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Wheelahan, Michael --- " Not just a business : the debate around contingency fees" [2016] PrecedentAULA 81; (2016) 137 Precedent 46


‘NOT JUST A BUSINESS’: THE DEBATE AROUND CONTINGENCY FEES

By Michael Wheelahan QC

On 7 March 2002, the Hon Justice Michael Kirby addressed a function for the presentation of the Australian Law Awards in Sydney. Justice Kirby spoke of a time when the Australian legal profession was not so profit-oriented, of the days of highly personal involvement with a wide mix of clients of modest means, and of the days when the words pro bono were unknown, because fee waiver was such a common fact of life. In his concluding words, Justice Kirby stated:[1]

‘The bottom line is that law is not just a business. Never was. Never can be so. It is a special profession. Its only claim to public respect is the commitment of each and every one of us to equal justice under law.

There is an award that every Australian lawyer can aspire to. It is hard to win. It requires long hours of devotion and care. But when it is won, it is special. It is the prize of respect and gratitude of the ordinary client for a job done with skill, courtesy and at no more than proper cost. Every lawyer, every day, should endeavour to win that prize. It does not usually come with a glittering ceremony. But in our hearts we know it is the most precious award of all.’

In May 2014, a working group of the Law Council of Australia presented its final report on percentage-based contingency fee arrangements.[2] The Working Group advocated the introduction of percentage-based contingency fee arrangements as ‘an additional option’ for clients to fund access to legal services. In April 2016, the Law Council decided not to accept these recommendations.

The purpose of this article is not to weigh the pros and cons of contingency fee arrangements. Much that might be said to support such arrangements has been set out in the Law Council of Australia Working Group’s final report, and in other papers, such as a position paper prepared by the Law Institute of Victoria, which was released on 17 February 2016.[3] The purpose of this article is to set out four reasons why percentage-based contingency fee arrangements are unnecessary, and undesirable, and why the Law Council was correct to reject their introduction.

The four principal objections to percentage-based contingency fee arrangements are:

(a) there is no apparent need for any alternative basis to charge fees to clients;

(b) a contingency fee arrangement treats a piece of litigation as a transaction, with no necessary relationship to the amount of professional time or effort required to prosecute the client’s case;

(c) contingency fee arrangements are inconsistent with the obligations of lawyers, and counsel in particular, to be independent of the client, and of the client’s cause; and

(d) the introduction of contingency fees will provide further opportunities for unscrupulous lawyers to charge amounts which are not proper, fair, reasonable or consistent with the standards of professional behaviour to which lawyers should aspire.


NO UNMET LEGAL NEED

A striking feature of the report of the Law Council’s Working Group is the focus on the claim of ‘unmet legal need’ to justify the introduction of widely available contingency fee arrangements,[4] the only exceptions to which were to be criminal, family law and immigration matters.[5]

Indeed, in an opinion dated 3 March 2016, the Victorian Legal Services Commissioner, Michael McGarvie, correctly observed that:

‘[T]he vice of contingency fees is being disguised behind the camouflage of access to justice.’

It is clear that the Working Group considered contingency fee arrangements to be appropriate for most litigation, including routine personal injuries litigation, which makes up the vast bulk of all civil litigation, at least in Victoria. The fact that the Working Group had personal injuries litigation in mind is confirmed by the examples of how contingency fees would operate in Attachment D of its report. Six of the ten examples used were personal injuries claims.

There is no objective support in the report of the Working Group to justify the high-level assertions of ‘unmet legal need’. In fact, real practical experience demonstrates otherwise. Those who are experienced in litigation know that potential claimants are very well served by the legal profession.

The vast bulk of civil litigation in Victoria involves ordinary citizens as claimants in injuries litigation. Included in this category are common law work-related claims; claims arising out of transport accidents; claims for statutory benefits; judicial review of administrative decisions including medical panel decisions, affecting the rights of claimants to statutory benefits and common law damages; and claims for injuries that fall outside the transport accident and WorkCover schemes, including claims arising out of alleged medical negligence.

