- The 1999 Law Reform Commission for Western Australia report (LRCWA) has some important recommendations for contingency fee arrangement for lawyers.
- The report recommends contingency fees only under two conditions:
i. The client can’t pay normal fees
ii. The lawyer is personally satisfied that the first condition is true.
If the lawyer wins, they get only their normal fee + an additional percentage of that fee.
- This means the lawyer would have to investigate not just legal issues, but also estimate the eventual final cost + the client’s finances. And trial costs are inherently uncertain.
- This financing arrangement would mean contingency arrangements are available only to the poor. Even though middle class people would have the same reason for using contingencies as poor people: they need financing, and they want to shift risk to the lawyer.
Further, we can assume that lawyers will exercise diligence, because they only get paid if they win.
This passage talks about contingency fees. To think about those, lets first talk about “normal” legal billing: hourly billing
Normally, a lawyer might charge, say, $300 an hour for services. If you retain them to work with you for a trial, they’ll bill you for each hour worked.
If a trial takes 100 hours of legal work, then the lawyer charges you $30,000. Ouch.
Now, what about a contingency? In that case, the lawyer agrees to be paid only if they win the case. (I.e. they are paid contingent upon the outcome).
In such a case, the lawyer might charge no money for losing. But if they win, they would take, say, half of the winnings. So if the case won $400,000, the lawyer would get $200,000.
The benefit to the client is they can’t lose money. They can also file a case without having money to pay upfront. The loss to the client is that if they win, then they win a lot less money.
The Australian report proposed a slightly modified system. Lawyers can only get their fee plus “an agreed upon additional percentage of their fee”. Which means that if their fee is $30,000, presumably they can only get an additional, say, 50% of $30,000.
So that greatly limits the maximum amount lawyers can make from contingency cases. (The result would be that lawyers wouldn’t take risky contingency cases: they’d want to be sure they won).
The other restriction is that lawyers can only take clients who can’t pay, and they must make sure the client can’t pay.
So lets say you want to launch a lawsuit, and you have $31,000 in life savings. You see a lawyer, and they suggest a contingency arrangement. They estimate costs of $30,000. What happens?
You can’t do a contingency! Because you technically have enough money, the lawyer only has the option of charging the $31,000. So you have to use almost all of your life savings on this lawsuit, or you can’t hire the lawyer.
Further, let’s assume you only had $5000 in the bank, and you ask the lawyer to work on contingency. The lawyer has to make sure you’re telling the truth. They perhaps need your bank records + have to do an investigation of all your other financial assets.
This puts an extra burden on the lawyer, before they even get paid or take a case. The lawyer has to do all the legal work of researching the case, estimating costs, and investigating the client, before they can accept the client. If it turns out they can’t take the client, the lawyer has just wasted a bunch of free work.
There’s one other problem. Legal costs are uncertain. This is one reason clients want to do contingencies: so they can shift costs to lawyers.
Let’s imagine again you have $31,000. The lawyer estimates things will cost $30,000. So you have no choice, you have to pay upfront (and will be billed for any cost overruns).
But suppose then the trial lasts much longer than you thought, because the opposition tries stalling tactics (e.g. lines 39-40). Suddenly the costs of trial balloon to $100,000. You win $105,000. Hooray!
Not much of an outcome, is it? At least you didn’t lose: then you would have been out $100,000. Instead of the $0 you would have lost had it been a contingency arrangement. So, this situation has created a very risk situation for the client.
The funny thing is, you would have been eligible for a contingency arrangement, had the lawyer known in advance that costs would balloon to $100,000. But since the reasonable estimate was $30,000, you weren’t eligible.
So this is pretty burdensome on middle class clients. That’s a known problem in law: middle class clients can’t afford services. The poor can afford them, thanks to legal aid. And the rich can afford them, thanks to their wealth. But the middle class (which includes a lot of working poor) is ineligible for legal aid, but hasn’t got the money for legal fees.
Shutting off contingency arrangements shuts off access to law for these people.
Of course, there are good arguments against contingency arrangements. But the author doesn’t discuss those: they clearly favor contingency arrangements.
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