This Consultation Paper has been prepared by the Conditional Fees Sub-committee of the Law Reform Commission. It does not represent the final views of either the Sub-committee or the Law Reform Commission, and is circulated for comment and discussion only.

The Sub-committee would be grateful for comments on this Consultation Paper by 15 November 2005. All correspondence should be addressed to:

It may be helpful for the Commission and the Sub-committee, either in discussion with others or in any subsequent report, to be able to refer to and attribute comments submitted in response to this Consultation Paper. Any request to treat all or part of a response in confidence will, of course, be respected, but if no such request is made, the Commission will assume that the response is not intended to be confidential.

It is the Commission’s usual practice to acknowledge by name in the final report anyone who responds to a consultation paper. If you do not wish such an acknowledgement, please say so in your response.

Preface

__________

Terms of reference

1. In May 2003, the Secretary for Justice and the Chief Justice directed the Law Reform Commission:

“To consider whether in the circumstances of Hong Kong conditional fee arrangements are feasible and should be permitted for civil cases and, if so, to what extent (including for what types of cases and the features and limitations of any such arrangements) and to recommend such changes in the law as may be thought appropriate.”

The Sub-committee

2. The Sub-committee on Conditional Fees was appointed in July 2003 to consider and advise on the present state of the law and to make proposals for reform. The sub-committee members are:

Prof Edward K Y Chen, GBS, CBE, JP

(Chairman)

President

Lingnan University

Mr William H P Chan

Deputy Director

Legal Aid Department

Mrs Pamela W S Chan, BBS, JP

Chief Executive

Consumer Council

Mr Andrew Jeffries

Partner

Allen & Overy, Solicitors

Mr Raymond Leung Hai-ming

Chief Executive Officer

C & L Investment Company Ltd

Mr Raymond Leung Wai-man

Barrister

Temple Chambers

Mr Kenneth S Y Ng

Head of Legal and Compliance

Hongkong and Shanghai

Banking Corporation

Mr Peter Schelling

(from February 2004

to June 2005)

Managing Director & CEO

Zurich Insurance Group

(Hong Kong)

Mr Michael Scott

Senior Assistant Solicitor General

Department of Justice

Mr Paul W T Shieh, SC

Senior Counsel

Temple Chambers

Ms Sylvia W Y Siu

Consultant Solicitor

Sit, Fung, Kwong & Shum

Ms Alice To Siu-kwan

(from September 2003

to February 2004)

Assistant General Manager

Technical Underwriting & Claims

Royal & Sun Alliance Insurance

(HK) Ltd

The Hon Madam Justice Yuen, JA

Justice of Appeal

High Court

Ms Cathy Wan

(Secretary)

Senior Government Counsel

Law Reform Commission

3. The Sub-committee considered the reference over the course of nine meetings since July 2003 and will hold further meetings to discuss and evaluate comments on this consultation paper.

What are conditional fees?

4. A conditional or contingency fee agreement can be described as an agreement between a legal practitioner and his or her client to the effect that the legal practitioner will charge no fees if the client’s court case is conducted unsuccessfully. The fees charged under this type of agreement are sometimes referred to as “event-triggered fees”, and the basis for charging legal costs is known as “no success, no pay” or “no win, no fee”. This type of fee arrangement is usually allowed only in civil litigation cases, although the scope of application differs amongst jurisdictions. In most jurisdictions, the costs indemnity rule applies, meaning that the unsuccessful party has to pay the costs of the successful party. Conditional or contingency agreements do not relieve the litigant from the risk of an adverse costs order to pay the other side’s legal costs if the litigation is unsuccessful.

Terminology

5. There are various ways in which event-triggered fees can be applied, and the amount of fees that become payable in the event of success will vary accordingly. Terms used to denote these different methods of charging include contingency fees, uplift fees, speculative fees, and percentage fees. These terms are not consistently applied in the literature on the topic. For the purposes of this paper, these terms have the meaning ascribed to them below.

Contingency fee, percentage fee, “no win, no fee”

6. In some literature^¹ the term “contingency fee” is given a wide meaning and includes any type of calculation on a “no win, no fee” basis. However, in other contexts, “contingency fee” is taken to mean “percentage fee”, whereby the lawyer’s fee is calculated as a percentage of the amount awarded by the court. This is the basis adopted in the USA. For the purposes of this paper, we use the term “contingency fees” to mean only “percentage fees”, whereas the term “event-triggered fees” embraces all the different “no win, no fee” bases of calculation.

Conditional fee, uplift fee, success fee

7. The term “conditional fee” is sometimes loosely used to mean event-triggered fees. However, in other contexts, and also for the purposes of this paper, “conditional fee” means an arrangement whereby, in the event of success, the lawyer charges his usual fee plus an agreed flat amount or percentage “uplift” on the usual fee. The additional fee is often referred to as an “uplift fee” or a “success fee”. Conditional fee agreements have been allowed in the UK since 1995, and also in the Australian jurisdictions of Victoria, South Australia, New South Wales and Queensland.

