8. Contingency fees

 

Introduction

  1. 8.1 The Commission has been asked to report on whether removing the prohibition on law firms charging contingency fees would mitigate the issues presented by litigation funding.
  2. 8.2 There has been extensive debate about whether lawyers should be able to charge contingency fees and it remains a live issue. While the terms of reference do not require the Commission to canvass all the arguments for and against the idea, the broader context is relevant when considering the issues that are within the scope of the review. For this reason, a summary of the key arguments is set out in the Appendix.
  3. 8.3 In this chapter, three broad issues presented by litigation funding are discussed. They encapsulate the limitations of litigation funding as a means of providing access to justice—both in the sense of enabling a person to use the legal system to enforce their rights, and with regard to the person’s exposure to a fair process and outcome. There may be other issues that should be included and the Commission would welcome comments about possible additions to the list.
  4. 8.4 The three issues discussed in this chapter are:
  • case selection—the limited range of cases selected for funding
  • costs—the actual amount of the funding fee
  • client interests—the subordination of the client’s interests to commercial objectives.

Case selection

The issue

  1. 8.5 The decision by a litigation funder to finance a particular claim is a commercial decision, based on the expected return on investment. As discussed in Chapter 2, the selection process is rigorous and the success rate of funded claims is very high. The Commission was told during informal consultations that as few as one in 20 claims considered for funding may be selected.
  2. 8.6 IMF (Australia) Ltd (now IMF Bentham Ltd), for example, has said that it funds claims that:
  • have strong prospects of success
  • are against defendants with a verifiable capacity to pay a judgment
  • can be proved primarily by reference to objective written evidence rather than potentially contested oral evidence
  • are likely to resolve for an amount in excess of $5 million (for a single claim) and
    $30 million (for a class action).1
  1. 8.7 Funded individual claims tend to be about insolvency, commercial and contractual disputes, intellectual property and estates. Funded class actions are weighted towards investor and shareholder claims. Litigation funders do not fund high-risk claims or claims aimed at obtaining non-monetary results such as an injunction or declaration. Social justice litigation, claims for compensation for personal injury and other claims that involve vulnerable people are generally excluded.

Effect of lifting the ban

  1. 8.8 The question for the Commission to consider is: Would permitting lawyers to charge contingency fees broaden the types of claim that would be funded, thereby enabling greater access to justice?
  2. 8.9 An answer in the affirmative would need to be based on evidence that there is an unmet demand for access to justice that would be met by law firms if they could charge contingency fees (excluding the areas of family law, personal injury and criminal law, as noted in the terms of reference).

Unmet demand

  1. 8.10 The suggestion has been made to the Commission that there is an unmet demand among small-to-medium enterprises for business-to-business litigation services, and that this demand could be met if lawyers were able to charge contingency fees. In contrast, the demand for legal assistance for personal injury claims is well met by firms being able to charge conditional costs, and large corporate claims are financed by litigation funders.
  2. 8.11 Then again, if business-to-business litigation does not already provide a monetary outcome that is financially attractive for law firms under conditional cost agreements, it is unclear how it would be economically viable under a contingency fee arrangement.
  3. 8.12 In its review of access to justice arrangements, the Productivity Commission concluded that lifting the ban on lawyers charging contingency fees would create a significant source of new funding over and above that provided by litigation funders.2 It proposed that lawyers may be better placed to assess risk and fund a broader range of meritorious claims than those that fall within a litigation funder’s commercial parameters.
  4. 8.13 Through pro bono work and by charging on a conditional or ‘no win, no fee’ basis, law firms already take on cases that carry a high risk of being unsuccessful, or do not promise a large monetary award for the plaintiff. Several law firms have conducted large ‘social justice’ type class actions on this basis without the support or indemnity of a litigation funder3 and were doing so long before litigation funders became involved in class actions.
  5. 8.14 As noted in Chapter 2, of the 87 class actions filed in Australia for the benefit of vulnerable people to March 2014, none were financed by litigation funders. Legal services were usually provided on a ‘no win, no fee’ basis, although some cases proceeded only with the support of government agencies or the community or because the lawyers were prepared to work for free:

