Legal Aid Policy : Law Reform Commission's Consultation Paper on Conditional Fees

Law Reform Commission's Consultation Paper on Conditional Fees

In September 2005, the Conditional Fees Sub-committee of the Law Reform Commission released an interim consultation paper on conditional fees.

Conditional fees are a form of "no win, no fee" arrangement. If the case is unsuccessful, the lawyer will charge no fees. In the event of success, the lawyer charges his normal fees plus a percentage "uplift" on the normal fees. Conditional fees are different from the American form of contingency fee, where the lawyer's fee is calculated as a percentage of the amount of damages awarded by the court.

At present, conditional fees, like other forms of "no win, no fee" arrangements, are unlawful for civil legal proceedings involving the institution of legal proceedings. The restriction has its origins in the ancient common law crime and tort of champerty and maintenance.

The proposal will have immense impact on legal aid, insurance and professional services in Hong Kong , but more importantly, there will be a radical change in a common law principle which is basic and fundamental to Hong Kong's legal system. This principle of public policy demands that a lawyer should not be placed into a position where his direct personal financial interest conflicts with or may conflict with that of his client or with his duty to the Court. This legal safeguard is part of our common law for good reason and should not be weakened or removed. The Legal Aid Services Council, having considered the proposal in length, has made the following comments.

Terms of Reference

The Sub-committee is asked to consider whether conditional fee arrangements are feasible, and to proceed accordingly. The Terms of Reference are too narrow to be comprehensive for a policy change of such significance. When fundamental change in public policy is contemplated, it is logical and sensible that only when there is established general consensus and acceptance of change should the issue of feasibility and implementation be considered. This is the guiding rule underlying any reform. The Sub-committee seems to assume that fundamental principles are agreed and that there is a need for the change to conditional fees. The crucial issue of change in principle is not evaluated. The public will be misled into confusing feasibility and necessity, and that examining feasibility before necessity is to put the cart before the horse.

Need for Change

The consultation paper states that the increase in unrepresented litigants is one of the major problems confronting the civil justice system in Hong Kong and produces some percentages to illustrate the point. The percentages of such hearings for interlocutory hearings in the High Court before Masters and civil trials in the District Court remain at about 34% and 49% from 2001 to 2004 respectively. Only the civil trials and civil appeals in the High Court rose from 37% in 2001 to 42% in 2004. Then it goes on to use an Australian Law Reform Commission research paper in 1996 to draw a conclusion about the situation in Hong Kong.

We are not aware of there being any research to ascertain the reasons of such increase in Hong Kong, which may be due to a variety of reasons other than inability to afford legal representation. We doubt if there is any causal relationship between the increase and the justification for introducing conditional fees. There is no evidence to show that conditional fees can bring down unrepresented litigation.

The consultation paper suggests that the barrier of legal costs, which dissuades certain persons from bringing or continuing with claims, can be removed by adopting conditional fee arrangements. Without this barrier, there can then be increased access to Court. It appears that the proposal is put forward for the benefit of a limited group of persons, and lawyers' cost is taken as the sole deterrent to those in this group not to proceed to litigation.

The consultation paper draws the conclusion that there is an unmet legal need in Hong Kong with the courts no longer accessible to a significant proportion of the community. In the context of legal aid, most criminal cases are eligible for representation through the Duty Lawyer Scheme, the Legal Aid Department and/or under Court's direction. The Ordinary Legal Aid Scheme (OLAS) or the Supplementary Legal Aid Scheme (SLAS), takes care of the lower income groups and some of the "sandwich" class for certain types of civil cases. The consultation paper's proposal only deals with those whose income is beyond the financial limits of SLAS to the very rich. This could be a limited group and not necessarily a significant proportion of the community as claimed. Willingness to pay for access to Court as against affordability also needs to be examined.

It is the current trend to use alternative dispute resolutions in contrast to resorting to the courts for civil matters, such as arbitration and mediation. To encourage access to Court through conditional fee arrangements goes against this very trend.

An analysis of the consultation paper reveals an interesting clash between expediency which is the real basis for conditional fee arrangements as against principle. The principle against conflict of interest, which is fundamental to our justice system, has not been properly addressed. Instead, conditional fee schemes are dressed up as another principle in themselves, stressing that they will widen access to the courts. Hence a means for expediency emerges as a principle and a necessity. The consultation paper has not considered other means for wider access, without major changes in law and principle, and gives the impression that conditional fees are the only option.

The case for change has not been established.