A feature of all this type of work is that claimants have available to them a wide choice of very capable firms and barristers who will conduct such litigation on a ‘no win – no fee’ basis. A ‘no win – no fee’ fee structure across a portfolio of cases allows firms and barristers to derive a reasonable income from their practices, and allows them to absorb losses. This model has been very successful over many years. When a claimant obtains a favourable outcome under a no win-no fee arrangement, costs are usually recoverable from the unsuccessful defendant. That is because costs in civil litigation are usually recoverable from a losing party as an indemnity; that is, as an indemnity against costs that are actually incurred.[6]

One can be confident that, under the way the profession operates in Victoria, any claimant with an arguable case will always be able to engage competent lawyers to pursue the claim on their behalf. This is due in part also to the focus in Victoria on professional duty, which is a great hallmark of the profession in Victoria.

LITIGATION AS A TRANSACTION

The Working Group’s proposed percentage-based contingency fee arrangement treated litigation as a transaction, in the same way a real estate agent might earn a commission on the sale of a property. There is no doubt about this because the Working Group referred to real estate agents in the foreword to its report:

‘Despite this approach in other jurisdictions, in all Australian states and territories lawyers remain prohibited from entering into contingency fee agreements with their clients.

This is in contrast to the position for non-lawyers, such as real estate agents and other sales agents who charge or are paid by commission.’

Astonishingly, one of the arguments that appears to have been advanced by the Working Group in support of percentage-based contingency fees was the ‘anomaly’ arising because lawyers could not charge commissions on the proceeds of litigation in the same way that real estate agents charge commissions on sales of property. There are manifold objections to treating professional services provided in the course of the administration of justice in this way.[7] Lawyers acting for clients in litigation are not commission agents who clip the ticket.

From a lawyer’s perspective, litigation is not a transaction. It requires hard work, skill, proper advice, and also the discharge of higher duties to the courts. Different cases will present different challenges. Some cases can be settled quickly and without recourse to the courts. In many cases, liability will not be in issue, and competent lawyers on both sides will at least have some common ground on a proper range for the assessment of damages. In those cases where competent lawyers give proper advice to clients to settle cases, the lawyers will be properly and adequately remunerated. No occasion arises in those types of cases to reward lawyers even further with a percentage of the total recovery.

In this regard, it is relevant to note one of the Working Group’s more unacceptable justifications for the introduction of percentage-based contingency fees. The Working Group suggested that percentage-based contingency fees can promote ‘efficiency’:[8]

‘Contingency fees can promote efficiency: lawyers are encouraged to be more selective and efficient because if the case does not ‘win’, they are paid nothing for their time and typically, nor do they recover expenses they have ‘fronted’. This means lawyers cannot afford to bring frivolous or unmeritorious cases and have a strong interest in working hard for their clients to resolve cases as efficiently as possible.’

The suggestion that percentage-based contingency fees might encourage early settlement is highly objectionable, and must be rejected as a justification for their introduction. It suggests that the lawyers might otherwise be motivated to prolong litigation. In fact, it should be clients who, on proper advice, chose whether to settle, or contest their litigation. There are effective means available to encourage clients to settle litigation without recourse to trial, including compulsory disclosure requirements, such as discovery and exchange of medical reports and, ultimately, offers of compromise. In Victoria, there is, in addition, a system of pre-litigation offers and counter-offers for common law WorkCover claims which provides an additional incentive for clients to settle cases. The suggestion that percentage-based contingency fees might result in a reduction of the number of claims litigated carries with it an implicit assumption that the lawyers who will benefit from the contingency fees will tailor their advice to their clients in such a way as to maximise the lawyer’s return, and minimising the amount of work the lawyer has to undertake to achieve that return. The argument that percentage-based contingency fees can promote ‘efficiency’ acknowledges and then magnifies the conflict of interest that is inherent in any percentage-based contingency fee arrangement.

Returning to the different types of cases that exist, some cases are difficult. They must be fought hard, but fairly, against well-resourced insurers and governments. Sometimes, trials can take weeks. There might be appeals. In these long, hard cases, the monetary rewards for the successful lawyers are entirely commensurate with the amount of work undertaken, including the degree of difficulty (which will be taken into account in fixing discretionary items). To return to the Law Council Working Group’s fatally flawed and objectionable ‘efficiency’ argument, if (contrary to accepted standards of professional conduct) lawyers would be motivated by percentage-based contingency fee arrangements to settle their clients’ cases early, the corollary is that there would be a diminished incentive to run the long, hard case, because the rewards for the lawyers sitting on their contingency fee arrangement are not so great. This only feeds into the hands of well-resourced defendants at the expense of claimants.


