Conditional Fees

A Consultation Paper was released by the Law Reform Commission on 14 September 2005.

For the benefit of those who have not followed the discussion, the expression conditional fee, as defined in the Paper, refers to an arrangement whereby an agreement is signed between a legal practitioner and his or her client to the effect that the legal practitioner will charge no fees if the client's court case is conducted unsuccessfully. This is not the same thing as a contingency fee, which refers to an arrangement whereby the lawyer's fee is calculated as a percentage of the amount awarded by the court. By way of incentive the lawyer could be given an "uplift" or "success fee" which is agreed in advance.

The Paper was the work of the Sub-committee on Conditional Fees. In paragraph 85 of the Executive Summary the Subcommittee stated as follows:

Although conditional fees were introduced in England to replace legal aid for certain types of cases, the Sub-committee, as directed by its terms of reference, has not considered the issue whether conditional fees should or could replace legal aid. Therefore, our proposals are intended to operate in parallel with, and to supplement legal aid, rather than to replace it or justify any reduction in funding.

The problem, as perceived by the Sub-committee, was that "there is a significant proportion of the community who are not eligible for legal aid, but cannot afford the high costs of litigation".

One solution, of course, is to extend the scope of legal aid, but this is a much bigger issue which the Sub-committee was not required to consider, though it did make a recommendation that the Supplementary Legal Aid Scheme should be expanded. The Sub-committee was principally concerned with the practicalities of conditional fees though it also considered arguments for and against the arrangement in terms of principle.

In 2002 the Law Society's Working Party on Conditional and Contingency Fees had already begun a study of various aspects of conditional fees and produced a 40-page report in 2004, but was unable to come to a consensus.

I believe the inability to come to a consensus arose out of a difficult point of principle: should lawyers have such a direct financial interest in the outcome of litigation as contemplated under the conditional fee arrangements?

It is not suggested that under the existing system lawyers are wholly disinterested or uninterested in the outcome of litigation in which they represent clients. It is obviously better for a lawyer to win than to lose. Success rate is also an important factor in the advancement of any legal career. However, what the lawyer does in litigation, or should be doing, is to exercise a dispassionate professional judgment as to what is the best achievable result in the best interest of the client, and work towards that result.

Where direct financial incentives are thrown in, the lawyer's professional judgment might well be influenced by inappropriate considerations. In the normal way a lawyer will advise a client on his chances of success in a piece of litigation in accordance with his professional judgment. But where the lawyer is asked to take on a case on a no win no fee basis the advice he gives is likely to be influenced by his personal interest in the outcome, because his own money is also on the line. This is not to say that this will be the inevitable result in every case, but the question is whether an arrangement capable of producing such a result should be institutionalised.

There are arguments in favour of conditional fee arrangements, and they are fully set out in the Consultation Paper. But leaving arguments aside, it is also instructive to examine what is being recommended by the Sub-committee.

How will a conditional fee arrangement work in practice? The following types of conditional fees are set out in Recommendation 10 of the Paper:

(a) No win, no fee; if win success fees;
(b) No win, no fee; if win, normal fees;
(c) No win, reduced fee; if win, normal fees; and
(d) No win, reduced fee; if win, success fee.

Recommendation 10 appears very much in favour of the consumer. It suggests that there will be no risk in suing. However, this is a misconception. A plaintiff will still be liable to pay the defendant's legal costs if the plaintiff lost. This is a substantial risk.

In the English system this risk is addressed by "after-the-event insurance" (ATE insurance). By ATE insurance a plaintiff is insured against the risk of paying the other party's legal costs if the plaintiff lost. The Sub-committee considered that ATE insurance was essential to the feasibility of a conditional fee arrangement, and recommended that "the Administration should conduct an indepth study of the commercial viability of ATE insurance in Hong Kong". (Recommendation 11). However, the Sub-committee did not appear optimistic on this point.

It should therefore be noted that a conditional fee arrangement does not result in no-risk litigation on the part of the plaintiff, but that it seeks is to transfer the risk to some other party.

It is also interesting to note what ATE insurance could cost. In a case cited in paragraph 99 of the Executive Summary the costs judge in England allowed an ATE premium of $62,500 for cover of $125,000, a premium which was 50% of the insured amount. It was also stated that in simple personal injury cases, the insurance premium in England now came close to the likely cost of an undefended action.

In England the cost of ATE insurance is required to be borne by the losing defendant. This arrangement was much criticized and the Sub-committee recommended that in Hong Kong it should be borne by the plaintiff in any event. It expressed the view that "it is inequitable, irrational and unfair to make insurance premiums and success fee recoverable from the losing party".

The ATE premium could be substantial and the Sub-committee acknowledges it is an open question whether ATE would be available in Hong Kong at all. It seems therefore that the conditional fee proposal could become unstuck over the question of ATE. Further, in view of the issues raised in the Paper the proposal does not appear to offer a neat and tidy solution to the problem of access to justice.

Recommendation 12 of the Consultation Paper offers a more conventional alternative:

Given the success of the Supplementary Legal Aid Scheme in widening access to justice by using event-triggered fees on a self-financing basis, consideration should be given to expanding SLAS on a gradual incremental basis, by raising the financial eligibility limits and by increasing the types of cases which can be taken up by SLAS.

Some thought should also be given to the situation of people who are sued, as it should not be assumed that people who sue other people are always in the right. Recommendation 6 seeks to protect defendants from nuisance claims by means of a security for costs provision. But this would only offer protection where a judge thought the plaintiff had no case or a very weak case. Given the complexities in litigation it is not easy to persuade a judge to come to such a conclusion. It is a fact of life that plaintiffs are not always in the right, and there must be defendants who fall within the "significant proportion of the community who are not eligible for legal aid, but cannot afford the high costs of litigation" who need and deserve some help. If something is to be done for plaintiffs, something should also be done for defendants. This is what the administration of justice is all about. One answer would be the expansion of legal aid.

The Law Society will be responding formally to the Consultation Paper and members are urged to express their views to assist the Council in formulating a representative stance. The Consultation Paper is on the following websites:

Please take time to study it and articulate your views.