The question of whether contingency fees should be introduced into Australia is a valid one, as the benefits of contingency fees can be easily balanced against the disadvantages
It has often been attempted to answer whether or not Australian lawyers should be permitted to charge their clients contingency fees, a system not currently permitted in Australian jurisdictions. It is a system of charging that has long been in existence in the United States and some Canadian provinces to varying extents. It is a system that promotes access to justice, client satisfaction and alignment of interests for both client and solicitor. It also, like any method of fees, has its disadvantages. This essay shall attempt to analyse these advantages and disadvantages and thus answer whether or not the introduction of such fees would be a positive outcome for the Australian legal community.
When discussing contingency fees, it is first important to explain exactly what is meant by a contingency fee. For the purposes of this essay, the definition set out by the Australian Senate Standing Committee on Legal and Constitutional Affairs in 1991 shall be used: "the defining characteristic of a contingency fee is that the client pays the lawyer only if the lawyer obtains the result sought".1 Within the purposes of this definition, there are three main types of contingency fees that can be identified. The first type, called a "speculative fee", which only entails that the payment of the solicitors normal fee if the particular case is won. If the case is lost, then it might be agreed that either the normal fee will be reduced or waived in full.2 The second kind, often called an "uplift fee", is similar to a speculative fee only that it usually involves a loading or bonus paid on top of the fee, which covers the risk of loss. This usually takes the form of a fixed sum, percentage or multiple of the fee. Mostly this is charged somewhere between 25 and 50 per cent of the normal fees.3 Currently this system is allowed in Victoria, as long as the premium is no larger than 25 per cent of the normal fees. The third (and most common in the United States) is the straight percentage fee. This involves a fixed percentage of the compensation, or a sliding percentage (dependant on the amount of damages awarded.) The solicitor in this example is paid nothing if the litigation is not successful, and the percentage compensates for the risk of failure. In this essay, each of the above examples will be broadly referred to as "contingency fees", unless otherwise specified.
Arguments For
There are many arguments in favour of the adoption of contingency fees in Australia, but these need to be identified and understood in order to decide whether or not the implementation of contingency fees would have a positive effect on the Australian Legal System.
Greater Legal Access
In implementing contingency fees, it allows for those who normally could not afford to pursue litigation due to adverse financial conditions to involve themselves in civil action. Many potential litigants with reasonable cases are deterred from action for two reasons, mainly the cost of their legal bill compared to the amount of potential damages, and secondly the risk of footing the bill of the opponent if the case is lost. While it can be said that some firms can afford to 'punt' on what appears to be a worthy case with a high probability of success4 this however poses problems on several different levels. Firstly it does not take into account those potential litigants who do not even consider pursuing any form of litigation or even advice on the basis of potential cost. Secondly, most firms cannot afford to "punt" simply because they do not have the financial standing to gamble on such cases without some involvement or research at cost to themselves. Contingency fees are a solution to this, allowing for greater involvement and access to the public, as well as aligning the solicitor and the client's objectives (which will be discussed below.) It has even been noted by the Full Court of the Federal Court of Australia in Gore v Justice Corp Pty Ltd (2002) that with the high costs of litigation, there are "risks that citizens with justifiable causes of action me be kept out of courts because of their inability to pay the costs of litigation or because they fear the financial risk of litigation."5 This a sentiment echoed in the Canadian Province of Ontario, (where contingency fees are not allowed) in MacIntyre Estate v Ontario, in which the provincial government was urged to legislate to allow contingency fees, as "Contingency fees are advantageous for middle class litigants because they shift most of the risk of litigation from a client to a lawyer."6 Both of these sentiments echo the real issue of being able to allow greater access to litigation, to which contingency fees can be a feasible solution. Both of these courts, in different jurisdictions, are facing the similar and universal problem of legal access to the community at large. Whilst the Canadian court, being in North America where contingency fees are widely in use can openly promote the use of this system in Ontario, the Australian court merely notes that there is a problem and leaves it open to solution. The simple answer of allowing openness and transparency for different charging methods, and allowing those with justifiable causes to be aware of different cost schemes is a beginning. However the actual introduction of a system of charging whereby there is a no win no fee clause actively promotes those with real cases and financial constraints to approach litigation with less fear of financial loss - a real benefit for the Australian community at large.
