OPINION: Contingency fees, where a lawyer is paid through receiving a percentage or share of a client’s recovery from a law suit, have been heavily promoted as being needed in Australia.

The debate appears to have arisen due to England and Wales adopting a version of contingency fees.

The Productivity Commission has supported the introduction of such fees to aid access to justice.

It has now become a common area of commentary in relation to class action.

However, the debate about contingency fees and class actions misunderstands how class actions operate in Australia. They involve a representative party bringing proceedings on behalf of similarly situated persons or entities.

Those members do not need to be known or identified. Rather, there is a group definition and all entities that fall within the definition are automatically part of the class action. Subsequently they are given notice that they may exclude themselves from the proceedings, that is, opt out. Parliament adopted the opt-out model to promote access to justice.

Group members who cannot be identified at the outset or who are unable to affirmatively participate due to social or economic barriers are not excluded from the legal system and a potential remedy.

However, contingency fees are contract-based, which means the lawyer and client must enter into a contingency fee agreement. Similarly, litigation funding agreements where third parties fund litigation in exchange for a percentage of a recovery are contract-based. But you cannot enter into a contract unless you can identify the person and obtain their signature. The opt-out class action includes people without them needing to enter contracts.

Dealing with the 'closed class'

Litigation funders have sought to thwart the opt-out approach by only bringing class actions on behalf of people who sign agreements with them – the so-called “closed class”. Consequently people have to accept the funder’s percentage or they are excluded from a remedy. Contingency fees would have to work the same way, giving significant power to lawyers to set fees and potentially excluding some people from a remedy.

However, another approach exists that has been used in the United States, which also has opt-out class actions.

The US developed the “common fund” approach to legal fees to replace the contingency fee because the lawyer could not contract with all group members. A lawyer could seek a reasonable attorney’s fee from a fund that the lawyer helped create for others, such as group members in a class action.

A contingency fee is a private arrangement, but a common fund is overseen by the courts. In exchange for the lawyer receiving a percentage from all group members (even without a contract), the percentage is subject to judicial approval and oversight, including specifying the amount of the percentage or fee and being satisfied it is reasonable in relation to the case’s time and complexity.

The court seeks to balance the need to compensate the lawyers for their efforts, the outcome achieved, and the acceptance of risk as to the outcome of the proceedings, with avoiding windfalls that over-compensate the lawyer to the detriment of group members.

Australian class actions already have judicial oversight, and the adoption of a common fund approach with judicial oversight for class actions rather than the ill-fitting contingency fee would involve little extra work for courts and lawyers. It would support access to justice but guard against the excesses of contingency fees.

Michael Legg is an Associate Professor in the Centre for Law, Markets and Regulation at UNSW. 

This opinion piece was first published in the Australian Financial Review.