Member Article

Consultation Paper on Conditional Fees On 14 September 2005, the Law Reform Commission of Hong Kong Conditional Fees Sub-Committee (the “Sub-Committee”) published a consultation paper on conditional fees (the “Consultation Paper”) recommending, among other things, that the existing prohibitions against the use of conditional fees in certain types of civil litigation by legal practitioners be lifted, so that legal practitioners may choose to charge conditional fees in appropriate cases. What are Conditional Fees? Conditional fees are a form of “no-win, no-fee” arrangement between legal practitioners and their clients. If the case is unsuccessful, the lawyer will charge no or a reduced fee. In the event of success, the lawyer charges his usual fee with or without a bonus, usually referred to as an “uplift fee” or a “success fee”. Conditional fees are different from the American form of contingency fee, where the lawyer’s fee is calculated as a percentage amount of damages awarded by the court. At present, a solicitor may not enter into a conditional or contingency fee arrangement to act in contentious business in Hong Kong. The restriction stems from legislation, common law and solicitors’ rules of professional conduct. The Proposed Conditional Fee Regime It was recommended by the Sub-Committee that the proposed conditional fee regime should apply to the following types of cases: 1. personal injury cases; 2. family cases, except where the welfare of children is involved; 3. commercial cases in which an award of damages is the primary remedy sought; 4. product liability cases; 5. probate cases involving an estate; 6. insolvency cases; 7. employees’ compensation cases; and 8. professional negligence cases. But not: 1. criminal cases; 2. family cases involving the welfare of children; 3. defamation cases; and 4. cases in which an award of damages is not the primary remedy sought. The success fee should be adjusted according to the stage of litigation, so that the full success fee would be payable if the dispute reached the litigation stage, but there would be a reduction in the success fee if settlement were reached earlier. The success fee, which is the bonus payable to the lawyer on top of his usual fees should he win a case, is a pure profit. The Sub-Committee is of the view that there is scope for capping the maximum success fee at less than 100% of the lawyer’s normal costs. Further, the success fee should also be capped at a prescribed percentage of the damages recovered, to prevent the undesirable end result that the entire recovery of the successful litigant being eaten up by the success fee. The claimant be required to notify the defendant of the existence of a conditional fee arrangement and the court should have discretionary power to require security for costs in appropriate cases to protect the defendant from nuisance and frivolous claims. Other forms of event triggered fees, including contingency fee arrangements, which allows a lawyer to take a percentage of the damages awarded, should continue to remain unlawful as being contrary to public policy. The Trend Conditional fee arrangements have been allowed in the UK since 1995, and also in the Australian jurisdictions of Victoria, South Australia, New South Wales and Queensland. ATE Insurance In Hong Kong as well as in the UK, Canada, Japan and most European countries, the unsuccessful litigant will usually be ordered to pay the legal costs of the successful party, in addition to paying his own legal costs. This rule is referred to as the “costs indemnity rule”. Given the costs indemnity rule, a conditional fee agreement alone would not protect the litigant against payment of the opponent’s legal costs in the event of unsuccessful proceedings. The Sub-Committee therefore recommended that an in-depth study into the commercial viability of “after-the-event insurance” (ATE Insurance) in Hong Kong be conducted, which typically covers the claimant against the opponent’s legal fees and disbursements and the claimant’s own disbursements. It was also recommended that consideration be given to expanding the current regime of the Supplementary Legal Aid Scheme or setting up an independent body to finance litigation (including payment of opponent’s legal costs should the litigation prove unsuccessful). Comments Whilst the proposed conditional fee structure might improve access to justice for the middle-income people who are ineligible for legal aid, it might also inadvertently encourage nuisance lawsuits. At present, individuals may be deterred from suing others, in particular large corporations, due to the lack of resources to pay their own legal costs plus the costs of the other party should they fail in the case. If conditional fee arrangements and ATE Insurance became available, that would necessarily mean litigants could litigate in a risk-free zone and it would obviously increase the numbers of litigation, in particular against big corporations. The meaning of “success” is not clear. Does it mean recovery of the full sum claimed? What if the court awarded a smaller sum? What if the case is settled, usually without admission of liability and at a smaller sum? Obviously, there are a number of other issues which require detailed consideration to enable such scheme to be put in place, for example, fee arrangements with Counsel and regulations on the level of success fee and ATE Insurance premiums. Should you have any other comments on the Sub-Committee’s recommendations, please feel free to let us know. We will consider your views in preparing our submissions to the Sub-Committee. Further Information The consultation period ends on 15 November 2005. Copies of the Consultation Paper can be obtained either from the Secretariat, Law Reform Commission, 20/F, Harcourt House, 39 Gloucester Road, Hong Kong, or on the internet at http://www.hkreform.gov.hk.