Department of Innovation, Industry, Science and Research, found that 20 per cent of owners of small businesses had experienced some form of dispute during the five years prior to June Of these, around half had a dispute where they had taken legal action. 6 The Legal Australia Wide Survey focused on individuals, but provided information about the other party to the dispute, finding that around a third of disputes involved the owner of a business as the other party. This indicates that disputes with owners of businesses are fairly common, and it is unclear whether the legal needs of this group are being adequately met. Contingency fee agreements have the capacity to facilitate access to justice across all matters where they are permitted. Whilst removing the prohibition on contingency fees will not alleviate all unmet legal need, it is another legal cost option that law practices and their clients could use to share the risk and increase access to justice. Removal of the prohibition on contingency fees would be a significant step towards addressing the lack of access to justice experienced by many Victorians. Enhancing Victoria s economic performance Addressing unmet legal need through contingency fee agreements has the potential for flow - on benefits to the Victorian economy. The Productivity Commission has observed that a well-functioning system gives people the confidence to enter into personal and business relationships, to enter into contracts and to invest. 7 This, in turn, contributes to Australia s economic performance. Removing the prohibition on contingency fees in Victoria has the potential to benefit the State economy through a first mover advantage by encouraging confidence and investment in business development opportunities supported by a robust and affordable legal system. Proportionality and transparency of contingency fees billing method Contingency fee agreements would enable law practices to explain to their clients at the outset of a matter, and in a transparent and easily understood manner, how legal costs are to be charged. 4 Legal Australia-Wide Survey: Legal need in Australia Executive Summary, Law and Justice Foundation, 2012, xvi-xvii. 5 Ibid, xvi-xvii. 6 Small Business Dispute Resolution, Department of Innovation, Industry, Science and Research. 2010,14. 7 Above n 1,

10 It is anticipated that contingency fee agreements would probably contain terms that are less complex than those in standard legal retainer agreements, particularly those premised on time - based billing. Understanding of billing arrangements is an essential factor in avoiding client dissatisfaction and in enabling clients to make informed decisions about their legal affairs. A further advantage of a simplified form of costs agreement is that clients will be better placed to compare billing arrangements being offered by more than one law practice. Clients are better placed to understand contingency fees in comparison to time - based billing. 8 do not understand: Many clients i) how many billable hours it is likely to take for their matter to be determined by a Court or resolved by negotiation; ii) how a Court Scale uplift fee works; iii) how the Practitioner Remuneration Order operates, and what loadings there may be on fees for skill, care and responsibility. Contingency fee agreements offer the benefit of ensuring legal costs are proportionate to the outcome achieved for the client. This is in contrast to both time based and conditional billing arrangements. Further, clause 172(1) of Schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic) requires that a law practice must charge costs that are proportionately and reasonably incurred and are proportionate and reasonable in amount. The Productivity Commission observed that contingency fees would avoid instances where the outcome may be successful but might only result in a nominal amount recovered which could leave the client without sufficient funds to pay the lawyers full fee and uplift. 9 There is evidence to suggest that this does occur in the UK under conditional costs arrangements. 10 Imposing an appropriate percentage cap on contingency fees for clients in personal injury matters would provide an important safeguard for this vulnerable group, whilst still providing those clients with the choice whether or not to enter into a contingency fee agreement. Where a law practice charges contingency fees in a matter, they should not be permitted to also charge hourly rates for work done on the same matter. An alternative to third party litigation funding Removing the prohibition on law practices charging contingency fees would facilitate a more level playing field by enabling law practices to offer their clients costs terms that are competitive with those offered by litigation funders. The present prohibition on contingency fees precludes clients from engaging law practices on a basis comparable to that on which they can engage litigation funders. In the case of class actions, removing the prohibition on law practices charging contingency fees could lead to significant reductions in costs to clients. Presently, in litigation funded through a third party litigation funder, commission payable to the funder usually ranges between 25% and 45%. Legal costs and fees (usually averaging between 10% and 15%) are typically paid to the funder in addition to their commission. By contrast, a contingency fee arrangement 8 Rupert Jackson LJ, Review of Civil Litigation Costs: Preliminary Report (2009) Ministry of Justice, Above n 1, Rupert Jackson LJ, Review of Civil Litigation Costs: Final Report, (2009) Ministry of Justice,

