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  • Writer's pictureDaniel Meyerowitz-Katz

Why the case against contingency fees does not stack up

Legal professional associations across the country have recently been speaking out against the impending introduction in Victoria of percentage-based or “contingency” fees charged by plaintiff lawyers acting in class actions. The Law Council of Australia, for example, has resolved to oppose contingency fees “as a matter of principle”.

It seems curious that lawyers are directing this level of outrage against the deregulation of the ways in which they are permitted to charge fees, particularly when three recent government enquiries have recommended such a change—one led by an eminent silk, and another by a sitting Federal Court judge.

If contingency fees are really so bad that they should be opposed as a matter of principle, why did each of the Productivity Commission, the Victorian Law Reform Commission, and the Australian Law Reform Commission to recommend their introduction? The answer is that on close analysis, the arguments against contingency fees to not bear scrutiny.

First, what are contingency fees exactly? A contingency fee agreement has two components. The first is that it is conditional—fees are not charged unless the matter is successful (ie it is a “no win, no fee” agreement). The second is that if fees are chargeable, the amount of fees charged is calculated as a proportion of the money recovered by the client.

By far the most common argument against contingency fees is that they create an incurable conflict of interest. As the argument goes, lawyers should not be permitted to have a financial interest in the outcome of the proceedings. The theory is that if lawyers are paid the same regardless of the outcome for their client then they are more likely to bring an independent mind to their work, to the benefit of all involved.

The main problem with this argument is that lawyers can already have a financial interest in the outcome of the proceedings. In fact, in many cases it is impossible to avoid. This is true for any lawyer who acts for clients who cannot afford to pay their bills. Even without a formal “no win, no fee” agreement, if a client cannot afford to pay legal fees unless they achieve a successful result, then a conventional fee agreement becomes a “no win, no fee” agreement in substance if not in form.

The fact is, few individuals or small businesses have the means to fund litigious proceedings. Accordingly, there are only two ways to ensure that lawyers can act without being financially interested in the outcome. The first is for all legal fees to be publicly funded—which will not happen any time soon. The second is to restrict access to legal advice to wealthy individuals and large companies—which is patently unjust (although it is worthwhile to note that the loudest opponents of contingency fees tend to be lawyers who act for persons in those two categories).

Thus, the aspect of contingency fees that gives lawyers a financial interest in the outcome of the dispute—that they only get paid if they win—is nothing new. The real novelty about contingency fees is the manner in which the fees are calculated—ie by reference to the outcome achieved rather than the amount of time spend doing work.

This begs the question: what is so much better about charging by the hour? Does time-based billing really give rise to less of a conflict of interest than outcome-based billing?

It is undeniable that charging for time gives rise to conflicts of interest. It encourages lawyers to do more work, regardless of the utility. For example, an unnecessary interlocutory application is a great opportunity to earn fees. A conference with clients becomes far more profitable if it goes for two hours than one hour, and it’s a better earner with two juniors in the room than the partner alone. Endless correspondence setting out all of the client’s gripes may be a waste of time, but it helps pay the bills.

For this reason, most law firms have billing targets for their staff. Solicitors are expected to do a certain amount of billable work per day. If there is nothing to do then they have to find something to do. Otherwise they will not meet budget.

Barristers are kidding ourselves if we think this problem is limited to solicitors. When an opponent is dragging things out with specious objections, does that really have nothing to do with the fees they will charge if the hearing goes over? In the history of the profession has there never once been a barrister who had their mortgage payments in mind when they encouraged a client to hold out for a better deal rather than settle before the hearing? Perhaps, but it seems unlikely. We may pride ourselves on the ability to manage these conflicts, but there is no denying that they are real.

Why, then, are contingency fees so dangerous? In all of the above scenarios, contingency fees eliminate the conflicts associated with time-based billing. Solicitors charging contingency fees have no incentive to bring unnecessary interlocutory applications, have superfluous team members in conferences, or exchange pointless correspondence. Likewise, counsel charging contingency fees have no incentive to needlessly prolong hearings or to discourage the early resolution of disputes.

In fact, in order to maximise their income, lawyers charging contingency fees are incentivised to incur the least possible costs while nevertheless achieving the best possible result. That is, they are encouraged to find the optimal balance between advancing the client’s case while minimising expenses. This seems consistent with objectives such as those stated in s 56 of the Civil Procedure Act 2005 (NSW) (“the just, quick and cheap resolution of the real issues in the proceedings”) or s 37M of the Federal Court of Australia Act 1976 (Cth) (“the just resolution of disputes according to law, and as quickly, inexpensively and efficiently as possible”). In contrast, time-based billing incentivises needless work and dragging things out. Put this way, it is not immediately obvious why it is so widely accepted that time-based billing should be encouraged and contingency fees prohibited.

The other common argument against contingency fees is that if they are introduced then Australia will become like America. This argument is little more than thinly-veiled xenophobia. There is no evidence whatsoever to support it. While it varies state to state, America has, on the whole, a very strong and functional justice system. There is no empirical basis to argue that the US system is necessarily inferior to Australia’s.

In any event, the differences between the Australian and American systems run far deeper than contingency fees. The introduction of contingency fees will not give Australians a constitutional right to trial by jury in all civil damages claims. Neither will it abolish the “loser pays” adverse costs rule. Fear not—contingency fees or no, there is no risk of us turning into America any time soon.

In conclusion, the arguments against contingency fees do not stack up. The three government enquiries that have examined the question have all come to this realisation.

The Victorian government should not be criticised for accepting the recommendation of these inquiries. In all likelihood, once they realise that contingency fees will not bring the sky crashing down on our heads, other jurisdictions will follow Victoria’s lead.

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