The Productivity Commission's Report into Access to Justice Arrangements focuses on consumers' and small businesses' ability to obtain legal advice and vindicate their legal rights within the civil justice system, but some recommendations, if adopted, will have direct or indirect impact on large businesses and companies, by increasing their litigation risk.
First, some good news for business
Tax deductibility of legal expenses
The Commission has recommended that the income tax deductibility of legal services be retained. Removing tax deductibility had long been an aim of plaintiffs' lawyers. Hopefully, this will be the end of the matter.
Litigation funders are for-profit companies which invest in litigation. In simple terms they pay the plaintiff's lawyer in exchange for a percentage of any verdict or settlement (ie. a contingency fee agreement).
The Commission has called for the licensing of litigation funders by ASIC, or another government body, to ensure proper protection of consumers, management of conflicts, and proper financial supervision and capital adequacy. It's also noted that this regulation would ensure that funders do not exercise too much control over proceedings and place undue pressure on the court system.
We believe litigation regulation will happen. There is a need for it, and, as we detailed in a recent paper, there is a way to achieve appropriate regulation.
The Reports suggests discovery be limited in scope and delayed to later stages of litigation. Given that discovery can be both very expensive and time-consuming, particularly for corporate parties, this is a welcome recommendation.
The Commission offers a further endorsement to national regulation of the legal profession. At present only New South Wales and Victoria have adopted the uniform regulatory regime. Its adoption by other jurisdictions would be of real benefit to consumers and small business as well as the profession.
The Commission recommends that the courts pursue further technological initiatives. These would both replace the old paper-based systems and facilitate more court appearances by video or telephone. To a large extent, most superior courts in which businesses litigate have these capabilities, so the impact will be limited.
Now for the bad news
As expected, the Commission has recommended the introduction of what is described as "damages-based billing" or contingency fees for lawyers. If accepted – and it's our view that it will be – this will overturn the long-standing prohibition on Australian lawyers entering into an agreement with their clients to take a percentage of any verdict or settlement. Of course, non-lawyers, in the form of litigation funders, have been doing this for years.
There can be little doubt that the introduction of contingency fees will see an increase in the overall level of litigation and, in all probability, an increase in the number of speculative or even unmeritorious claims. The one thing that may put a break on this is a further recommendation that courts be given the power to make cost orders against non-parties "in the interest of justice". The Commission's report makes it clear that the court should have the power to make both costs orders and security for costs orders against lawyers who enter into contingency fee agreements.
In addition to paying their lawyers, litigants must pay courts to use the service they provide. It is on this matter, in particular, that the Commission views access to justice through the prism of courts being service-providers rather than the third and co-equal branch of government.
At present, courts recover between 20-35% of their costs from the fees they charge. The Commission recommends that this percentage increase, in some cases at up to 100% of the true cost. This will mean an increase in court fees.
This would mean large organisations and companies would pay substantially more for filing claims and taking them to a hearing. For example, a publicly listed company currently pays $4,720 to start a case in the Federal Court and up to $16,765 for each hearing day. Fees like these could increase if the recommendations are adopted.
The Commission recommends fees be harmonised across the nation, so that equivalent fees are charged at equivalent amounts in equivalent jurisdictions.
The Commission recommends the abolition of all restrictions on lawyers' advertising. This will encourage more advertising, particularly by lawyers who act for plaintiffs in workers' compensation, consumer law and personal injury matters.
Costs are another target of the Commission's report. At present, the usual rule is that a losing party must pay a large proportion of the winner's legal costs.
The Commission has not recommended significant changes to the regime for the awarding and recovery of costs in the Federal and Supreme Courts. However, it does suggest that in the inferior courts, such as the District and Local Courts, fixed amounts should be recoverable for certain matters.
The next steps
The Report is only a recommendation to the Australian, State and Territory Governments. As matters relating to the legal profession are primarily within the province of the States and Territories, the adoption of much of this Report will require the co-operation of nine parliaments and governments, as well as dozens of courts and tribunals, in Australia.
We do think, however, that regulation of litigation funders (which would fall within the Commonwealth's powers) will happen, which would be a welcome development. We similarly consider the recommendation to permit contingency fees will be adopted as part of the national harmonisation of the regulation of the legal profession.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.