Reduction of Legal Aid Reliance
While the current system of Legal Aid allows access to justice for the poorest members of society, most of society is in the middle class income category and thus not able to take the option of legal aid on the basis of their income. Moreover, the likelihood of legal aid being granted depends on the constraints on the system; meaning legal assistance is more likely to be granted in family and criminal cases.7 Evidence of this is presented in the report by the Law Institute of Victoria in 1989, which in its ...
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Reduction of Legal Aid Reliance
While the current system of Legal Aid allows access to justice for the poorest members of society, most of society is in the middle class income category and thus not able to take the option of legal aid on the basis of their income. Moreover, the likelihood of legal aid being granted depends on the constraints on the system; meaning legal assistance is more likely to be granted in family and criminal cases.7 Evidence of this is presented in the report by the Law Institute of Victoria in 1989, which in its report stated that in 1986/87 and 1987/88 applications for Legal Aid in regards to civil matters were 18.9 per cent and 18.1 per cent respectively.8 Whilst these figures are somewhat dated, they cannot be underestimated as they show that clearly civil matters take a back seat to more pertinent matters such as criminal and family cases. Thus those who apply for Legal Aid in regards to civil matters are not as likely to be approved as other matters - leaving the lower classes out of civil action. Here contingency fees allow the void to be filled, as those to whom the option of litigation would have been deterred by cost are able to present their case at no initial cost to them, they need only have a good case. More importantly, the introduction of contingent fees would allow for a better allocation of legal aid funds.
Solicitor Reward and Incentive
The sheer nature of contingency fees effectively puts a financial interest in a case for a solicitor, thus effectively putting client and solicitor on the same level - incentive for financial reward or gain. This often means that the client feels that the solicitor has the same interest in the case, and does not feel like they are being slowly drained by billable hours. It also means that the solicitor has a direct incentive to work hard and gain the best result for their client. Moreover, the solicitor is hopefully more likely to work more speedily and incur as few expenses as possible. However, in turn this must be measured by the impact on solicitor income if it is to be effective in determining whether it is financially viable. This is a key point when attempting to answer whether these types of fees should be introduced into Australia, as financial viability must answered in the positive to both the solicitor and the client in order to be approved for the Australian legal community. Here the American system must be analysed for benefits, and studies seem to show that plaintiff personal injury solicitors earn less than average. In the case of smaller awards, contingency fees often result in a lower fee than hourly billing.9 This means that lawyers are more likely to try to avoid prolonging trials, an accusation which is sometimes directed at solicitors. However, it is worthwhile noting that whilst a solicitor will have the opportunity to advise a client to take an early settlement, realistically this is not going to be a common occurrence a solicitors in a contingent fee case will want to elicit the greatest amount of damages for their client - something directly in their interest and that of the client.