Some class representatives were either unable to secure legal representation or secured representation only as a result of the financial support provided by legal aid commissions or similar entities, the class members, donors, or lawyers acting on a pro bono basis.4

  1. 8.15 It has been suggested that large law firms such as Maurice Blackburn and Slater and Gordon have been able to allocate resources to class actions for vulnerable people from the profits they have made on other types of class actions, such as investor class actions.5

    On this view, by increasing the financial return for other types of class actions by charging contingency fees, law firms could afford to provide legal representation for meritorious cases that otherwise would not be pursued for lack of finance. As a result, the class action regime would be used more extensively to provide access to justice for vulnerable people.
  2. 8.16 Maurice Blackburn has argued that current conditional costs arrangements constrain lawyers’ rewards and do not adequately address the risk in a given case, and this is turn limits the number of cases that can be undertaken on this basis.6 It follows that being able to charge contingency fees would provide another way to finance social justice cases and be compensated for the risk.
  3. 8.17 However, the Legal Services Commissioner, Michael McGarvie, has called for the ban on lawyers charging contingency fees to remain. In his view, the Productivity Commission did not identify a gap that lawyers charging contingency fees would successfully fill.7 He contends that litigation funding, together with lawyers acting on a conditional fee basis, already provide an adequate framework for access to justice.8 Put another way, lawyers charging contingency fees and funding fees are mutually exclusive—there is no need for one where the other already exists.9 He has observed:

In Australia, we have generally good opportunities for access to justice and we have fair and proportionate fees. We should not adopt a flawed and cynical device for over-charging as an excuse for giving people access to the courts. Contingency fees are not good for any of us.10

Economic imperatives

  1. 8.18 A decision by a litigation funder to finance a particular case is reached after a careful assessment of all the factors that may affect whether the case is likely to produce a sound return on the investment. If law firms, like litigation funders, were permitted to charge contingency fees, it is reasonable to expect that they will do so in each case only after conducting a cost/risk analysis—even if the criteria they use differ from those used by litigation funders.
  2. 8.19 One key factor would be whether charging a contingency fee would be preferable to charging on a conditional basis, or under some other type of costs agreement. It may not be feasible for many law firms to charge for large and complicated proceedings on a contingency basis, especially where damages are likely to be limited. They may not have the structure, capital adequacy or risk appetite. It may be prudent to continue to be paid on the basis of work done rather than to receive a percentage of a small award.
  3. 8.20 It appears that only large law firms with significant capital reserves would have the financial capacity to conduct large-scale litigation on a contingency fee basis. Even then, they may be unable to conduct multiple class actions at a time on this basis, because of the high risk and cost involved. For this reason, law firms charging contingency fees could still need litigation funders to underwrite large-scale litigation,11 in which case the litigation funder’s selection criteria would determine whether the litigation is funded.
  4. 8.21 In England and Wales, lawyers have been able to charge contingency fees since 2013.12 The response by the legal profession to this change indicates that contingency fees are charged only where doing so provides a clear financial advantage for lawyers equal to the risk taken. Otherwise, the clients are charged another way. To date, there has been very little evidence of contingency fees being used. They were recently described as a ‘damp squib’ and compared to a yeti in that ‘they are believed to exist in practice but hardly any sightings have been made’.13
  5. 8.22 It is possible that the reluctance to charge contingency fees in England and Wales is due to confusion about regulation and the impact of cost shifting.14 However, there does appear to be resistance within the legal profession. In reflecting on the lack of enthusiasm for contingency fees, John Peysner has concluded:

Whilst the image of litigators might be that of aggressive risk takers in fact in relation to changes in the procedural and financing environment, they tend to be quite conservative. It is unsurprising that when faced with an alternative between, say, a true and tried method of financing and a new method, many will adhere to the old method when given the choice.15

  1. 8.23 However, the conditions in which the ban on lawyers charging contingency fees was lifted in England and Wales are very different to those in Victoria, and so direct comparisons should be made with care. The Commission would welcome submissions that focus on the local market for legal services.