Fundamental Principles

Public policy and common law principle
Champerty or giving of assistance, encouragement or support to litigation by a person who has no legitimate interest in the litigation is currently against public policy and is unlawful in common law. Though discussed in the consultation paper which makes reference to trade unions and insurance companies having a justifiable and legal interest in litigation, it is not clear if it is the intention to change the law to permit champerty and maintenance in Hong Kong. This is an important principle in common law having extensive implications should it be changed and should be discussed thoroughly before any change is to be implemented. If it is abolished, it will open the door to speculators and claims recovery intermediaries having only an interest in litigation cases for financial returns. The proposed introduction of conditional fees will permit legal practitioners, a specific group of people to have interests in the outcome of litigation. No reason has been given as to why only this group is permitted. Further legal complication arises if champerty is not abolished but a specific group of people or litigation under specific arrangements is allowed for potential financial rewards.

Conflict of interest and professional ethics
The consultation paper proposes that certain money recovery cases should come under conditional fee arrangements. The effect of a conditional fee agreement is that a lawyer will charge no fee if the client's court case is conducted unsuccessfully, i.e. "no win, no fee". In the event of success, the lawyer charges his usual fee plus a percentage "uplift" on the usual fee. This fee arrangement changes the lawyer-client relationship which is predicated on professional and objective advice and paid for by the client, to that of an investment model where the lawyer takes a financial interest from the outcome, i.e. his return on investment, into the client's case. Logic indicates that it is far more likely than not that the conduct of a lawyer with a financial interest in the result of a litigation will be influenced by that financial interest. Lord Benson, in the Royal Commission on Legal Services Final Report 1979 has this to say on contingency fees (contingency and conditional fees are similar, being only separated by a question of degree as to the extent of the sharing of financial interest in the outcome of the case) :

The overwhelming weight of evidence that we have received is opposed to the introduction of contingency fees. It was pointed out the arrangements of this kind encourage lawyers to concentrate only on strong cases and on cases which, without real merits, have a high nuisance value which makes them worth pursuing. The fact that the lawyer has a direct personal interest in the outcome of the case may lead to undesirable practices including the construction of evidence, the improper coaching of witnesses, the use of professionally partisan expert witnesses, especially medical witnesses, improper examination and cross-examination, groundless legal arguments designed to lead the courts into error, and competitive touting. A client may lose by this arrangement in two ways : a proportion - often substantial - of any damages recovered goes to the lawyer; and as the lawyer pays all the costs of the case in return for this proportion of the damages, he is exposed to strong temptation to settle the claim before incurring the heavy expense of preparing for trial and of trial itself, although it may not be in his client's interest to do so. Alternatively, the client, having nothing to lose, may insist that a hopeless or irresponsible claim be pursued to litigation in the hope that some profit will result."

The risk is obvious. The Benson Report reflects the well- established principles of common law, and any deviation would require introduction of complex regulations to control abuse. Quality and integrity of the legal service will be affected. Any conditional fee arrangement which departs from the simple, strong and easy to enforce rules of conduct for lawyers must provide evidence for the need of change, as a matter of policy and as an issue of principle. The proposal will fail to provide a better system.

Furthermore, introduction of conditional fees will benefit claims recovery intermediaries, but unlike lawyers they are unregulated. These claims recovery agents may become bankrupt leaving the litigants to bear the entire costs.

Costs indemnity rule
The costs indemnity rule requires the losing party to bear the legal costs of the other side. According to the Sub-committee's report, this is to deter vexatious claims, encourage settlement and compensate successful litigants in part. This fundamental principle of litigants paying for their own risk of litigation has been well accepted and practised. Conditional fees will work against this fundamental principle of determining vexatious, frivolous and unmeritorious claims. While conditional fees may benefit those who want to go to the law with legal costs shared by lawyers and insurance, it is essential that, a proven case of deficiency in our legal system that cannot be recompensed or improved, other than resorting to conditional fees, has to be established first. The tempted move to conditional fees without regard to the basic principle of indemnity is ill-conceived.

Recommendation 6 of the consultation paper asks that the use of conditional fees be disclosed to the other party and that the court should have discretionary power to require security for costs in appropriate cases. The Recommendation aims to safeguard or protect defendants from nuisance and irresponsible claims. Again it serves to illustrate a recognition that nuisance and irresponsible claims are inherent in conditional fee schemes. Further, it is not clear which party is to bear the security for costs ordered by the court. Where both lawyers and insurance companies are reluctant to provide that security, there will be no access to justice. If the lawyer shoulders that cost he will be tied to the outcome of the case and his conflict of interest will increase. The Recommendation will aggravate the degree of conflict.