Public Satisfaction
In jurisdictions where contingency fees are permitted, they more often than not lead to client satisfaction. This is self-evident in the sheer nature of the "no win no fee" regime, as clients are quite obviously going to be more satisfied with the prospect of not having to pay a fee if their case is lost. Moreover, a plaintiff or potential plaintiff is most likely to feel happiest when their interests are aligned with those of their solicitor, as mentioned above. This is enhanced by the notion of not having to pay bills whilst one party employs delaying tactics and also pressure for lower settlement. Whilst it no doubt suits the solicitor when an early or pre-trial agreement is reached, this is only going to suit the solicitor if the settlement is an appropriate one - hence the client feeling like their attorney is completely on side. This is best exemplified by examples shown from Canada, where contingency fee arrangements are permitted in some Provincial jurisdictions. In 1985, the Law Society of British Columbia received 92 complaints regarding fees; only two were related to contingency fees. In 1987, 101 complaints were received, only 5 related to contingency fees. Moreover, according to the Law Society of British Columbia, the public will choose contingency fee arrangements in areas of personal injury litigation "99.9 per cent of the time, even though they realise it will cost more."10
Freedom of Contract
Another argument in favour of contingency a fee is that client and lawyer should be able to decide what they think is the best system of charging. Of course this should be fully dependant on the client comprehensively understanding the fee options available to them, but the client and lawyer should be free to enter whatever contract they see fit. There are arguments against unregulated contingency fees, but contingency fees should only be charged as alternative to normal scale charging, not as a complete replacement. No doubt situations will arise where an uplift fee would not be ethical, but as mentioned above, some forms of contingency fees allow those who normally would not be able to pursue litigation to pursue civil litigation. In turn, solicitors would be able to make offers so as to suit the marketplace, just as currently they are free to contract outside the scale dependent on skills, experience or perhaps just pure market forces. An example of this occurring in a contingency fee arena is in the United States, where a New Jersey attorney has recently run television advertisements offering to represent car accident victims for a 15 per cent contingency fee, as opposed to the traditional 33 per cent.11 The aims of this lower fee, inter alia, is towards freeing the tort system "from the yoke of the 33 per cent contingency fee"12 (which he goes on to explain that no-one can explain where or why 33 per cent is the standard fee) but also in the hope that his advertisement could lead to a "new practise of negotiating fees on a case-by-case basis, taking into account whether liability is an issue or not, whether the claim is likely to settle without filing a lawsuit and whether substantial legal work will be required."13 Whilst this is still in the beginnings of the process of change, it is pertinent to recognise the significance when attempting to initiate change into the Australian Legal System, as solicitors should be allowed to market their own fee, thus effectively giving the client an advantage. This also reinforces the argument of allowing greater legal access to those who normally wouldn't be able to afford litigation, as clients would be able to shop around for the best fee for their own circumstances.
Arguments Against
To see whether contingency fees would take foot in Australia, the arguments against must be analysed and qualified in order to determine whether or not these outweigh the benefits. This shall be set out below.
Increased Litigation
The most prominent argument against contingency fees is that they encourage an overly litigious society, as exemplified most often by the United States. The argument is that this environment encourages lawsuits, particularly fallacious ones, which in turn leads to higher damage awards and higher liability insurance premiums. This is no doubt to some extent valid, as greater financial ability to litigate for the middle classes will have an effect on society. However what must be quantified is the role of solicitors and barristers in controlling litigation. Essentially a solicitor is only going to accept a case with a contingent fee attached if he or she believes it to be a valid case. However there will be many occasions on which a solicitor may feel forced to take a case against his better judgement rather than risk losing a good client to another solicitor14 as no doubt potential plaintiffs, having nothing to lose, will attempt to pursue litigation at any means necessary. The risk also includes class actions where plaintiff's solicitors push for greater involvement of other members, often not explaining the case fully to potential litigants. This can possibly lead to an overload on court schedules, and it is often noted how this is the case in the United States. However it should be noted that if contingency fees were to be introduced into Australia, then it is more than likely that they would not be as widely used as in the United States. This argument has some merit, as the system in Australia is different enough with Australia's rules as to paying of costs (that is, the losing party pays the legal costs of the victorious litigant). It begs the question as to whether the introduction of contingency fees would mean that a losing party paying on a contingency fee basis would still have to pay the winning side's costs as per the current rules. Despite this question, it would seem that the benefits of greater access to justice would outweigh the potential increase in litigation, which also has the flip side argument of the law being tested out on a greater scale. More importantly, an introduction of contingent fees into Australia would allow for the legal community to learn from the examples of contingent fee societies and institute a system of control or system of education for the public.