11 based on 25%, or even 35%, would result in considerable savings to clients. Litigation funders could continue to play a role by providing additional funding in selected cases. The Table below illustrates the difference between distribution of settlement sums in matters funded by third party litigation funders, and what the distribution would have been had a contingency fee arrangement been in place between the clients and the law practice. As is evident, consumers would have received almost $90m more under contingency fee arrangements based on 25%. These calculations are based on 10 litigation funded cases using data provided by a legal practice specialising in class actions. Table 1 Actual 25% contingency fee 35% contingency fee Settlement sums ($m) Settlement sums ($m) Settlement sums ($m) Funder Revenue ($m) Contingency fee ($m) Contingency fee ($m) 258 Paid to Claimants ($m) Paid to Claimants ($m) Paid to Claimants ($m) % to Claimants 63% % to Claimants 75% % to Claimants 65% Funder Profit ($m) Benefit to Claimants ($m) 88.3 Benefit to Claimants ($m)

12 ARGUMENTS AGAINST CONTINGENCY FEES Conflicts of interest It has been suggested that allowing law practices to charge contingency fees will intensify conflicts of interest in comparison to situations where other billing arrangements are used. There is a concern that, under a contingency fee agreement, law practices may be encouraged to advise their clients to accept low settlement offers to ensure that the law practice receives its fee, including in instances where the client wants to reject a settlement offer and proceed to determination. There is also a concern that, under contingency fee agreements, some plaintiff law practices may be more willing to accept instructions to commence speculative legal proceedings with the intention of settling quickly and receiving the agreed percentage of fees. The Productivity Commission noted that such conflicts of interest are not unique to contingency fee arrangements, and require management across the board. 11 For example, under existing conditional fee agreement arrangements, law practices have a financial interest in the outcome of the litigation. As Chief Justice Martin noted in his submission to the Productivity Commission, on a day - to - day basis any potential conflicts arising from that interest are well managed. 12 The Productivity Commission has suggested that the conflict arising from a lawyer having an economic interest in a matter under contingency fee arrangements provides a benefit to consumers. The Productivity Commission observed that contingency fee arrangements mitigate poor incentives under time-based billing by encouraging lawyers to weigh up actions against their costs. 13 Enabling law practices to charge contingency fees would also discourage the settle at the door of the Court mentality. By the time a matter is due to be heard, most of the legal work has been done and many resources of the Court have been used. If contingency fee arrangements were in place, there would be an economic incentive for law practices to minimise costs and achieve the highest return for the client at an early opportunity. The Productivity Commission concluded that damages-based billing is unlikely to promote unmeritorious claims or create insurmountable conflicts of interest compared with permitted forms of billing. 14 There is no evidence to suggest that lawyers and law practices will not continue to manage potential conflicts of interest well if contingency fee arrangements are permitted. Unmeritorious claims It has been suggested that allowing law practices to charge contingency fees will open the floodgates to US style litigation. 11 Above n 1, Ibid Ibid Ibid

13 On one view, permitting law practices to charge contingency fees could play a role in enhancing the civil justice system by encouraging law practices to be more selective about the cases that they take on and to be more efficient in the way they handle those cases. Law practices which act on a contingency fee basis would assume considerable financial risk, which would act as a deterrent to them accepting instructions to bring frivolous, unmeritorious or speculative cases. The Productivity Commission noted that, in jurisdictions which retain the adverse costs rule (Canada and the UK), the introduction of damages - based billing has not led to an explosion of frivolous claims. 15 Many commentators have noted that Australia s cost-shifting rule should act as a similarly effective deterrent to frivolous litigation if damages-based billing were introduced. 16 Evidence from Australia suggests that allowing third party litigation funders to charge a proportion of damages has not led to an increase in unmeritorious litigation Ibid Ibid Ibid

