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5 minutes on... What the ALRC report means for contingency fees in Australia

October 12, 2019
Craig Arnott & Matt Lee

Published early in 2019 following a year-long inquiry, the Australian Law Reform Commission Final Report on Class Action Proceedings and Third-Party Litigation Funders (ALRC report) sets forth a number of recommendations—including lifting the ban on law firm contingency fees in certain contexts.

Below, we take five minutes to explore the impact this reversal would have on the legal industry in Australia.

What are the report’s recommendations surrounding contingency fees?

Under current law, lawyers are prohibited from engaging in damages-based contingency fee arrangements with their clients—that is, billing their clients for a percentage of the amount recovered by litigation. By contrast, a limited form of fee-based contingency is permissible in Australia and commonly takes the form of “No Win; No Fee” arrangements offered by a few firms that focus solely on plaintiff-side cases.  The ALRC report proposes allowing a limited-scope contingency fee model for class action proceedings, subject to the leave and oversight of the Federal Court.

Why does this matter for Australian firms and clients?

A move by the Australian legislatures—even in limited circumstances—to permit law firms to provide their clients with the option of contingency fees arrangements, would bring Australia in line with jurisdictions like the US, where the use of such arrangements is already accepted practice.

Having more options available when it comes to legal fee structures is patently beneficial for both law firms and their clients. Clients are increasingly pushing back against the traditional law firm hourly fee model and demanding firms be more competitive in winning their business: For instance, by offering alternative fee arrangements. When law firms work on contingency, they are providing clients with access both to counsel and the courts disregarding any economic impediments that would otherwise prevent meritorious claims from being brought. The report further suggests that such a move would provide greater access to justice for medium-sized class actions, promote competition amongst funders and encourage lower commission rates.

How could this impact legal finance in Australia?

An agreement to represent a client on a contingent basis creates financial obligation and risk of outright capital loss to a law firm whose clients—however meritorious their claims—may well lose. A law firm working on contingency risks financial losses of many millions of dollars in costs paid for lawyers’ fees, case expenses and indemnity for or insurance against adverse costs. This makes third-party legal finance all the more essential.

Successful firms will need a partner to help manage the contingent risk in order to represent multiple deserving clients who have meritorious but highly risky and expensive matters, all of which may prove unsuccessful. Law firms are normally cash-in, cash-out partnerships without access to outside equity or long-term debt which may be stressed by assuming a significant amount of contingency fee risk—the ability of a third-party funder to share that risk would therefore be a welcome relief.

Legal finance provides law firms with much-needed sources of capital to help manage their risk and maintain focus on how to best serve their clients. This is evidenced by the sheer number contingency-fee matters that Burford has funded globally, often by partnering with law firms on a portfolio basis.

What happens next?

Burford welcomes the recommendation of the ALRC report to lift the ban on contingency fee arrangements in class action proceedings. In fact, we would advocate that this permission be extended more broadly than the ALRC has proposed, to solicitors representing clients in all other types of disputes.

That said, it is important to note that the recommendations proposed by the ALRC report—including those relating to contingency fees—are just that: Recommendations. Implementing such wide-scale changes would require the co-operation of governments in all States and Territories to amend the relevant legislation which will take significant time and throw up its own set of challenges. Thus, it is unlikely that we will see contingency fee arrangements appear overnight in Australia but the importance of this reform remains, nonetheless.