Conflict Of Interest
There is some question as to whether the introduction of contingency fees into the Australian Legal System will have a windfall effect on the image of solicitors to the general public, as the direct ability of a solicitor to control a case to their own benefit becomes a possibility. The question becomes whether an attempt by solicitors to adversely affect the outcome of trial, such as accepting a pre-trial settlement in order to avoid a lengthy or costly trial. As the Hon. Geoffrey Davies puts it "The most rewarding path for plaintiffs' lawyers in a contingency fee system is to settle early, take the fee and move on."15 If clients are well informed (perhaps through second or differing opinions when searching for a litigator) then the chances of a conflict of interest can be greatly reduced. However, these problems are nothing new to the legal industry, as these problems are more an indication of the lack of competition. For example, it can be argued that in the current system, where a solicitor is paid an hourly rate, he or she might work too hard on case and reject settlement offers in order to generate more hours of work.16 This in itself is a conflict of interest, so even in a worst case scenario involving contingent fees is not going to be any worse than under the current system of payment. In fact, one point is that under hourly fees lawyers have greater incentives to delay settlement, and indeed it has been found that cases take significantly longer to settle when contingency fees are limited.17 When speaking about limiting contingency fees, it essentially means preventing people with poor information from paying too much for legal representation. This argument is based on datasets by the United States Department of Justice and the Bureau of Justice Statistics, and the study found essentially that limits on contingency fees provided for a safeguard or protection measure against solicitors taking advantage of clients with less legal information. Moreover, the point as to whether or not a lawyer is willing to take a case on a contingency fee basis provides a strong signal to plaintiffs about the quality of their case18 is in fact a good indicator as to whether or not contingency fees can exist with the current system of charging in Australia. The solution of limiting contingency fees allows for a protection regime whereby solicitors are unlikely to take a case on a contingency basis that is unlikely to succeed - as their prospects of receiving a fee are limited. Where case is presented before a solicitor that appears to have high prospects of victory, then a contingency fee will likely be taken - a strong indicator to the plaintiff as to their prospects of victory and in turn an indicator to their prospects of victory at trial and thus an indicator to not accept a pre-trial agreement.
Financial Effects for Practitioners
There are two points that must be examined in order to determine the financial effects of the implementation of contingent fees into Australia. The first is whether or not it will have a positive effect on solicitors in terms of amount of work and cash flow. It has not been proven that contingency fees in fact benefit the legal profession. There are two issues at stake when discussing this; 1) that lawyers only enter into contingency fee arrangements and agree to litigate those claims which have some chance of success19, and 2) because of the risk involved and the nature of civil litigation, the highest paid lawyers are often those paid on an hourly basis. Civil litigators in the United States who charge on a contingent basis often do not make as much as other lawyers, simply because they do not always succeed or always make enough from each particular case. However, there is a flip side to this point, as contingent fee cases where there is a massive payout can sometimes far exceed what would normally be considered a fair and reasonable fee. For example, assume that a lawyer gets paid $200 an hour, and works 80 hours on a successful case. He or she would make $16,000 from that particular case. However, if a lawyer charges on a contingency basis, and the plaintiff is awarded damages of $100,000, then obviously the fee becomes $33, 000. However, as has been recently shown, where large awards payouts are given, the benefit to the lawyer becomes massive. As shown recently in the United States with the September 11th Victim Compensation Fund, Laura Balemian was recently awarded $6.7 million - a fee of more than $2 million to her legal representation.20 This is clearly in excess of what normally would have been paid if hourly rates were being charged. The issue in regards to funds is thus two fold: either a solicitor will be risking their cash flow on cases that have little chance of success because they do not have many meritorious cases; or the benefits of successful litigation far outweigh what would be considered a reasonable fee and the client suffers as a result. Herein lies the integral issue and dispute of contingency fees - the gamble and interpretation of benefits and disadvantages - both exist, and must be controlled or regulated in order to protect both client and solicitor. The second point is the role of barristers in the fee process. As Australia differs from the United States with the use of barristers, it must be taken into account that barristers' fees can constitute a large portion of the cost to the client. More importantly, if a barrister refuses to enter into a contingency fee arrangement where a solicitor did, this impacts on the cost of the legal fees to the client, as it will not be the agreed upon recovery. This either means that solicitors will assume the responsibility of barristers' fees under the contingency arrangement, or the client must pay these fees as normal, which thus increases the cost of litigation. This is a highly prevalent point, as for contingency fees to be successful in Australia, there needs to be some forms of control whereby some terms are agreed upon in the contingency arrangement in regards to barrister costs.
