Are Damages-based agreements a future alternative for lawyers and their clients?

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Most individuals and businesses that encounter a legal problem will privately engage a lawyer and meet any legal fees with their own resources.  However, legal fees can be large (easily running into many thousands of dollars) and are often unexpected or may escalate.

The Productivity Commission has released a draft report on Access to Justice as part of its inquiry into Australia’s system of civil dispute resolution.  The focus of the report is on constraining costs and promoting access to justice and equality before the law.

What are damages-based and conditionally-based agreements?

In a damages-based agreement a lawyer receives an agreed percentage of the amount he or she recovers for the client and is not paid if the legal action is unsuccessful.  This form of billing is currently prohibited in Australia but not in other countries such as Canada and the United Kingdom.

In a conditional agreement some or all of the lawyer’s service fees depend on whether the legal actions results in a successful outcome.  A ‘no win no fee’ agreement is a type of conditional fee where no service fees are charged unless the outcome is successful.  This form of billing arrangement is permitted in Australia.

In its report, the Commission concluded that the restriction on damages-based agreements should be removed subject to comprehensive disclosure requirements to protect consumers of legal services.

Some of the proponents in support of damages-based agreements argue:

(a) It aligns the incentives of the lawyer with their client more effectively than conditional billing;
(b) Time billing becomes irrelevant while inefficiencies and delay become the enemy of the lawyers as well as the client; and
(c) It promotes access to justice (for a broader discussion on Access to Justice and the costs that drive see Pragma Legal’s previous eNewsletter dated 18 March 2014).

Some of the proponents against damages-based agreements argue:

(a) It will increase weak or unmeritorious litigation; and
(b) It has more potential for conflicts of interest to arise between lawyers and their clients.

The Commission’s report is presently in a draft with the final report scheduled to be delivered to Government in September later this year.  It remains to be seen whether the recommendation will be included in the final version of the Report and if so, whether legislators will endorse it.

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