Costs

The issue

  1. 8.24 Through its funding fee, a litigation funder will seek to obtain a return on investment that justifies absorbing the many risks of the litigation,16 which are often uncertain or unknown at the commencement of proceedings. They include the risk of an adverse costs order if the litigation is unsuccessful.
  2. 8.25 The size of the funding fee, both in absolute terms and as a share of the amount recovered in damages or from settlement, is the subject of consistent controversy. As noted in Chapter 2, regularly cited figures suggest a range of between 20 and 45 per cent of the settlement or judgment amount.17 In addition, legal costs already paid by the litigation funder that are not met by the other side at settlement are recovered from the plaintiff. As most settlement approval judgments do not reveal the rate of the funding fee, it is difficult to determine the accuracy of these figures. The fee structures are very different in each case.18

 

Effect of lifting the ban

Direct impact on total costs

  1. 8.26 Maurice Blackburn has put the view that, if lawyers were able to charge contingency fees, the overall cost to clients would be substantially less than the current combined fees of lawyers and litigation funders.19 A litigation funder would not be involved and would not need to be paid. In these cases, by charging contingency fees rather than entering a conditional costs agreement, the law firm could increase the amount it is paid in recognition of the risk it carries. At the same time, the plaintiff would receive a greater share of the settlement amount or award of damages.
  2. 8.27 As noted above, this scenario would apply only to the few law firms with the capital and risk appetite to fund the litigation alone, without the backing of a litigation funder or an insurer.
  3. 8.28 The Commission would welcome submissions about other scenarios where costs to the client would be directly reduced, particularly in proceedings other than class actions.

Indirect impact of increased competition

  1. 8.29 A rationale commonly given for the view that the costs to clients would decrease if law firms charged contingency fees is that there would be greater competition in the litigation funding market, which would put downward pressure on funding fees.20 The Commission is interested in receiving any empirical data to suggest that the increased number of litigation funders operating in Australia in recent years is placing any downward pressure on funding fees.
  2. 8.30 It is possible that increased competition from lawyers charging contingency fees would lead to an increase in the volume of claims. If this occurred, Michael Legg has suggested that it would be more likely to reduce the quality and merit of new claims than the funding fee.21
  3. 8.31 In the United States, where lawyers commonly charge contingency fees, there is some evidence that they modify the percentage they deduct, in the client’s favour, to prevent damage to their reputations.22 There is, however, very little evidence that litigants shop around and make decisions on the basis of the actual contingency fee percentage proposed.23
  4. 8.32 Another consideration is that lifting the ban on lawyers charging contingency fees would not necessarily create competition for the same services that litigation funders currently provide. Litigation funders provide a project management service whereby they monitor the progress of the litigation and manage the associated legal costs. They have told the Commission that there would be a continuing need for their services in conjunction with legal services even if the ban were lifted.
  5. 8.33 A further important distinction is that, unlike law firms, litigation funders cover any security for costs orders or adverse costs orders. The risk of paying adverse costs is the largest risk taken on by the litigation funder and is reflected in the funding fee. Currently, law firms acting under a ‘no win, no fee’ agreement do not provide an indemnity for any adverse costs.24 Law firms argue that the risks of providing an indemnity are not well met by conditional cost agreements, even with an uplift.25
  6. 8.34 As discussed in Chapter 7, market forces alone do not determine the legal costs of class actions. In approving a class action settlement, the court considers the reasonableness of any legal costs charged. In this process, the court is concerned with the aggregate amount of legal costs charged rather than the actual billing method. This supervisory role would continue. For example, in Canada the Ontario Superior Court of Justice found a contingency fee agreement void for not being fair and reasonable, as there was no evidence that the lawyers had indemnified the client for an adverse costs order or their own legal expenses if the proceedings were unsuccessful.26 While the matter was ultimately successful and a valid signed contingency fee agreement in place, the Court reduced the percentage of the contingency fee allowable.27

