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Ethics: Contingency plans

Every Issue

Cite as: (2006) 80(12) LIJ, p. 80

The Victorian Civil Justice Review presents challenges to the profession.

Pressure for contingency fees is emerging again. As part of a wider review into civil justice, the Victorian Law Reform Commission (VLRC) has asked:

“Should clients have the option of being able to agree to legal fees being calculated as a percentage of the amount recovered in civil proceedings: in individual cases; or in representative or class action proceedings (where such percentages would be calculated by reference to the total recovery on behalf of the represented group or class)?”.[1]

Lobbying is occurring to allow contingency fees because of the opportunity such fees provide to increase income.

If some firms can obtain, say, a 30 or 40 per cent slice of a multi-million dollar class action settlement, as opposed to just a 25 per cent uplift of normal fees under the present arrangements,[2] which lawyer will be immune from the desire to use a contingent arrangement instead of the “old hat” uplift?

It will be claimed that the greater “cost” to clients of contingency fees is justified because there will be greater access to justice. Yet a control-tested, empirical relationship between contingency fees and increased access to justice cannot (by definition) be shown to exist in this country and, in my opinion, such a relationship is most unlikely.

Consider the reality of decisions by individual lawyers about whether to advise commencement of proceedings. Where a case is strong, a lawyer will be found to run it because item remuneration plus the current uplift is more than sufficient incentive to get involved. The prospect of a contingency fee will not put such a case into the system.

In the opposite scenario, where a case is “arguable” or even weak, a determined client, having been duly warned in writing of their prospects, of the size of the likely solicitor-client bill and of the implications of the cost indemnity principle, may still proceed to court at their own risk.

Lawyers commence litigation for such clients every day on an item remuneration basis, provided there are reasonable arrange-ments for cost security.

“Access to justice” is nearly always meaningless in the context of inherently weak proceedings: that is, proceedings where as practitioners we say that justice is unlikely to be found in a plaintiff’s claim.

The relatively small number of cases where a test environment exists may represent a real exception, but otherwise a contingent fee arrangement will not convert a weak case into a strong one and, partly because of the cost indemnity rule, lawyers will presumably not be permitted to advise commencement of weak cases on a contingent fee basis.[3]

This is why the real source of contingent fee pressure comes not from informed consumers, but from inside the profession. And it would not do us credit.

If access to justice were really likely to benefit from contingency fees, there might be a genuine argument as to whether the utilitarian objective of increased access would outweigh the Kantian imperative: to avoid our own conflict of interest.

This conflict was always at the heart of public policy opposition to contingent fees and it is still central. As it is, with lawyers’ ethics intimately involved in every second royal commission, why do we want to add to community cynicism by a disguised push for more fees?

The other reason why contingency fees would be unwelcome in ethical terms is they are likely to pressure those of us who sign up such clients to vary our settlement advice once a case gets closer to finalisation.

The problem is a reduced incentive to encourage clients to use alternative dispute resolution (ADR).

Since early finalisation of cases via an ADR settlement is often likely to result in lower dollar settlements than a full trial, ADR is already an implicit challenge to our ethics. If contingency fees were available, they would be likely to maximise our incentives to advise going forward to trial.

On 30 August 2006, the High Court decision in Fostif[4] entered the equation.

A majority of High Court judges ruled that public policy considerations which prohibited third parties from taking an interest in litigation were no longer relevant in determining whether there had been an abuse of court process. The decision has been hailed by litigation funders as a boost for access to justice, and so it may be because it confirms that those companies can take a share of the proceeds of their successful cases.

But the ethical question of the need for an arm’s-length relationship between the “funder” and “fundee” was left unaffected by the decision[5] and the lawyer who advises on settlement of a financed claim will not, it is to be hoped, be paid pro rata in relation to the size of the judgment.

After Fostif, it remains an ethical priority for a litigation funding company (and by implication, the plaintiff’s lawyer), to avoid exploitation of the plaintiff, whether an individual or a class.

So how should the VLRC team which is to consider the contingency fee issue deal with the above ethical challenges?

One option is to simply require all proposed contingent fees to be court approved, as appears likely in the analogous environment of litigation funding agreements.[6]

But should the VLRC just affirm the current view – particularly in the case of individual plaintiffs who do not have the partial protection of a class action – that there are good ethical reasons why lawyers should not be put in a conflicted position and encouraged to take a share of their clients’ damages?

There is no controlled, empirical evidence that access to justice will increase with contingency fees, but we can be certain of the additional conflicts of interest inherent in their introduction.

The community is sufficiently cautious of the profession already without the VLRC adding to the ethical burden.

ADRIAN EVANS is associate professor in law and convenor of Legal Practice Programs at Monash University.

[1] VLRC “Civil justice review” consultation paper 2006, Question 53. The VLRC was accepting comment on all issues until 30 November 2006.

[2] Note 5 above. Note that Richardson and O’Brien confine their observations to litigation funding agreements.

[3] Jamie Richardson and Michael O’Brien, “Men no longer in tight financial situations”, 80(10) LIJ at 51.

[4] Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd; Australian Liquor Marketers Pty Ltd v Berney [2006] HCA 41.

[5] Legal Profession Act 2004 (Vic) s3.4.28(3).

[6] Legal Profession Act 2004 (Vic) s3.4.28(4) already prohibits lawyers from commencing uplift proceedings that are unlikely to succeed.


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