Selective versus wider access to Court
The proposal for conditional fees claims it will bring wider access to Court. Financial viability being the prime consideration would limit access to Court to those cases that have good financial returns. Cases with merits but without high returns on investment will remain inaccessible to Court. Conditional fee arrangements will therefore only provide selective access and only to some types of cases.

Equality of arms
The aim of conditional fees, according to the consultation paper, is that filing a civil claim should not be the preserve of the wealthy or the poor, but open to all with good cause.

Truly with conditional fees, people of whatever means can file a claim without worrying too much about legal costs, particularly with the introduction of after-the-event insurance. But will this wider access work to the benefit of society as a whole ? The fact that claimants can irresponsibly litigate with less, or practically no concern on costs, will create a more litigious society as the barrier of legal costs which dissuades many people from bringing or continuing with claims is removed by using conditional fees.

While conditional fee arrangements will remove from the plaintiff the risk he currently has to bear, the defendant will often be left alone to defend himself. There will not be damages out of which a defendant can pay the uplift or success fees, not to mention the difficulty in securing after-the-event insurance. Surely access to justice requires fairness on both sides of the equation. Under conditional fees, the balance is tilted in favour of the plaintiff.

The consultation paper recommends that conditional fees be permitted for commercial cases in which award of damages is the primary remedy sought, for product liability cases and in professional negligence claims. Conditional fee arrangements in these cases impose pressure on the defendant to settle, even when they might have a reasonable defence, for fear of threat of the uplifted legal costs when the case is lost. With the "no win, no fee" mechanism, large corporations and professionals will become targets of more lawsuits. The discharge of the plaintiff's liability from legal costs will encourage vexatious or irresponsible litigation, leaving the defendant to suffer. Conditional fees will upset equality of arms, and hamper fair access to justice.

Direct fiscal impact on legal aid

Contributions from winning cases to support other cases is the principle underlying SLAS. Legalizing conditional fees and the introduction of a privately-run contingency legal aid fund will result in the easier and more lucrative cases being creamed off by the private sector thereby leaving the Legal Aid Department (LAD) and the public purse with the more problematic cases and their costs. Currently the LAD generates surpluses from winning cases and this works to the advantage of the public generally. Under current arrangements SLAS can grow and subsidize more deserving but not necessarily surplus generating cases. However, the conditional fee arrangements, by removing such cases, will deprive SLAS of a ready source of income. In the end, it will be left with the more problematic cases and will be unable to support deserving cases. Consequently the balance will be upset and this could lead either to losses or cessation of the SLAS. Similarly it may increase the public funding cost of the Ordinary Legal Aid Scheme as higher success rate cases or cases with prospect of generating more surpluses may be taken up under conditional fee arrangements in the private sector.

Other considerations

Malpractice
Arguments in favour of conditional fees in the consultation paper take the line that as there is insufficient evidence or only anecdotal evidence of malpractice, introduction of conditional fees is justified. The consultation paper downplays this risk by saying that unethical conduct can be avoided if the conditional fee regime is properly structured. With the problem of client confidentiality, gathering of evidence would be difficult, and individual cases will be hard to detect. The very nature of the abuses will probably mean that mostly they will be hidden, and cases which may illustrate the problem will be hidden from effective scrutiny. This strained argument is inadequate and unsatisfactory to justify such a major change in policy and to the legal system. It is certainly not desirable to encourage risk-taking or investing on litigation in Hong Kong. The ethical objections ought to be further analysed, thoroughly considered, and be brought to the public's attention before embarking on whether conditional fee arrangements are desirable as opposed to merely feasible. Currently many sectors of the community are placing greater emphasis on ethical principles and good governance but the consultation paper's proposal goes against that desirable trend.

To justify introducing conditional fees, the consultation paper assumes legislation will create a properly structured conditional fees regime. It also relies on the legal professional bodies to police professional standards. The Court of Appeal in Awwad v Geraghty (2000) 3 WLR 1041 at page 1062H considered that it would be inappropriate to leave the enforcement of this sort of a policy purely to the disciplinary processes of the professional bodies. We are uncertain if the issue is purely a matter of professional standard, and we should like to know the extent of the risk, and the complexity of the conditional fee structure. The input from the legal professional bodies will be helpful.

After-the-event (ATE) insurance
The viability of the conditional fees proposal will essentially depend on the availability of ATE insurance. Recommendation 11 of the consultation paper shows that conditional fee schemes are inherently risky to such an extent that insurance is most essential to make them work. The insurance will likely be very expensive, uncertain or simply unavailable, and if available, will lead to spiralling cost in conditional fees cases. Further, Recommendation 3 of the consultation paper can result in the plaintiff's entire recovered damages being eaten up because the insurance premium and the success fee will have to come out of his damages. In a modest case, his damages will be wiped out. Instead of conducting an in-depth study of the viability of ATE insurance in Hong Kong as per Recommendation 11 of the consultation paper, it will be more worthwhile to look into the feasibility of providing cover for the expanded SLAS scheme.