Client interests

The issue

  1. 8.35 A litigation funder’s aim of obtaining a sufficient return on its investment may not align with the interests of the funded plaintiff. For example, in keeping legal costs and disbursements within budget so that its returns are as projected, the litigation funder may press for early settlement rather than allowing negotiations or court proceedings to continue.
  2. 8.36 The relationship between a litigation funder and a funded plaintiff depends on the type of claim being funded. The Commission has been informed that, in a funded commercial claim, the litigation funder may negotiate the commercial terms of the funding agreement directly with the plaintiff.
  3. 8.37 In comparison, in a funded class action, the litigation funder has very little, if any, interaction with the representative plaintiff. The lawyer acts as an intermediary between the litigation funder and the client. Even in class actions, however, the litigation funder is likely to give instructions to the lawyer on the progress of the case, particularly at settlement. The lawyer—who has an ethical obligation to protect the interest of their client—is required to give priority to the instructions and interest of the client over those of the litigation funder. The complex conflicts of interest that arise in the tripartite relationship between the litigation funder, lawyer and plaintiff are discussed in Chapter 3.

Effect of lifting the ban

  1. 8.38 Lifting the ban on lawyers being able to charge contingency fees could reduce the risk of a conflict of interest between the litigation funder and the client, and assuage concerns about the relationship between the litigation funder and the lawyer.
  2. 8.39 However, while lifting the ban may mitigate the risk of a conflict of interest between the litigation funder and the client, it may increase the risk that the lawyer is in a position of conflict. Lawyers’ ethical and professional obligations prohibit them from acting for a client where there is a conflict—whether real or apparent—between their duty to serve the best interest of the client and their own interest, except as permitted by law.28 They must also avoid any compromise to their integrity and professional independence.29
  3. 8.40 It is widely argued that being able to charge contingency fees would directly affect lawyers’ duties to their clients and undermine their professional independence, creating a conflict of interest not otherwise there when charging a fee for service.30 When a lawyer takes on the role of the funder, the interests that receive priority can become opaque.
  4. 8.41 Opponents of the Productivity Commission’s recommendation that the ban be lifted have said that it did not address the importance of maintaining lawyers’ independence from litigation funding in order to separately manage conflicts of interest and protect the interest of the client.31 On this view, each party in the tripartite relationship should maintain a distinct role and relationship to the others.32
  5. 8.42 The High Court noted in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd33 that the role of each party in funded litigation is separate and distinct. It has been argued that, if litigation funding is to be managed appropriately, lawyers need to remain independent from it.34 If the ban on contingency fees were lifted and the services of litigation funders not used, proceedings would be ‘lawyer funded, lawyer managed and lawyer settled’.35 The plaintiff’s only source of information and advice about the conduct of the litigation would be from a party with a direct financial interest in the outcome.36
  6. 8.43 Two recent cases in the Supreme Court have reinforced the importance of lawyers remaining independent of contingency fees charged for litigation.37 In Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (No 3),38 the acting lawyer financed the litigation through a separate entity. He attempted to negotiate a contingency fee agreement as the litigation funder, claiming both the legal costs as well as the funding fee. The Supreme Court rejected the strategy as an abuse of process.39
  7. 8.44 Similar funding arrangements applied in Bolitho v Banksia Securities Ltd (No 4).40 The Court noted the importance of the public’s perception of the lawyer as independent and fulfilling their obligation to the court. Justice Ferguson noted:

