MurUEJL 3
Contingency Fees In Western Australia
||GiGi Visscher BComm, PGradDipBus, LLB(Hons)|
||Volume 7, Number 1 (March 2000)|
ContentsContingency Fees In Western Australia
In October 1999, the Law Reform Commission of Western Australia (LRCWA) issued their final report, "Review of the Civil and Criminal Justice System".
More than 400 recommendations are contained within this report and, according to The West Australian, it is the largest inquiry of its kind in the English speaking world.
Buried within its 400 pages are several exciting new proposals including recommendations that contingency fees be introduced into Western Australia.
- "Contingency fees" are any arrangement entered into by a lawyer and their client for the payment of legal fees in excess of a lawyer's normal fee that is contingent on the outcome of the case. Such fee arrangements are currently not permitted in Western Australia as a result of the torts of maintenance and champerty. Although there are various types of contingency fee arrangements, the LRCWA has recommended that only one such arrangement be introduced. Specifically the LRCWA has advocated the introduction of "uplift" or "conditional" fee arrangements. These fees require a client to pay their lawyer's normal fee and an agreed percentage increase in the event the case is successful. Although the LRCWA is to be applauded for this proposal a detailed analysis of the specific recommendations reveals that certain aspects are perhaps in need of further review.
- In Recommendation 141 (see http://www.wa.gov.au/lrc/finalreport/finalreporthtml/ch16civilcosts.html), the LRCWA advocates that limited contingency fee agreements should be permitted in all cases, except in criminal law and family law matters, where two conditions are satisfied. The first condition is that the contingency fee arrangement must be used as a last resort and that all other means of avoiding this fee arrangement have been exhausted. Additionally, the lawyer must be satisfied that the client is financially unable to conduct the litigation without the use of a contingency fee arrangement.
- Under this recommendation, lawyers wishing to enter into an uplift fee arrangement will be required to determine whether their client is "unable financially to conduct a litigation". In order to make this determination a lawyer will need to undertake an individual investigation into each case with reference to the personal circumstances of the potential litigant and the nature of the litigation involved.
The lawyer will be required to have regard, among other things, to factors such as the likely costs of the proceedings, the assets and liabilities of the litigating party and their average annual income and expenditure over, say, the three immediately preceding tax years.
- This appears to be a particularly onerous task for a number of reasons. For example, determining the cost of the litigation is problematic as it is dependent upon a number of factors, including the strategy and approach adopted by the opposing side.
- Advocates of the introduction of contingency fees for non-impecunious clients argue that contingency fee agreements should not be limited to certain income categories or to natural persons. They argue that to do so would be a mockery of the rule that all are equal before the law and would unjustly limit parties' freedom of contract.
The selection criteria would also be artificial and would once again make the court inaccessible to a large portion of middle income people, or even wealthy people who would have to liquidate assets to pay the costs of running a trial.
- Further, it is argued that companies, as well as natural persons, should be able to avail themselves of contingency fees arrangements. There are many persons belonging to the poorer part of the community who carry on business by means of corporations who may equally need to be assisted in obtaining access to the courts. Similarly many small and medium sized businesses are conducted through legal entities such as close corporations, where the fate of the member or members of the close corporation is very closely linked to that of the close corporation. According to these proponents, these legal entities must be afforded the same rights as individuals to contract with their lawyers on a contingency fee basis.
This is an especially pertinent argument in Australia where there are in excess of 1,000,000 corporations and more corporations per capita than even the United States.
- In addition to the issues of equality and the difficulties discussed above, there are three primary reasons why non-impecunious clients would benefit from contingency fees. First, they provide financing for the costs of pursuing a legal action. Second, they shift the risk of not recovering those costs, and of not obtaining a damages award that will pay their lawyer's fees, from the client to the lawyer.
- Finally, some plaintiffs may also be motivated by the convergence of the lawyer's interest and their own under a contingency fee arrangement. Indeed, it would be reasonable to assume that clients would prefer their lawyers to be interested in the outcome of litigation, since they will perceive their lawyer will display greater diligence and commitment to the case.
- Therefore, given the difficulties for the lawyer in determining whether their potential client is "financially unable to conduct the litigation", the issues of equality and the benefits of contingency fees for clients (not just impecunious clients), all Western Australians should be permitted to enter into contingency fee arrangements with their lawyers.
- According to Recommendation 142 (see http://www.wa.gov.au/lrc/finalreport/finalreporthtml/ch16civilcosts.html), the safeguards set out in the Access to Justice Advisory Committee Report, "Access to Justice: An Action Plan", should be adopted. One of these safeguards calls for the rules governing contingency fees to specify a "maximum uplift factor of 100 per cent of the usual fees of the practitioner."
- In theory, this proposal appears to be a good solution to the problem of potentially excessive fees. However, a major concern in setting a fee cap is whether it will provide the compensation needed to induce a lawyer to take meritorious cases and handle them properly.
- Further, some argue that fee caps invite lawyers to underwork.
Clermont and Currivan concluded, 20 years ago, that fee caps "are largely cosmetic, keeping the final fee at what seems a reasonable level to the outside observer, while still permitting the lawyer covertly to pick and then milk (through underwork) the lucrative cases."
- According to Recommendation 143 (see http://www.wa.gov.au/lrc/finalreport/finalreporthtml/ch16civilcosts.html), the uplift should be calculated on the amount of costs recovered from the other side by court assessment or agreement and not on the bill the solicitor renders to their client.
- This recommendation is likely to cause unnecessary uncertainty and confusion for lawyers, and prove extremely difficult to explain to clients and cause unnecessary complication in assessing a lawyer's fees.