INDEPENDENCE OF THE PROFESSION

The Law Council Working Group recommended that percentage-based contingency fees should cover the professional costs of all lawyers involved in the case, including counsel. The Working Group recommended:

‘As a general rule, barristers briefed by lawyers subject to conditional fee agreements will agree to also undertake the work on a “speculative” basis.’

It is difficult to imagine that any independent Bar in Australia would have found these recommendations acceptable. For its part, the Victorian Bar opposed the introduction of percentage-based contingency fees, and was successful in its opposition, because the Law Council did not act on the Working Group’s recommendations.

The legal profession, and the Bars in particular, pride themselves on their independence. Independence means being independent of the client, and of the client’s cause. Unlike a real estate agent, lawyers engaged in litigation have higher duties, including duties to the courts to further the administration of justice.

The need for lawyers to be independent has been recognised by professional rules of conduct. For example, the Legal Profession Uniform Conduct (Barristers) Rules 2015, which apply in Victoria and New South Wales, provide that (inter alia):

(a) barristers owe their paramount duty to the administration of justice;[9]

(b) a barrister has an overriding duty to the court to act with independence in the interests of the administration of justice;[10]

(c) a barrister must not act as the mere mouthpiece of the client or of the instructing solicitor and must exercise the forensic judgements called for during the case independently after appropriate consideration of the client’s and the instructing solicitor’s wishes where practicable;[11] and

(d) a barrister must refuse to accept or retain a brief or instructions to appear before a court if the barrister has a material financial or property interest in the outcome of the case, apart from the prospect of a fee.[12]

There are corresponding obligations in the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015.[13]

In the adversarial system, the courts rely on the independence of counsel and solicitors. The courts have insisted that those who appear before it are independent of their client’s cause.[14] A solicitor should not act for a party in litigation where he or she will be a material witness. A solicitor should not ordinarily act in litigation where the solicitor has a personal interest in the outcome, such as where a document drawn by the solicitor is impugned. Nor should a solicitor act for a party in litigation where the solicitor has a pecuniary interest in the outcome beyond normal fees. In Bowen v Stott, Hasluck J referred to the power of the court to restrain practitioners from acting where it is necessary to preserve the proper administration of justice:[15]

‘The relevant principles are affirmed and given further expression in Kooky Garments Ltd v Charlton [1994] 1 NZLR 587 and also in a decision of Steytler J in this Court in Newman v Phillips Fox (a firm) (1999) 21 WAR 309. It emerges from the latter case, that the rationale for intervention upon the third ground is a recognition that the integrity of the legal process and of the Court function might be undermined if it were thought that solicitors or counsel did not possess the objectivity and independence which their professional responsibilities and obligations to the Court require of them.

The most obvious case in that regard would be a situation in which a solicitor had some direct pecuniary interest in the outcome. It might seem to an independent observer that a solicitor, notwithstanding his best efforts to be impartial and objective, might adjust his evidence in some way to procure a result that suited his interest. The decided cases suggest also that the same principles apply in circumstances where a solicitor might feel impelled to justify or defend his conduct in representing a client, notwithstanding that the solicitor did not have any specific pecuniary interest in the outcome other than the obtaining of his professional fees.’

It is one thing for the prospect of recovery of the lawyers’ fees to be contingent on a successful outcome. It is quite another thing to have both the entitlement to and the size of the lawyer’s remuneration contingent upon the outcome, with the lawyer being entitled to a substantial percentage of the proceeds of the litigation. Such an arrangement would give the lawyer a much more direct interest, and attracts the sorts of considerations referred to by Hasluck J above.


