A debate is looming about freeing up restrictions on the ways lawyers can charge their clients, and the answers aren’t simple, argues Morry Bailes.

There is a conversation that we will all be having in the not too distant future regarding the charging of contingency fees by lawyers.

Presently it is unlawful for a lawyer to charge a client a percentage of their damages. Damages are the monies awarded to a claimant in a successful civil action to compensate for their loss. The current rules only permit traditional charging, usually on a per hour rate basis. Limited conditional fee agreements are allowed involving some uplift on the usual hourly rate in the event of success, but not a straight contingency. That is still unlawful.

In the dying days of the Rudd/Gillard government, then Assistant Treasurer David Bradbury ordered the Federal Productivity Commission to commence a public inquiry into access to justice in Australia. In September last year its final report was delivered to the government who tabled it in December making it available to the public. A copy can be found at here.

As you might imagine the report is detailed and voluminous, however what it says about contingency fees makes for interesting reading. The commission labels the contingency style fee agreement as “damages-based” billing. This is what it has to say:

The Commission is unconvinced that any perverse incentives inherent in damages-based billing are more pronounced than those embodied in conditional billing. Rather, damages-based billing has the potential to provide several advantages, including better aligning the interests of lawyers and their clients by removing incentives to over service. There is an important caveat to this claim — in order for incentives to be aligned, clients need to be fully informed about the merits, and likely costs, of pursuing their claim.

The Commission considers that the prohibition on damages-based billing should be removed, subject to consumer protections such as comprehensive disclosure requirements and percentage limits on a sliding scale to prevent lawyers earning windfall profits on high value claims.

So, in a nutshell, the Productivity Commission supports contingency fees arrangements. And why wouldn’t it? It comprises a bunch of economists to whom a percentage fee arrangement is easily understood and makes perfect economic and commercial sense. It allows a potential claimant access to the civil justice system that he, she or it may not otherwise enjoy, because payment of fees is contingent on success and the receipt of damages. It leads to efficient prosecution of a claim because, unlike with hourly rates, there is no incentive for a lawyer to dawdle. It is an option available to claimants in Canada, the UK and states of the USA. So why not Australia?

There are two fundamental reasons why we have not gone down the contingency fee path. Both are ethical considerations.

Firstly, contingencies ought to be used where there is risk associated with a claim. The risk is shared by lawyer and client and, like any sharing of risk, there is the potential for reward. A contingency may often yield to the lawyer a sum above what a fee based purely on an hourly rate may yield. On the other hand, the client gets in to the justice system when they otherwise may not be able to afford to.

The ethical dilemma is when to introduce a contingency arrangement. To do so in a matter where there is little or no risk may be unethical. Where you draw the line is one of perception.

The second difficulty is when to advise a client to settle rather than litigate a claim. Invested in the outcome of a matter, a lawyer may be tempted to settle early in order to avoid the risk of litigation resulting in the claimant receiving a lesser result but the lawyer still receiving the contingency. In states of America the contingency therefore slides upward the closer the matter gets to litigation, to reward the lawyer for the increasing risk.

All members of the legal profession are bound by conduct rules; we are an ethical profession which is highly regulated. At present the gap in this area is being filled by largely unregulated litigation funders who expose themselves to the litigious risks and take, in effect, a contingency-style payment from the ultimate award of damages. Almost without exception all large class actions in Australia have been funded by litigation funders in this way, often on both sides. What litigation funders usually do not do is fund individual claims, which is where lawyers may need to fill the breach. Consequential amendments to conduct rules to ensure client protection and maintain ethical standards, as suggested by the Productivity Commission, may be necessary.

Professor Dal Pont of the University of Tasmania Law School, who is a leading voice on the subject of legal ethics, has recently opined that the ethical challenges relating to introducing contingency fee arrangements in Australia can be overcome largely because the same ethical dilemmas exist now and are handled successfully by the profession.

The conversation that we as a society and as a community must have is whether contingency fee arrangements may alter the fabric of this place. Some see such arrangements as providing access to justice. The Productivity Commission refers to those in need as the “missing middle”; well off enough to be ineligible for legal aid or legal assistance but insufficiently well off to pay for a legal action. Contingency fee arrangements are a way to get them into the civil justice system, along with poorer claimants who do not receive a grant of legal aid to pursue a civil damages claims.

Against that is a concern that unmeritorious claims may be prosecuted too frequently with settlements reached by defendants for reasons of expediency. Will contingency fees provide access to justice or stoke the fires of an unnecessarily litigious society? This is the substance of the pending conversation, and the recommendations of the Productivity Commission make it inevitable that we have it.

If contingency fee arrangements are to appear on Australia’s legal landscape there is a great deal more work that needs to be done. Should the contingency be capped or uncapped, and controlled by market forces? Should we, as a matter of policy, exclude such areas as family law and criminal law? All of these issues need to be addressed, but the threshold question of whether to accede to the Productivity Commission’s recommendations must be settled first.

Morry Bailes is managing partner at Tindall Gask Bentley Lawyers, Member of the Executive of the Law Council of Australia and immediate past President of the Law Society of SA.

The opinions expressed in this column are his own.

His column appears in InDaily on every second Thursday.