Contingency fees: Loyalty under strain

Recently, the Victorian Government passed legislation with the innocuous title of Justice Legislation Miscellaneous Amendments Act 2020 (Vic.).

It amends a number of pieces of legislation, but one will attract a little more attention than most – the insertion of a new section, s33ZDA, into the Supreme Court Act 1986 (Vic.), the effect of which is to allow contingency fees.

This is achieved by granting the court the discretion to allow contingency fees in a matter if “it is appropriate or necessary to ensure that justice is done in the proceeding”.¹ In brief, the highlights are:

• A plaintiff in a group proceedings can apply to court for an order that contingency fees be allowed.
• The court will determine the percentage of the fee.
• Liability for those costs must be shared among the group members.
• Lawyers claiming a contingency fee must also indemnify the lead plaintiff for any adverse costs orders.
• The lawyers claiming the fee may be required to give security for the defendant’s costs.

The amendment is a mere 240 words, but its effect is expected to be momentous; although, just how great an impact this actually is will depend on the way in which the court wields its discretion, and on that we can only wait and see. While brevity in legislation is admirable, however, it can lead to loose ends, and for lawyers there is a big one – an inherent conflict of interest, which the legislation does nothing to resolve.

The conflict arises because once a lawyer or law firm is charging a contingency fee, they have skin in the game – an interest in the outcome that goes beyond their client’s interests. While lay people might assume that the firm will work hard for the highest award and thus do better for the client, lawyers know it is not that simple.

Suppose an order has been made allowing a 30% contingency fee. That does not mean that the law firm involved will not be recording how much time is spent on the matter, because the firm will need to know how much the matter is costing in terms of lawyers’ time. The firm will also have a good idea about what a likely settlement figure will be.

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This means that there might well come a time when the amount of work actually done on the matter exceeds the percentage of the likely settlement; meaning, the firm will start losing money on the matter.

The closer the matter comes to that point, the more incentive the firm has to encourage the client to settle. It is immaterial that the firm might continue to provide competent and independent advice. The law firm has an interest in the matter, and is fundamentally conflicted.²

The core of a lawyer’s relationship with their clients is independence and loyalty. Millet LJ (as his Honour then was) described the duty of loyalty as follows:

“The principal is entitled to the single-minded loyalty of his fiduciary. The core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”³

That duty has been described as “unequalled elsewhere in the law”⁴ and a practitioner’s ability to appropriately discharge it is compromised by a contingency fee arrangement. It is difficult to see how a lawyer can provide “single-minded loyalty” when their fee depends on the size of the settlement, and a conflict of duty and interest in such an arrangement is unavoidable.

In addition, regardless of what the firm does, the general public may well apprehend that the firm will urge an insufficient settlement to ensure a profit (or indeed advise against accepting a fair offer in pursuit of a bigger cut for the firm). This means that the new legislation may well put lawyers in the position of diminishing public confidence in the administration of justice.

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This leads to a situation in which a disgruntled member of the plaintiff group may at some point make a complaint against the law firm for acting while in conflict. There is nothing in the legislation which abjures lawyers from their duties (and indeed there should not be); meaning, that any lawyer charging contingency fees, despite there being an order of the court which allows it, is fundamentally and incurably conflicted.

Simply put, there is no scenario in which contingency fees are charged that does not automatically lead to a conflict, and before rushing to join what is expected to be a plethora of new class actions, practitioners would be wise to consider their ethical duties.

(NB: The authors advise that this article represents their own views on the subject, and does not necessarily represent the position of Queensland Law Society or any of its committees on this issue.)

Notes
¹ Supreme Court Act 1986 (Vic.) s33ZDA(1).
² Australia Solicitors Conduct Rules 2012 (Qld) r12.
³ Bristol and West Building Society v Mothew [1998] Ch 1, 18.
⁴ Moffatt v Wetstein (1996) 135 DLR (4^th) 298, 315.