Cost increase
The Sub-committee's proposals will result in unsatisfactory or restricted access to justice and could adversely affect the legal system and the prospects for its improvements. Significant expenses will be added into the legal system by introducing conditional fee schemes. It will add to the total cost of litigation without significant gain in productivity or access to justice because of a number of services and features to be paid for. These extra expenses include high ATE insurance premium, administrative costs in setting up the arrangements, success fees or uplift and extra cost in paying claims recovery agents or middlemen. Conditional fee arrangements will also induce disputes over legal costs. Taxation, which is bound to escalate, will take up even more judicial time and resources.

The inevitable consequence of conditional fee arrangements is the added expenses being generated from all these extra activities. Little of these extra expenses will go towards productive and good quality legal work. It will cause a considerable amount of satellite activities instead.

Capping success fees
Recommendation 4 of the consultation paper proposes that success fees be fixed by legislation. Recommendation 5 further suggests that success fees should be capped at a prescribed percentage of the damages recovered. Both recommendations will lead to a situation where rules will artificially constrain lawyers so much so that they cannot adequately provide for the true risk they bear. As a result of capping, a balanced reward for lawyers may never be found, especially in a small community like Hong Kong. It also reveals the fact that because conditional fee arrangements are faulty the level of fees has to be decided by arbitrary capping. In the absence of capping, the court has to adjudicate after-the-event with more litigation and cost.

Contingency arrangement and legal aid in the United States
Contingency arrangement in the United States is known to be controversial and not practised in substantially the same form in any other country. Medical and insurance costs have increased substantially as a result. Without a well tried and successful model, there is no urgent need for Hong Kong to introduce conditional fees.

The consultation paper mentions the absence of a legal aid system in the United States. We notice however, that a Federal government funding of US$330 million was provided to the Legal Services Corporation (LSC) of the United States for 2005. The LSC funds local organizations throughout the US that provide civil legal assistance to the poor. If contingency fee arrangements had indeed provided access to justice for all, LSC funding should not have been necessary.

Supplementary Legal Aid Scheme (SLAS)
Hong Kong has a well-developed legal aid system in operation for over 35 years providing access to justice to the lower middle class and below who cannot afford litigation because of limited means. This is commonly known as the Ordinary Legal Aid Scheme (OLAS). SLAS has provided legal aid to those of the "sandwich" class since 1984 in respect of certain types of civil cases and has expanded legal aid to a wider spectrum of society. The SLAS fund is very well managed and it has been possible for a reduction of the aided person's contribution rate from 15/7.5% to 12/6% in July 2000, and a further reduction from the current 12/6% to 10/6% has just been announced. These reductions reflect the prudent management of the Scheme. The proven success of SLAS is undenied.

Wider access to justice, which is the paramount concern and which leads the Sub-committee to propose conditional fees, can in fact be equally and fruitfully achieved by modifying and expanding SLAS. The benefit of this is that SLAS does not involve basic change in public policy or in the fundamentals of the legal system, and is less complicated and risky than conditional fee arrangements. Indeed the consultation paper commends SLAS being a successful scheme meeting the needs of the middle class. Recommendation 12 of the consultation paper says, "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." The Sub-committee is certain on SLAS but not on conditional fees. The way forward is clear. If SLAS can be prudently expanded, there will clearly be no necessity or justification for conditional fee arrangements with all the inherent risks and associated complexity, and requiring a fundamental change in public policy and the common law system. SLAS can readily accommodate wider access. The Administration's recent announcement on 14 December 2005 to allow additional expenses to be deducted when calculating the disposable income of a legal aid applicant, which has the effect of widening access, well demonstrates this flexibility.

Conditional fees will eliminate cases of principle and merits but with no financial surplus to be made from them, nor any large sum of damages from which money can be extracted to pay the uplift, such as judicial reviews and cases with a public law element. These cases are usually important to the development of law and the social fabric of Hong Kong and its environment. The consultation paper makes no mention on how conditional fee arrangements will help develop this crucial jurisprudence and provide protection and adequate access to the courts for persons with such cases. It is with the expanded SLAS that cases of principle and merits, where benefit cannot be measured in purely monetary terms, may be considered by their merits and aid granted. Recommendation 2 misses out cases involving public law principles. The expanded SLAS will be more comprehensive in this regard.