- Additionally, in Recommendation 144 (see http://www.wa.gov.au/lrc/finalreport/finalreporthtml/ch16civilcosts.html), the LRCWA recommends that an uplift agreement should only be entered into with leave of the court.
Unfortunately, this recommendation is likely to deter lawyers from entering into such arrangements as it will cause additional costs and delays, and be a further hurdle to overcome.
- A major issue in relation to this recommendation is whether it is possible to determine ex ante whether a contingency fee arrangement provides for excessive compensation. 
The problem arises, in part, due to the difficulty of constructing a reasonable fee baseline against which the actual contingency fee arrangement can be judged. In theory, the optimal fee is the amount required to induce a lawyer to take and properly handle a particular case.
- Another issue is that the information required to construct the baseline is rarely available. The problem arises because of the practical difficulty of determining what is the riskiness of the case, its time demands, and the potential recovery before the case really begins.
- The problems associated with regulating unreasonable or excessive contingency fees is demonstrated in Re Swartz.
In this case the Arizona Supreme Court disciplined a lawyer for charging a contingent fee that they held to be "clearly excessive."
However, the court did not find that the lawyer's fee was excessive at the time the lawyer and his client entered into the agreement. Interestingly, the court found that the fee originally agreed upon was within the customary limits for the type of case and was, therefore, not unreasonable. The court did not construct a reasonable ex ante baseline to judge the reasonableness of the fee against. However, the court argued that a contingency fee that is proper when initially agreed upon may later turn out to be excessive. The court held that a lawyer has a duty to reduce their fee to a reasonable fee and to collect no more than a reasonable amount in light of the time and effort he devoted to the case.
- According to Schneyer, the reason why a court would insist on using hindsight as their methodology of review is because by using hindsight they can at least gather evidence on the amount recovered, the effort expended, and the difficulties the case finally presented.
On the other hand, determining a baseline for judging the reasonableness of a fee will often be impossible. According to Schneyer, in Re Schwartz the Arizona Supreme Court used the hindsight test not because it is theoretically the best measure of a fee's reasonableness, but as a concession to the practical problems. 
- Re Schwartz demonstrates the difficulty of an ex ante review and that the only time when the adequacy of the contingency fee can really be assessed is ex post. Perhaps a better recommendation is that advocated by The Justice Statement: ".... requiring lawyers, before proposing a contingency fee arrangement, to assess the risks of winning or losing the case, advise the client in writing of that assessment, and be able to defend the imposition of a contingency fee on the basis of those risks."
- The current recommendation would merely escalate costs while contributing little, if anything, to protecting the client. Indeed, the rationale for the LRCWA's review of the civil and criminal justice systems was the costs and delays currently experienced in these systems. It is hard to imagine how this procedure requiring leave of the court for every conditional fee agreement entered into could do anything other than add to the costs and delays of civil litigation.
- In addition, judges of the Appellate Division in South Africa have pointed to the danger that disclosure of contingency fee arrangements might subconsciously induce the courts, once aware of the existence of a contingency fee agreement, to increase awards to offset the impact of the uplift fee which the successful litigant will have to pay. 
- As this recommendation appears to have many problems perhaps an alternative safeguard could be considered. This paper suggests that the courts could engage in random audits of contingency fee agreements rather than reviewing each and every agreement entered into.
- Aspects of the LRCWA's recommendation in relation to uplift fees require further review. Specifically, the introduction of conditional fees should be for all Western Australians, leave of the court should not be required to enter a contingency fee arrangements, and the issue of a fee cap and the method of calculating the uplift should be revisited. These recommendations along with another 443 recommendations in this final report are currently under review by the Attorney-General.
Law Reform Commission of Western Australia, Review of the Civil and Criminal Justice System - Final Report (Perth: Law Reform Commission of Western Australia, 1999)
The West Australian, 28 October 1999, 1,1.
This issue was considered and rejected by the South African Law Reform Commission, in part for these reasons: South African Law Reform Commission, Report on Speculative and Contingency Fees Project 9
(South Africa: The South African Law Reform Commission, 1996), para 4.86.
Australian Law Reform Commission Review of Adversarial System of Litigation: Rethinking the Federal Civil Litigation System Issues Paper 20 para 12.50.
Law Reform Commission of Western Australia, Review of the Civil and Criminal Justice System - Consultation Draft (Perth: Law Reform Commission of Western Australia, 1999), Costs, 28.
South African Law Reform Commission, above n3, para 4.89.
South African Law Reform Commission, above n3, para 4.89.
Access to Justice Advisory Committee, Access to Justice: An Action Plan (Canberra: Australian Govt. Pub. Service, 1994), Action 6.2.
T Schneyer, "Legal-Process Contraints on the Regulation of Lawyers' Contingent Fee Contracts" (1998) 47 DePaul Law Review 371, 410.
K Clermont & J Currivan, "Improving on the Contingent Fee", (1978) 63 Cornell L. Rev 529, 536, 581.
Law Reform Commission of Western Australia, Review of the Civil and Criminal Justice System - Final Report (Perth: Law Reform Commission of Western Australia, 1999) Civil System - Costs, Recommendation 143.
Ibid, Recommendation 144.
T Schneyer, above n10, 395.
686 P.2d 1236 (Ariz. 1984).
In re Swartz 686 P2d 1236 (Ariz. 1984), 1238.
T Schneyer, above n10, 395.
Attorney-General's Department, The Justice Statement (Canberra: Office of Legal Information and Publishing, 1995) 49.
South African Law Reform Commission, above n3, para 4.101.