The Productivity Commission has recommended that law firms be permitted to enter into damages-based costs agreements (where the fees charged by lawyers are dependent on the amount of damages awarded to their clients) as a way of increasing access to justice for people and organisations who could not otherwise afford to pursue legitimate claims.

In our view, while there are certain risks inherent in such arrangements, both for clients and for the efficient resolution of claims, any measures that are capable of facilitating better access to justice should be encouraged. We agree with the Productivity Commission that appropriately regulated damages-based costs agreements can facilitate access to justice.

Use of costs agreements as a way of facilitating access to justice

While information about the civil justice system is arguably more accessible and easier for the general public to understand than it has ever been, accessing justice remains difficult for many people. Court rules and practice can be complicated and pursuing proceedings is expensive, particularly where legal fees are involved.

There are three main ways of structuring fee arrangements to address this issue:

  • pro bono assistance
  • contingency fees
  • damages-based costs agreements (which is a particular type of a contingency fee).

Pro bono assistance is one of the great features of the legal profession but there is a limit on its availability. Firms will make decisions regarding the matters they undertake pro bono based on various factors, but common criteria will include the nature of the applicant for assistance (for example, whether they are a charitable organisation), their level of need and the type of matter for which assistance is sought.

Unfortunately, there will be many people, and organisations, whose resources will limit their capacity to pay for legal services but who do not fall within the applicable criteria. Unless they are willing, and capable, of representing themselves, they will need some other form of assistance.

One option is contingency fees, which is a model that is commonly used by a number of law firms in personal injury proceedings. Under these arrangements, payment of some, or all, of the legal costs incurred in a matter (usually calculated at an hourly rate) is contingent on the success of the matter to which the arrangement relates. ‘No win, no fee’ arrangements are a typical example of a contingency fee.

Contingency fee arrangements can also provide for payment of uplift fees, whereby an additional fee is payable, on top of the standard legal costs, if the client is successful. The imposition of uplift fees is subject to legislative restriction, however, and is capped at 25 per cent of the legal fees otherwise incurred in jurisdictions where it is permitted.The circumstances where ‘no-win, no-fee’ arrangements will be offered will depend on the policies of the firm offering the arrangements, as will any other conditions applicable to such an agreement.

Damages-based costs agreements

A particular type of a contingency fee arrangement is a damages-based costs agreement, under which the costs charged by a lawyer are contingent on the amount of damages awarded to their client. While such agreements are common in a number of overseas jurisdictions, lawyers are not currently permitted to enter into such arrangements in Australia.

There is no such restriction on third party litigation funders, however. Companies which provide funding for law firms to pursue class actions, for example, will often charge a percentage of any damages awarded as a condition of funding the proceedings.

Risks inherent in damages-based costs agreements

There are risks in the use of damages-based costs agreements, which mainly arise from the vulnerability of the claimants who might wish to enter them. Their likely inexperience with the law, and/or the legal system, and possibly a lack of financial resources, puts them in an unequal bargaining position regarding the terms of any costs agreement and in making any decisions as to the strategy to be adopted in their case, including with respect to making or accepting particular settlement offers.

There are also risks which arise from the lack of any financial exposure the claimant faces in their case, both because the claimant will not have to pay their own lawyers’ costs and because they may not have the funds to satisfy any adverse costs order made in favour of the other party. This may lead some claimants to proceed to hearing, despite a reasonable settlement offer, because of a feeling that they have nothing to lose by trying to obtain a higher award at trial.

While there were also concerns that damages-based costs agreements, and contingency fee arrangements in general, would increase the prevalence of unmeritorious claims, there does not appear to be any evidence that this is the case. Nor is it likely to be the case, as firms are unlikely to take on unmeritorious claims, given the financial exposure they face when operating on a contingency basis.

Productivity Commission recommendations

Late last year the Productivity Commission published its Inquiry Report, ‘Access to Justice Arrangements’, which recommended that lawyers be permitted to enter into damages-based costs agreements. The Productivity Commission consider that such arrangements have the potential to better align the interests of lawyers and their clients, providing consumer protection obligations exist in relation to the matters lawyers are required to disclose to their clients prior to entering into the arrangement and providing there are limits on the percentage of damages which are recoverable as fees.

Similarly, the Productivity Commission recommends that, while litigation funders should be permitted to continue offering damages-based agreements to law firms, they should be better regulated. The Productivity Commission has recommended a licensing system, as well as the development of obligations in relation to the proper disclosure of the nature of the agreement, and the management of the litigation funders’ financial obligations and risk management.

Where to from here?

Despite the potential risks which contingency fee arrangements carry, we are of the view that any measures capable of facilitating better access to justice should be encouraged and that appropriately regulated damages-based costs agreements can facilitate access to justice.

As the vulnerability of potential claimants appears to give rise to the most serious risks, we consider that regulatory attention should initially focus on the arrangements themselves, and that any undesirable consequences which arise with respect to the efficient resolution of claims be addressed as part of the various courts’ ongoing projects regarding alternative dispute resolution and case management. Establishing incentives for non-litigious means of settling disputes, or to resolve proceedings early, are issues which are of broader concern to the courts and the legal profession in all matters, not just to those which are pursued under a contingency fee arrangement.​