Australia: Contingency fee arrangements and tighter controls for litigation funders: proposed reforms


On 8 April 2014, the Australian Government's Productivity Commission released its draft report concerning Access to Justice Arrangements in Australia (Report). The Report is the product of an initial phase of public consultation conducted by the Commission over the past eight months on a wide range of issues relating to access to justice.

In the Report, the Commission has made recommendations on ways to improve access to the civil justice system and equity of representation, as well as seeking further input from interested parties on these issues. A copy of the full Report can be viewed here.

In this article we focus on the Commission's specific recommendations in relation to:

  • reform to billing arrangements in civil matters with the introduction of damages-based billing in Australia; and
  • increased regulation for third party litigation funders.

The introduction of damages-based billing

Currently in Australia, lawyers are permitted to enter into 'conditional' billing arrangements with their clients whereby the fees payable depend on whether the legal action is successful, with the potential for a further 'uplift' on legal fees, subject to various jurisdictional limits and disclosure requirements. This form of alternative billing agreement has been recognised by the Commission as enabling clients to "pursue actions that they would not otherwise have the financial capability to do, thus increasing access to the civil justice system".

While this form of 'contingency' fee arrangement has become a common feature of the Australian legal landscape, 'damages-based' billing has been and remains prohibited in Australia.

As the name suggests, damages-based billing is where the lawyer receives a pre-determined percentage of the award of damages and is not paid if the legal action is unsuccessful. This billing arrangement is commonplace in jurisdictions such as the US, Canada and more recently the UK. It has been heralded by some as having resulted in an increase in access to justice without "an explosion of frivolous claims".

In the Report, the Commission has made recommendations that the restrictions on damages-based billing be removed for most civil matters, subject to comprehensive disclosure requirements. This recommendation has been met with mixed reviews.

Opponents to its introduction have suggested that it could create adverse incentives for lawyers and will likely lead to an increase in weak or unmeritorious litigation. It has also been suggested that such arrangements give rise to a greater risk of conflict of interest than the routine arrangement since, for example in personal injury matters, legal fees are met by damages that are intended to cover the costs of future care.

Supporters of its introduction contend that damages-based billing aligns the incentives of the lawyers with the client because the lawyer's fee is result-based and the fees do not increase with the hours worked. Further, Australia's cost-shifting rule, whereby the loser pays, should continue to counter the threat of an increase in frivolous litigation. It has also been put forward that unlike the routine conditional fee agreement, damages-based fees offer the benefit of resulting in a proportional payment for the client and avoiding the scenario where the outcome is successful but, with only a nominal amount recovered, the client is left with loose change after paying legal expenses.

In terms of further public consultation, the Commission has asked for input on the appropriateness of the current cap of 25% on conditional billing arrangements and whether a percentage cap on a sliding scale should be considered in the context of introducing damages-based billing.

Implications of permitting contingency fee arrangements

In practical terms, increasing demand from commercial clients for non-traditional fee arrangements will likely see the proposal to remove the restriction on contingency fee arrangements welcomed by both firms and clients alike.

However, there is a danger that contingency fees could be misused by some in the market. The Commission should be mindful of the fact that lifting the restriction on contingency fees will lead to a marked increase in the volume of particular types of 'big ticket' proceedings from commercially astute plaintiff law firms geared for class action litigation, with potentially little actual benefit to those requiring access to justice.

The mooted cap on contingency fee arrangements is also unlikely to assist in overcoming the inherent conflict that lawyers could be placed regarding their duties to the court and their clients, on the one hand, and their own interests, on the other.

Third party litigation funding reforms

While recognising that litigation funders often provide an important avenue in accessing justice for litigants who lack financial resources but have meritorious claims, the Commission has recommended increased regulation of third party litigation funders. Specifically, the Commission has recommended that litigation funders should:

  • hold a financial services licence;
  • be subject to capital adequacy requirements;
  • meet appropriate ethical and professional standards; and
  • be monitored by the Australian Securities and Investment Commission.

Without traversing the history of litigation funding in Australia, the current position following the introduction of the Corporations Amendment Regulation 2012 (no 6) is that persons providing funding as part of either single or multi-party litigation are exempted from the requirement to hold an Australian financial services licence provided they have appropriate processes in place for managing conflicts of interest.

The proposed increase in regulation is seen as a response to the unique risks that are said to arise from the litigant/funder relationship, including the imbalance of bargaining power, the potential of conflicts of interest between funders, lawyers and plaintiffs and the potential that funders exercise too much control over proceedings.

Impact of the proposed reforms to third party litigation funding

The proposed tightening of regulations for litigation funders should be welcomed, particularly as new entrants come into the market and where the entities standing behind funders are changing. A stricter licensing regime and prudential requirements for people holding themselves out as litigation funders will not only protect consumers from any commercially sharp practices but will go a long way to ensuring that regulators have oversight of the activities of funders, without impacting access to justice.

What to watch?

The Commission has invited submissions on the draft report and the recommendations before 21 May 2014. We will continue to keep you updated as to the progress of the Commission's review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ben Allen
John Moran
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