Conclusion
The question of whether contingency fees should be introduced into Australia is a valid one, as the benefits of contingency fees can be easily balanced against the disadvantages. The consequences of the Australian system, when compared to that in the United States and some provinces in Canada, is that in punishing an unsuccessful plaintiff to pay costs, tends to discourage litigation. Thus it should be advocated that the introduction of contingency fees into Australia proceed, but conversely this introduction should include provisions that protect the rights of the client. There are situations where contingency fees may work against the client, but these situations, generally speaking, can be avoided through the education and enlightenment of potential litigants. More importantly, if the client understands the different means of charging, then at least the chances of a satisfactory outcome for all is increased. Essentially the controlled introduction of contingency fees into Australia can benefit many, including the lower and middle classes, government through reducing pressure on legal aid, and the legal community through increased litigation. Thus it should be advocated that contingency fees are introduced into the Australian Legal community proceed - to the advantage of all.
Bibliography
Australian Senate Standing Committee on Legal and Constitutional Affairs, Cost of Legal Services and Litigation - Discussion Paper No. 3 Contingency Fees (1991)
Neil Andrews, English Civil Procedure: Three Aspects of the Long Revolution Rome 2001
Geoffrey Davies, Civil Justice Reform: Some Common Problems, Some Possible Solutions, Journal of Judicial Administration Vol. 16 (August 2006
Eric Helland and Alexander Tabarrok, Contingency Fees, Settlement Delay, and Low-Quality Litigation: Empirical Evidence from Two Datasets, The Journal of Law, Economics & Organisation, Vol. 19, No. 2 (2003)
Law Institute of Victoria, Contingency Fees in Victoria 1988
Law Institute of Victoria, Funding Litigation: The Contingency Fee Option 1989
Anthony Lin, Lawyer's 9/11 fee is contested, New York Law Journal, September 4th, 2006
Gore v Justice Corp. [2002] FCA 354
Macintyre Estate v Ontario (Attorney-General) [2002] 61 OR 3d 257
Kate Tokeley, Taking a Chance: A Proposal For Contingency Fees, Victoria University of Wellington Law Review, Vol. 28 (1998)
Abraham Wickelgren, Comment on "Aligning the Interests of Lawyers and Clients" in American Law and Economics Review Vol. 6 No. 2 (2004)
Joshua Winnick, Putting a Price on Plaintiffs' Work, New Jersey Law Journal, Jan 5 2007
Australian Senate Standing Committee on Legal and Constitutional Affairs, Cost of Legal Services and Litigation - Discussion Paper No. 3 Contingency Fees (1991) para. 2
2 N. Andrews, English Civil Procedure: Three Aspects of the Long Revolution Rome 2001 p20
3 ibid Andrews p21.
4 Law Institute of Victoria, Contingency Fees in Victoria 1988 p2
5 Gore v Justice Corp. [2002] FCA 354
6 Macintyre Estate v Ontario (Attorney-General) [2002] 61 OR 3d 257
7 ibid Law Institute of Victoria p2
8 Law Institute of Victoria, Funding Litigation: The Contingency Fee Option 1989
9 op cit Contingency Fees In Victoria p3
0 op cit Contingency Fees In Victoria p3
1 Joshua Winnick, Putting a Price on Plaintiffs' Work, New Jersey Law Journal, Jan 5 2007.
2 Ibid J. Winnick
3 Ibid J. Winnick
4 ibid Contingency Fees In Victoria p3
5 Geoffrey Davies, Civil Justice Reform: Some Common Problems, Some Possible Solutions, Journal of Judicial Administration Vol. 16 (August 2006) p8
6 Abraham Wickelgren, Comment on "Aligning the Interests of Lawyers and Clients" in American Law and Economics Review Vol. 6 No. 2 (2004) p435
7 Eric Helland and Alexander Tabarrok, Contingency Fees, Settlement Delay, and Low-Quality Litigation: Empirical Evidence from Two Datasets, The Journal of Law, Economics & Organisation, Vol. 19, No. 2 (2003) p540
8 op cit Hellan and Tabarrok, p540.
9 Kate Tokeley, Taking a Chance: A Proposal For Contingency Fees, Victoria University of Wellington Law Review, Vol. 28 (1998) p16.
20 Anthony Lin, Lawyer's 9/11 fee is contested, New York Law Journal, September 4th, 2006
Morgan Squires - 18131980