14 SAFEGUARDS In the past, some opponents of contingency fees have raised concerns regarding vulnerable clients and the inherent conflicts of interest which would arise if law practices charged contingency fees. The prohibition on law practices charging contingency fees could be removed subject to measures being put in place to ensure clients, including vulnerable clients, are protected by appropriate safeguards. The following are examples of possible safeguards which could be implemented: a prohibition on contingency fees for family law, criminal law, and migration law matters; a cap on contingency fees of 35% of damages for personal injury matters; a prohibition on charging additional legal fees in conjunction with contingency fees for work done by the law practice on the same matter; adherence to existing legal profession regulatory legislation. Percentage cap on contingency fees Personal injury claimants are a particularly vulnerable client group. Imposing a cap of 35% on contingency fees in personal injury matters would provide a safeguard for clients in this group, at the same time as offering them a choice as to the basis on which the law practice will be paid for acting for them in their claim. A cap of 35% on contingency fees in personal injury matters would protect clients from excessive erosion of their damages awards without impacting the economic viability of contingency fees. This is supported by analogy with the experience in Victoria in the context of conditional fee arrangements, which are commonly used in personal injury matters. As statutory thresholds do not apply to dust disease claims, some sectors of the legal profession may argue that they form a distinct category of personal injuries claims. If considered appropriate, in personal injury matters involving dust disease claims, consideration could be given to: imposing a cap on contingency fees which is lower than 35%; or alternatively permitting contingency fees on a sliding scale percentage depending on the settlement/damages amount and/or complexity of the matter. The Productivity Commission has recommended sliding scale caps for all retail clients. 18 The LIV is not in a position to recommend appropriate percentage caps for all areas of law, and is hesitant to arbitrarily suggest limits on fees without evidence - based assessment. If a cap on contingency fees is to apply to legal matters other than personal injury matters, it should be done in a manner having regard to both consumer protection and economic viability. The LIV recommends that any percentage caps on contingency fees (including the cap on personal injuries matters) be prescribed in regulation, rather than provided in statute. This would allow for flexibility, testing and the ability to adjust the cap in light of market experience and evidence-based assessment. The LIV also recommends that any cap set on contingency fees be subject to periodic review. 18 Ibid

15 Caps that limit the fees law practices can charge under contingency fee agreements limit the scope of their operation, and thus effectiveness in terms of improving access to justice. This is particularly so in matters involving small claims. Research studies on the operation of contingency fees in the United States suggest that capping contingency fees can make it less likely that lawyers can afford to risk bringing particular cases. The risk that a matter may be uneconomical to litigate diminishes the increased access to justice that contingency fee agreements could otherwise offer. 19 The UK s Civil Justice Council has acknowledged that the imposition of caps on contingency fees increases the number of cases that are dropped without resolution and reduces the level of damages for which cases are settled. 20 In a study undertaken in the US, it was concluded that there was a significantly larger rate of abandoned cases in the US states where there are capped contingency fees (18%), compared to the rates in those states with non-capped contingency fees (5%). 21 In every Australian jurisdiction, rigorous regulatory costs provisions apply to all lawyers and law practices, especially in relation to disclosure, compliance, complaint and cost assessment. The legal costs regulatory requirements will be significantly strengthened in favour of consumers of legal services following the introduction of the Legal Profession Uniform Law Application Act 2014(Vic) which incorporates the Legal Profession Uniform Law (Uniform Law). Limitation on contingency fees according to areas of law There needs to be safeguards in place to protect vulnerable clients. Retaining the prohibition on contingency fees in criminal law matters, immigration law matters and family law matters would protect vulnerable clients involved in legal matters covered by these areas of law. A contingency fee scheme should be consistent with the existing legislative prohibitions on conditional fee agreements in certain areas of law. Both section of the Legal Profession Act 2004 (Vic) and clause 181 of Schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic)prohibit conditional fee agreements in criminal proceedings and proceedings under the Family Law Act 1975 (Cth). This position was supported by the Productivity Commission in its Inquiry into Access to Justice Arrangements. 22 Costs disclosure requirements under contingency fee arrangements and professional obligations There is a need for adequate costs disclosure requirements to ensure that consumers of legal services under a contingency fee arrangement are charged fair, reasonable and proportionate fees. 19 R Moorehead and P Hurst, Improving Access to Justice: Contingency Fees a study of their operation in the United States of America, (2008) Civil Justice Council, 19, < 20 Improved Access to Justice Funding Options and Proportionate Costs, Civil Justice Council, A Tabarrok, and E Helland, What Do We Know about Contingency Fees? (Presentation to American Enterprises Institute, 22 September 2004). 22 Above n 1,

