Precedent (Australian Lawyers Alliance)
THE FUTURE OF COSTS LAW: PROSPECTIVE SOLUTIONS TO REGULATORY PROBLEMS
By Amy Pascoe
This article examines of the future law reform option of percentage based contingency fees, and its access to justice implications. It considers the current regulatory framework in the United Kingdom (UK) to assess possible implementation throughout the Australian jurisdictions.
With the recent decline in Australia’s economy, methods to boost the public’s confidence throughout the economic sector is at an all-time high. One of the specific proposals to boost confidence throughout Australian communities is to implement changes to alleviate the cost pressures of accessing legal advice and any ensuing litigation when people experience problems of a legal nature. As a result, those interested in improving access to justice are always open to discussion about areas of reform. This is due to the important link between confidence in the economy and the underlying notion that if costs prevent access to justice, the end result is an undermining of the rule of law.
One of the more recently proposed methods of increasing access to justice in Australian jurisdictions is to legalise percentage-based contingency fees (PBCFs). PBCFs are more commonly known throughout the legal profession as ‘damages-based agreements’ or ‘contingency fees’. Unlike the current time-based billing predominantly used throughout Australian jurisdictions, PBCFs allow lawyers to charge their fees based on a pre-determined percentage of their client’s ‘financial benefit’ or ‘legal win’. This method of charging is currently used throughout the United States, Canada and more recently, in the UK.
THE UNITED KINGDOM – THE INTRODUCTION OF DAMAGES-BASED AGREEMENTS
In December 2009, Chief Justice Jackson, of the England Court of Appeal, released the final report on the Review of the Civil Litigation Costs in the United Kingdom (the Jackson Report). The Jackson Report identified that the costs of litigation were disproportionate, an impediment to access to justice, and one of the main problems facing the judicial system throughout the UK. One of the recommendations was to lift the restriction on damages-based agreements (DBAs, the UK’s version of PBCFs) in all areas of the law, apart from criminal and family law proceedings. The Jackson Report received widespread praise throughout the legal profession and many of the recommended reforms were implemented on 1 April 2013 by way of the Legal Aid, Sentencing and the Punishment of Offenders Act 2012 (UK). These reforms included the introduction of DBAs, with regulation by way of the Damages Based Agreements Regulations 2013 (UK) (DBA Regulations).
At present, the DBA Regulations introduced in the UK give a lawyer the choice of entering into a DBA with their client. This works alongside the current method of time-based billing, so the lawyer and client can choose which method of charging they prefer for each particular case. At present, the DBA Regulations include both absolute restrictions in certain areas of law, as well as caps in other areas of law to prevent abuse. For example, in criminal and family law proceedings, DBAs are restricted, whereas in personal injury matters, a cap of 25 per cent of the amount received by the client is currently in operation. In all other areas of law, the cap is currently 50 per cent.
DBAs have now been in operation in the UK for approximately three years. However, discussion around regulatory changes are already underway. In particular, technical amendments to the DBA Regulations have recently been an area of research and discussion in an effort to make DBAs more attractive to the legal profession. This followed preliminary research conducted in 2014 which revealed that many lawyers still preferred to use the traditional time-based billing method. Therefore, DBAs were regarded as a ‘damp squib’, failing to encourage more lawyers to take on clients through conditional fee arrangements and thus achieve the desired result of increasing access to justice. To make DBAs a more attractive method, current recommendations include:
• amending the definition of financial benefit to allow lawyers and clients the option to agree on trigger points at which a DBA becomes payable;
• increasing the percentage caps in some areas of law and allowing defendants the opportunity to access DBAs (not just plaintiffs); and
• allowing ‘hybrid’ DBAs which are in effect time-based billing up to a certain point (say discovery), and then a percentage-based agreement for the remainder of the case once the lawyer has had an opportunity to assess the risk.
In addition to increasing the prevalence of DBAs, amendments to correct certain problems that had been identified since the introduction of DBAs were also discussed. In particular, a number of problems resulting from a lack of regulatory guidance had been identified.  For example, the current DBA Regulations fail to provide any indication of:
• whether counsel fees should be included in the cap. In this regard, the potential for conflict between lawyer and counsel was noted, due to both having to ‘share’ the cap;
• whether goods and services tax is included within the capped limit; and
• what the cap should be based upon. For example, should it be the total amount received including interest and costs, or just the actual damages portion?
The proposed amendments to the DBA Regulations were due to be addressed by draft legislation late in 2015. At present, it is still unclear whether the government is prepared to adopt all of the recommendations made.
THE PROPOSAL TO INTRODUCE PBCFS IN AUSTRALIAN JURISDICTIONS
In 2013, as a result of growing concern over lack of access to justice for many citizens and the UK changing its costs regime to allow DBAs, the Law Council of Australia (LCA) created a working group to discuss the law reform of legal costs in Australia. In May 2014, the LCA released its final report on the legalisation of PBCFs in Australia.
The LCA recommended introducing PBCFs as a means to increase access to justice and provide enhanced efficiency throughout Australian courts: lawyers would not only be more efficient and try to resolve matters more quickly, but PBCFs would also increase proportionality because the amount of legal fees being charged would be linked to the result achieved, and not the amount of work undertaken to receive the end result.  In addition, the client would be entering a more straightforward agreement with more clarity, as any costs agreement would be less complex than the standard hourly rate costs agreement. 