The court relies upon practitioners to apply an independent and objective mind when conducting a case on behalf of the client … the more that is at stake, the greater the risk that the lawyer will not bring or will not be seen to be bringing to bear the requisite degree of objectivity that the role of lawyer demands.41

  1. 8.45 Opponents of lifting the ban often identify conflict of interest as the most concerning aspect of the introduction of contingency fees. The principle that a lawyer advocates for a client’s cause independently of that cause, is essential to ensure compliance with duties to the court and to the administration of justice.42
  2. 8.46 Supporters of lifting the ban have argued that, theoretically, any form of legal billing will present a conflict of interest. In addition, the current billing methods have disadvantages. Time-based billing may result in unclear legal fees, or even an incentive for inefficiency and over-servicing.43 In Armstrong Scalisi Holdings Pty Ltd v Piscopo (Trustee),44 for example, Justice Rares noted that access to justice was difficult where a client was expected to pay for four lawyers charging for the same repetitive work. In that case, the charges were considered an inappropriate and inefficient use of the client’s resources, and contrary to a lawyer’s fiduciary duty to their client to ensure cases are prepared reasonably and economically.45
  3. 8.47 It has also been suggested that the conflict of interest that would arise if lawyers charged contingency fees is already evident under a conditional costs agreement, where the lawyers are paid only if the case is successful, and their fees are deducted from the proceeds of the litigation.46 This arrangement already allows lawyers to share in the risk of litigation with the client.
  4. 8.48 Conversely, critics of contingency fees note there is a fundamental difference between a ‘no win, no fee’ agreement and a contingency fee. While a ‘no win, no fee’ agreement is charged in reference to the work done, a contingency fee effectively purchases the lawyer a share in the litigation.47 Arguably, contingency fees give rise to a very different and substantial conflict of interest for lawyers that does not arise with litigation funders.

Other options

  1. 8.49 If lifting the ban on lawyers being able to charge contingency fees is unlikely to broaden the access to justice that the class action regime was intended to provide, the Commission is interested in receiving submissions that propose other funding arrangements that could be more effective. They could be alternatives to lifting the ban, or measures that could be introduced in addition to lifting the ban.
  2. 8.50 The difficulty in overcoming financial barriers was recognised by the Australian Law Reform Commission (ALRC) when developing the model on which the Victorian class action regime is based. It recommended a special fund be established that would underwrite the risk for meritorious claims and pay costs awarded against representative parties.48 The Victorian Law Reform Commission proposed a similar class action funding mechanism in its Civil Justice Review in 2008.49
  3. 8.51 Since then, changes in the way in which legal services are provided and financed potentially present novel ways of addressing the problem. For example, the use of technology to deliver legal services more efficiently is extending to the financing of legal claims. International tech start-up companies are providing a platform that brings crowdsourced funding (or crowdfunding) to public interest litigation.50 Litigants can access funds raised either by donations or investment models from any person in the world who wishes to donate or invest. By seeking community donations, litigants can get finance for legal cases that would not attract funding from commercial sources. The litigant is able to control the rate of return to be paid to investors when the court case is settled. These models are still relatively new and remain largely untested in relation to the ability to raise funds for large scale litigation such as class actions.
  4. 8.52 The Commission encourages submissions that explore other ways of improving access to justice through Victoria’s class action regime.

Questions

  1. 26 Would lifting the ban on contingency fees mitigate the issues presented by the practice of litigation funding?
  2. 27 If the ban on contingency fees were lifted, what measures should be put in place to ensure:
  3. (a) a wide variety of cases are funded by contingency fee arrangements, not merely those that present the highest potential return
  4. (b) clients face lower risks and cost burdens than they do now in proceedings funded by litigation funders
  5. (c) clients’ interests are not subordinated to commercial interests
  6. (d) other issues raised by the involvement of litigation funders in proceedings are mitigated?
  7. 28 Are there any other ways to improve access to justice through funding arrangements?

 

 

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