16 Lawyers have professional obligations, including their duty as officers of the Court and obligations under the Civil Procedure Act 2010 (Vic). These are taken very seriously by members of the legal profession. Disciplinary action may be taken against lawyers who do not discharge these duties. These professional obligations extend to extensive costs disclosure requirements under the Legal Profession Act 2004 (Vic) which will expand with the introduction of the Legal Profession Uniform Law Application Act 2014 (Vic). Further, Part 4.3 of Schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic) will introduce new overarching obligations requiring that law practices must not charge more than fair and reasonable amounts for legal costs based on a test of proportionality. The LIV supports the introduction of additional costs disclosure requirements for contingency fee agreements akin to the way with which conditional fee agreements are currently dealt. Conditional fee agreements must: o o o o be in writing in clear and plain language and signed by the client; contain a statement that the client has been informed of the right to seek independent legal advice before entering into the agreement; include a cooling off period of no less than five days (with an exception for sophisticated clients); and define the circumstances that constitute a successful outcome. These duties do not apply to formal or informal litigation funders. 23 The experience in No Win, No Fee billing in personal injury cases indicates that very few law practices offering such services are acting in a manner contrary to their duties to their clients. 23 Legal Profession Act 2004 (Vic) sub-s (3). 15

17 EXAMPLES OF UNMET LEGAL NEED WHICH COULD BE ADDRESSED BY REMOVING THE PROHIBITION ON CONTINGENCY FEES The issue of unmet legal need is likely to be more prevalent in commercial matters. The examples below represent scenarios where claims may not be brought because the potential claimants are unwilling or unable to fund the claims or bear 100% of the costs associated with them. These potential claimants would be provided with access to justice if the prohibition on contingency fees was lifted, and they were in a position to engage a law practice to act for them on a contingency fee basis. Most meritorious personal injury cases can be funded through No Win, No Fee arrangements. Although removing the prohibition on contingency fees would probably not significantly increase the number of personal injury cases funded, clients who choose to enter into contingency fee agreements would be provided with a clearer understanding of what the law practice will be charging for acting for them in that matter. Thresholds under the Wrongs Act 1958 (Vic), Transport Accident Act 1986 (Vic) and Accident Compensation Act 1985 (Vic) also impact such cases. Example 1 A number of farmers have their crops devastated. They hypothesise the cause as their use of a new chemical application. Given that they are without income for the year, the farmers cannot meet their existing financial commitments, let alone fund investigations into the cause or issue legal proceedings against a multi-national company. The farmers ask the law practice if the law practice is prepared to act for them in the matter if they agree to pay the law practice 1/3 rd of any damages they recover. In the absence of contingency fees, the proceeding does not commence and the farmers recover nothing. With contingency fees, the proceeding commences and, if successful, the farmers recover 2/3 of the awarded sum. 16

