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Contingency fees: Call for ban to be lifted

Contingency fees: Call for ban to be lifted

By Karin Derkley

Justice 

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The LIV argues allowing lawyers to enter into contingency fee arrangements with their clients would help address access to justice. 

The LIV is calling for the ban on contingency fees to be lifted, despite the fact the longstanding prohibition has been incorporated into the Legal Profession Uniform Law (LPUL).

The LIV released a submission in February that argues that contingency fees would address unmet legal need, contribute to a well-functioning justice system and provide an additional funding choice for potential clients.

Allowing lawyers to enter into contingency fee arrangements with their clients would help address access to justice issues, particularly for the “missing middle” that could not afford a private lawyer, but did not qualify for legal aid, LIV president Steven Sapountsis said.

Under a contingency fee arrangement, clients pay lawyers an agreed percentage of the amount that is recovered by the client in a dispute or litigation. This amount replaces the hourly rates normally charged.

The LIV recommends contingency fee arrangements be allowed with important safeguards including a cap of 35 per cent of received amount in personal injury matters; if contingency fees are charged by a law practice hourly rates cannot also be charged for the same matter; contingency fees should not be permitted in family law, criminal law or migration law matters; additional costs disclosure requirements should apply for contingency fee agreements akin to those which apply to conditional fee agreements.

Mr Sapountsis said the LIV believed that contingency fee arrangements would provide an alternative and transparent billing method for clients.

Critics of the proposal to lift the ban include the Victorian Bar Association and the CEO of the Victorian Legal Services Board and Commissioner Michael McGarvie.

Mr McGarvie said LPUL has a focus on legal costs being reasonable and based on legal services that are proportionate to the client’s legal needs. Contingency fees would annihilate that principle, he said. “With contingency fees the doctrine of reasonableness and proportionality will be dissolved into an unregulated soup where very few, if any clients, will gain better access to a lawyer. Instead many will pay handsomely, and some lawyers will wrongly believe their entitlement to large chunks of their clients’ damages payouts is a just reward for their own risk-taking.”

At present, clients who do not qualify for legal aid have two choices. They can apply to use a “no win no fee” firm, where they pay lawyers’ fees conditional on receiving a damages payout, plus sometimes an extra percentage of the win amount as an “uplift fee”. Or they can obtain finance for their case through a commercial third party litigation funder, where they pay a percentage of their damages payout in what is essentially a contingency fee arrangement, plus a further percentage to cover legal costs.

In Australia contingency fees payable to lawyers are currently prohibited in all states and territories, a prohibition that has been incorporated into LPUL. Victorian Attorney-General Martin Pakula last year indicated support for lifting the ban, but said at this year’s Conference of Council that while doing so was not out of the question, under LPUL “going it alone is not an option”.

NSW Attorney-General Gabrielle Upton has said that contingency fees are not under “active consideration”. Victorian Shadow Attorney-General John Pesutto said that while the Coalition was not opposed in principle to such a regime, “we have entrenched reservations” including concerns regarding possible incentives to practitioners.

Contingency fees are supported by the Productivity Commission, subject to certain exceptions and restrictions. The Victorian Law Reform Commission has also recommended reconsidering the prohibition on percentage-based contingency fees. The Law Council of Australia has not yet finalised its position on whether the ban should be lifted, but has acknowledged contingency fees as a means of increasing access to justice.

Legal firms generally have been supportive of contingency fees, however one vocal critic, Herbert Smith Freehills partner Jason Betts, said that their introduction is likely to result in an increase in litigation and could lead to lawyers putting their own financial interests ahead of their clients.

In effect, contingency fees provide lawyers with the financial incentive to fund their own class actions, he said. Because they can charge a percentage, there is a “risk that lawyers will explore higher risk cases at the margin of merit or seek early settlements from defendants reluctant to engage in several years of a class action. As a result, we could see Australia replicate the US litigation environment and an increased risk of ‘greenmail’ tactics emerging, where defendants are encouraged to settle to avoid going to trial.”

However, LIV CEO Nerida Wallace said that Australia’s civil procedure legislation is likely to put the brakes on any US-style flood of litigation. The percentage caps that are recommended by the LIV will also ensure that contingency fees will not create a “bonanza” for lawyers, she said.


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