The LCA report also included recommendations for regulatory safeguards to protect both lawyers and clients. Such safeguards include:
• restricting PBCFs in certain areas of law such as family, migration and criminal law proceedings;
• calculating percentage amounts on lump sums including interest, costs and disbursements;
• setting caps in some areas of law such as personal injury;
• the percentage amount agreed upon to include both the lawyer’s and counsel’s fees;
• retaining the current disclosure requirements at the time of entering the agreement; and
• not requiring lawyers to indemnify their clients against adverse costs orders.
In December 2014 (six months after the release of the LCA’s report), the Productivity Commission released the Access to Justice Arrangements Report (the AJA Report).  The AJA Report agreed with the LCA report’s recommendation to permit a client and lawyer the choice of entering into a PBCF; however, its view was influenced more by the assertion that PBCFs would promote economic growth in the marketplace.  The rationale for this belief is that PBCFs are a vehicle for instilling confidence in the business sector, giving business entities ready access to the courts should a problem arise, therefore encouraging citizens to enter into business arrangements more freely. 
Similar to the LCA report, the AJA Report recommended regulatory safeguards, but ones that were aimed more at protecting the client. Such safeguards include:
• comprehensive disclosure requirements, including strict allocation of where liability falls for adverse costs orders;
• percentages capped on a sliding scale; and
• PBCFs to be used solely on their own, with no hybrid fees allowed. For example, charging a portion of the client’s fees by the hour and a portion based on a percentage would be strictly prohibited.
POSSIBLE CONSIDERATIONS FOR AUSTRALIAN JURISDICTIONS IF AND WHEN PBCFS ARE INTRODUCED
At present, even though there are no concrete plans to legalise PBCFs in Australia any time soon, it is a possible law reform option in the future. With the media coverage this year of cuts to Legal Aid (albeit only in regard to criminal jurisdiction), there is no doubt that private funding options are the future for reform options in increasing access to justice. In civil disputes, the current reform options revolve around the legal profession effectively ‘funding litigants’ through the use of PBCFs and receiving a reward for their risk at the conclusion of the matter. This is somewhat akin to the use of third-party litigation funding currently present and active in Australia.
If and when PBCFs are introduced, Australian jurisdictions will be able to learn from the UK’s example of how to regulate them, as by the time PBCFs are introduced in Australia, the UK will have very likely undergone specific regulatory changes to provide much-needed guidance. Presently, issues such as conflict, hybrid PBCFs, the use of PBCFs for defendants, technical issues around using caps and trigger points for when a PBCF becomes payable all merit further consideration in Australia.
Either way, it is clear that for PBCFs to increase access to justice in Australia, lawyers will have to feel comfortable using this method of charging. To feel comfortable, lawyers will need to be assured that they are receiving the appropriate compensation for the risks undertaken in entering such an agreement in the first place, while at the same time being confident that they know how to calculate PBCFs properly without exposing themselves to possible sanction for unwittingly overcharging their client.
In addition to lawyers feeling comfortable, measures must be in place to protect vulnerable clients and the overarching ethical obligations owed by the lawyer to the client. Accordingly, whether the current disclosure regimes provide the necessary safeguards is debateable, and more thought and research into this area is required in the future.
Amy Pascoe is currently practising as a graduate lawyer at Coulson Legal, a specialist legal costs firm based in Perth, Western Australia. Amy is also a PhD candidate at Murdoch University specialising in the law of costs with her thesis pertaining to the introduction of percentage-based contingency fees in Australia. PHONE: (08) 6555 2970 EMAIL: firstname.lastname@example.org.
 For example, the Productivity Commission released its Access to Justice Report in September 2014, which addresses methods to increase access to justice in an attempt to promote growth in the economic sector.
 Oceanic Sunline Shipping Company Inc v Fay  HCA 32; (1988) 165 CLR 197.
 Rupert Jackson, Review of Civil Litigation Costs: Final Report (December 2009).
 Legal Aid, Sentencing and the Punishment of Offenders Act 2012 (UK).
 Damages Based Agreements Regulations 2013 (UK).
 Ibid, r4.
 Civil Justice Council, The Damages-Based Agreements Reform Project: Drafting and Policy Issues (August 2015).
 Civil Justice Council, see above note 11.
 Ibid, 14.
 Revisions to damages-based agreements for civil litigators (24 September 2015), Lexis Nexis: Dispute Resolution http://blogs.lexisnexis.co.uk/dr/revisions-to-damages-based-agreements-for-civil-litigators/.
 Law and Justice Foundation of New South Wales, Access to Justice and Legal Needs – Legal Australia Wide Survey – Legal Needs in Australia, Vol. 7 (August 2012).
 Law Council of Australia, Percentage-Based Contingency Fee Agreements (May 2014).
 Ibid, 14.
 Ibid, 26.
 Ibid, 11.
 Productivity Commission, Access to Justice Arrangements, Project No. 72 (5 September 2014).
 Ibid, 22.
 In April 2016, the LCA rejected the introduction of PBCFs as a result of mixed reactions throughout the legal profession. Even though the LCA’s rejection puts a hold on any plan for introducing PBCFs in the immediate future, it is still a possible remedy for alleviating access to justice pressures down the track, especially in commercial litigation.