Expenses on insurance brought about by conditional fee arrangements will discourage access to justice for small cases. The high cost of the ATE insurance premium and other expenses aforementioned will mean that the damages will be seriously depleted. Cases will not be worth taking on. It will be unjust as it will mean that only high damage claims will be attractive. This would disadvantage the public who currently derive subsidy from winning cases which is used to increase the SLAS fund to support more deserving cases which have public interest elements. Conditional fees lawyers will be unwilling to take on difficult cases which involve important and developing areas of the law because these may be riskier, more expensive, may not settle and may even need to be taken to the Court of Appeal or the Court of Final Appeal. Conditional fees would cream off the more financial rewarding cases leaving the more deserving but difficult cases to be unrepresented or sending them to the legal aid system. For this additional reason, Recommendation 13 is objected to.

Recommendation

Hong Kong should keep with the common law position, as is promised in the Joint Declaration and the Basic Law, as a matter of public policy and principle which has a sound practical and ethical governance basis.

In many aspects of the law, the fundamental concept is that not only must justice be done, it must be seen to be done. Perceptions are as important as substance. This means that lawyers must not actually have a conflict of interest. This means too that they must not put themselves into a position where they are seen to have a conflict of interest. Lawyers who allow themselves to be in such a conflict are in a position to do injustice which inevitably can taint and corrupt the system. Hong Kong has pioneered the SLAS fund, a method of financing litigation for the sandwiched class. One of the main strengths of the SLAS is that it eliminates the ethical problem inherent in conditional fee arrangements. It insulates lawyers from having a direct investment interest in the outcome of a case. Lawyers are remunerated for the work which they reasonably do, irrespective of whether their clients win or lose.

To provide wider access to Court, the solution is to expand SLAS and for it to cover more types of civil cases. Given the increase in activities and caseload to be expected of the expanded SLAS, the public is concerned that legal aid should be independent of the government and devoid of any bureaucratic connotation. A statutory body with responsibility for the full operation of the new scheme, preferrably with LAD as the executive arm with administrative costs continued to be kept low is an alternative to the conditional fee arrangements proposed in the consultation paper.

The expanded SLAS will not operate for profit. It will take a share in the compensation awarded in successful cases to pay the defendants' legal cost in unsuccessful ones. It will however require additional seed funding from the government to provide the necessary coverage for it to take on more cases. It will not be unduly constrained as to the type of cases as private conditional fee arrangements would be. The expanded SLAS will have adequate funding to take on more deserving cases with public interest elements, and will not have to concentrate only on cases "with good damages to costs ratio", and surpluses from cases of high success rates will provide funds to subsidise cases which may have public interest and hence "good public benefit to costs ratio". This new scheme allows greater access to justice, and provides an additional choice enabling claimants access to the court, at relatively little or no cost to the public purse.

SLAS is efficient and cost effective. More importantly, it is fully tested and assured. It safeguards professional ethics and is not financially centered on conflict of interest as are conditional fees. It helps balance equality of arms. It is simple, safe, and more importantly, affordable by society and the individual.

SLAS is a form of contingency fee arrangement but it will remove conflict of interest from lawyers. To widen access to justice, the expanded SLAS itself can also take on higher risk cases with a more creative structure which could be looked into in more detail. As an example, a scheme could be established for cases which do not come under the expanded SLAS to allow the authority to enter into a conditional fee arrangement with the applicant. In return, the authority could obtain its ordinary or normal costs plus a capped success fees. The assigned lawyer would not be part of this arrangement and there will be no ethical disadvantage. Under this arrangement, there should be provisions for assigned lawyers to be reimbursed for the extra costs incurred in doing such higher risk cases.

Genuine access to justice is of paramount importance. Something as valuable as legal representation providing access to justice must be provided ethically and in conformity with existing principles of law and public policy. To continue to command the confidence of the public it must be seen to be ethical. This can now be done using the expanded model of SLAS per Recommendations 12 of the consultation paper, and not private conditional fee arrangements. The focus should be commencing further studies on expanding SLAS as a priority. It is proposed that the Law Reform Commission should prepare a consultation paper on expansion of SLAS and the setting up of the corresponding statutory body for further deliberation.

The Legal Aid Services Council (LASC) is a statutory body set up in 1996 to advise the Chief Executive, Hong Kong Special Administrative Region on legal aid policy, to oversee the administration of the legal aid services provided by the Legal Aid Department and to advise on the feasibility and desirability of establishing an independent legal aid authority. SLAS naturally comes under our consideration regularly. With its background and experience, LASC will be pleased to offer assistance in exploring further such a body.