OVERCHARGING

Overcharging – that is, charging what is more than fair and reasonable – is capable of constituting unprofessional conduct, and exposes the legal practitioner to disciplinary action. Unfortunately, there are unscrupulous lawyers who over-charge lay clients. There are many instances of over-charging recorded in published cases, including decisions of the bodies charged with disciplinary functions over lawyers. In order to protect the reputations and integrity of the vast majority of lawyers, and in turn to protect the public, the basis on which costs can be charged and recovered is highly regulated. As far as Victoria and New South Wales are concerned, that regulation has evolved over recent decades, and is now found in the provisions of the Legal Profession Uniform Law, and the Rules made thereunder. The regulation of costs has the following features:

(a) costs are generally assessed based upon a fee for an item of professional work, or time spent on professional work;

(b) there is an overarching requirement that costs charged are no more than what is fair and reasonable in all the circumstances;

(c) the quantum of costs may be referrable to a court scale of costs in the case of litigation, a practitioner remuneration order, or a costs agreement;

(d) there are obligations to make disclosure to clients of the basis on which costs will be charged, of an estimate of total costs, and of the client’s rights;

(e) where costs are the subject of a costs agreement, the costs agreement may be a conditional costs agreement, whereby some or all of the costs are conditional upon a successful outcome of the case, and may provide for an uplift fee of not more than 25 per cent of the legal costs; and

(f) contingency fees are prohibited.

To permit fees to be charged on the basis of an open market, where the lawyer takes a ‘cut’ much like a real estate agent or auctioneer, undermines many of the principles behind this regulation.

Allied to the problem of over-charging is the fact that under general law principles there is a presumption of undue influence between solicitor and client.[16] There is no exercise of undue influence in charging a client scale, or fair and reasonable costs. However, the prospect that clients and solicitors would have scope to negotiate percentage-based contingency fee arrangements heightens the prospect that improvident arrangements will be entered into by clients with simple cases where they would be much better off without such an arrangement. Clients in such cases would be subject to rapacious charging in circumstances where the Law Council’s Working Group suggested that the only real limitation would be a ‘cap’ of 35 per cent or 40 per cent. To quote again the observations of Victoria’s Legal Services Commissioner, Michael McGarvie:[17]

‘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.’


CONCLUSION

The Law Council of Australia was correct to reject the introduction of percentage-based contingency fee arrangements in Australia. I have discussed four principal reasons supporting the rejection. There are many others, which are beyond the scope of this short article. To repeat and emphasise the words of Justice Michael Kirby:[18]

‘The bottom line is that law is not just a business. Never was. Never can be so.’

Michael Wheelahan QC is a member of the Victorian Bar who specialises in civil appeals in all areas of law, class actions, and judicial review.


[1] The Hon Michael Kirby AC CMG, Law Firms and Justice in Australia, 7 March 2002, http://www.hcourt.gov.au/assets/publications/speeches/former-justices/kirbyj/kirbyj_award.htm.

[2] Law Council of Australia, Percentage Based Contingency Fee Agreements, Final Report of the Working Group, May 2014.

[3]http://www.liv.asn.au/getattachment/d2034105-84c6-4455-bfa5-11642d3860a3/Contingency-Fees-Position-Paper-Released-17-Februa.aspx.

[4] Law Council of Australia, see note 2 above, the Foreword, and paragraphs [47], [60], [73].

[5] Ibid, Executive Summary at [1].

[6] Kuek v Devflan Pty Ltd [2011] VSCA 25; (2011) 31 VR 264; Wentworth v Rogers [2006] NSWCA 145; (2006) 66 NSWLR 474.

[7] For a searing analysis of why real estate agents are not engaged in a ‘profession’ see, Carr v Inland Revenue Commissioners [1944] 2 All ER 163 at 166-7.

[8] Law Council of Australia, see note 2 above, p10, second bullet point.

[9] Legal Profession Uniform Conduct (Barristers) Rules, r 4(a).

[10] Ibid, r23.

[11] Ibid, r42.

[12] Ibid, r101(g).

[13] Ibid, rr3.1, 12.1, 17.1.

[14] See generally, Bowen v Stott [2004] WASC 94 at [51], (Hasluck J); Re LPO
Transact Pty Ltd (In Liq); Williamson v Nilant [2002] WASC 225 at [25], (McKechnie J); Holborow v Rudder [2002] WASC 265 at [25] (Heenan J).

[15] [2004] WASC 94 at [52]- [53].

[16] Jenyns v Public Curator (Qld) [1953] HCA 2; (1953) 90 CLR 113 at 133; Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 at 119. See also, Weiss v Barker Gosling (1993) 114 CLR 223.

[17] Opinion, 3 March 2016.

[18] The Hon Michael Kirby AC CMG, see note 1 above.


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