18 Example 2 A small/medium enterprise buys plant and equipment direct from an overseas manufacturer. The overseas company had an agent in Australia, which has gone into liquidation. The manufacturer has an independent representative in Australia (upon whom an application for substituted service may, if granted, be served), but no presence in Australia and unknown assets in an overseas jurisdiction. The plant and equipment is clearly faulty, but there is a significant prospect that any order will not be able to be satisfied. The small/medium enterprise asks the law practice if the law practice is prepared to act for it in the case on the basis that the law practice will be paid a percentage of the amount which is actually recovered. In the absence of contingency fees, the proceeding does not commence and the SME recovers nothing. With contingency fees, the proceeding commences and, if successful, the SME recovers a percentage of the awarded sum, as negotiated with the law practice. Example 3 The liquidator of a small proprietary limited company wants to pursue: a) possible preferential payments; b) directors for insolvent trading; and / or c) a possible phoenix company. The creditors of the company in liquidation lack the financial resources to fund the actions. The liquidator asks the law practice if the law practice is prepared to act for the liquidator on the basis that the law practice is paid a percentage of recovered amounts. In the absence of contingency fees, the proceedings do not commence and the liquidator and creditors do not recover anything. With contingency fees, the creditors, through the liquidator, pursue their claims. If successful, they recover a percentage of the awarded sum, as negotiated between the liquidator and the law practice. 17

19 Example 4 A small/medium enterprise has a valid claim against a proprietary limited company (or a possibly insolvent individual), but is uncertain if the company has any net assets, or the value of any company assets. It is reluctant to bring the claim and throw good money after bad. It is prepared to spend some money to start the proceeding but wants to limit its financial risk. The company director asks if the law practice is prepared to accept the retainer on the basis that the company pays the law practice $10, plus 30% of any actual satisfaction of the debt over and above the $10, In the absence of contingency fees, the proceeding does not commence and the SME recovers nothing. With contingency fees, the proceeding commences and the existence and value of the company s assets are identified. If there are assets, the proceeding continues and the SME is successful, then: If the Court awards $10,000 or less, the SME s liability to the solicitor is limited to the gap between the award and $10,000. If the Court awards more than $10,000, the SME recovers 70% of the amount that is more than $10,000. Example 5 A person has a claim before the Fair Work Commission (FWC), a no cost jurisdiction. FWC has a pro bono program providing legal assistance to eligible persons. The person does not qualify for pro bono assistance under the program, but cannot afford to pay for private legal advice. In the absence of contingency fees the person abandons their claim as they cannot afford to seek advice about their claim from a lawyer. With contingency fees, the employee's claims are considered and determined by the FWC. If successful, the employee recovers a percentage of the sum awarded, as negotiated with the law practice. 18

20 Example 6 A person suffers catastrophic injuries and seeks to retain a law practice to commence a personal injuries claim on a "no win, no fee" basis. Due to uncertainty on the question of liability, the law practice declines to act on a "no win, no fee" basis due to the risk of an unsuccessful outcome. Due to their injuries, the person is unable to afford upfront legal fees. Without contingency fees, the legal proceeding does not commence and the person does not receive any damages. With contingency fees (capped at 35%), the incentive for the law practice to act for the person is more reflective of the risk involved in the proceeding. The person is therefore more likely to obtain legal representation and commence the legal proceeding. CONSULTATION This paper was developed with the assistance of the LIV Contingency Fees Working Group, which was formed specifically for this purpose. The working group comprised solicitors across a range of practice areas, including solicitors who act for plaintiffs, defendants and small and medium businesses clients in matters including personal injuries litigation and commercial law. Following approval by the LIV Council of the policy positions, an early draft of the paper was provided to the Victorian Bar for comment. Due to the timeframes involved, the LIV has not received comments from the Victorian Bar. In developing the paper, consideration was given to the positions previously expressed by the Victorian Bar to the Law Council of Australia and the Victorian Law Reform Commission. The LIV also had regard to the work of the Law Council of Australia's Percentage Based Contingency Fees Working Group; some members of that working group were also members of the LIV s Contingency Fees Working Group. The Law Council of Australia has not approved a final position on contingency fees or adopted the discussion paper developed by the Percentage Based Contingency Fees Working Group. 19