Speculative fee

8. Where a “speculative fee” is charged, the lawyer is entitled to charge only his or her normal fee in the event of successful litigation. Where the action does not succeed, the lawyer is not entitled to a fee. Speculative fees have been used in Scotland for a long time.

Layout of this paper

9. The first chapter sets out the sources of litigation finance in Hong Kong, and the rules which apply to the allocation of costs. Chapter 2 examines the application of contingency fees in the USA, while Chapters 3 and 4 look at the development of conditional fees in England and recent problems and litigation there. Chapter 5 turns to the experience of event-triggered fees in a number of other jurisdictions, and Chapter 6 deals with the arguments for and against conditional fees and sets out related issues for discussion. The Sub-committee’s recommendations are set out in Chapter 7, while Chapter 8 contains a summary of the recommendations.

Chapter 1 The costs of litigation

____________________________

Who pays for litigation?

1.1 The costs of litigation in courts and tribunals are met from a number of different sources. The principal sources of finance for litigation are discussed below.^²

1.2 Insurance – Insurance companies are major participants in litigation, particularly in personal injury cases, where the dispute usually concerns the amount of damages rather than liability. In cases where the courts order the defendant to pay the plaintiff’s costs pursuant to the cost indemnity rule,^³ these costs are often paid by the defendant’s insurance company in accordance with the insurance policy. In some jurisdictions, litigation costs are paid out of legal expense insurance schemes. These are common in Europe and in the United States, and growing in number in Canada and the United Kingdom.^⁴ In Sweden, for example, legal expense insurance was introduced in 1961 and is now an obligatory part of householders’ comprehensive insurance. It is reported that 70% of Sweden’s population is protected by legal expense insurance, and 84% of total litigation costs are paid out of insurance. Such schemes provide cover to individuals for the costs of litigation in the courts (but not tribunals) in relation to disputes that arise in their everyday relations, except for divorce proceedings and disputes arising from an occupation for gain other than regular work.^⁵ The cover indemnifies the litigant for his own costs and the costs of the other party that the litigant might be required to pay.^⁶

1.3 Legal aid – The Legal Aid Department in Hong Kong provides assistance to litigants who satisfy the relevant means and merits tests, if their type of case is covered by the legal aid schemes.^⁷ The legal aid schemes cover both criminal and civil cases, the latter mainly in relation to matrimonial disputes, personal injury and running-down cases. In 2003, 21,643 applications for civil legal aid were received and 10,694 of them were granted. The Legal Aid Department’s expenditure on civil cases was $343 million that year, and $769 million was recovered for the aided persons. As for criminal legal aid, the same year recorded 4,411 applications, with 2,803 of them granted, for an expenditure of $89 million.^⁸

1.4 Tax deductions – The Australian Law Reform Commission^⁹ pointed out that businesses are major users of the court system, and that legal expenses incurred are generally tax deductible. The ALRC’s consultation exercise revealed that many people saw the tax deductions available to business litigants as inherently inequitable because they were not also available to individual litigants. The business litigant who does not have to bear the full cost of litigation can therefore afford to engage more readily in litigation, to prolong the litigation, and to hire more expensive representation. Individuals who qualify for legal aid must undergo a strict merits and means test, whereas business litigants are eligible for tax deductions without any assessment of the merit or reasonableness of the legal expense.^¹⁰

1.5 Legal practitioners – In jurisdictions which allow event-triggered fees, the litigation costs of unsuccessful cases are borne by the legal practitioners. The level of utilisation of contingency or conditional fees differs from jurisdiction to jurisdiction. The Australian Law Reform Commission observed^¹¹ that in Australia speculative and contingency fee arrangements are commonly used by plaintiffs’ lawyers in personal injury cases. They are also used, although less frequently, for other claims for damages. Occasionally they are used where non-monetary relief, such as a declaration or injunction, is sought. In Scotland, by contrast, it is estimated that only about 1% of all cases are charged on a speculative basis.^¹² As for the United States, in the absence of legal aid, contingency fees are one of the principal sources of financing for litigation.

1.6 Claims Intermediaries – These are businesses run by non-legally qualified persons that help clients handle their compensation claims, usually those arising from traffic or work-related accidents. They operate on a “no win, no fee” basis, and usually require payment of 20% – 30% of the compensation received if the claim is successful. Claims intermediaries have proliferated in England, and are operating in Hong Kong. Given that the common law offences of maintenance and champerty are still applicable to Hong Kong, in some circumstances the activities of some compensation claims agents might be unlawful. Those claims intermediaries who act within the law offer a convenient service to the public, although the public should be aware that these agents are un-regulated. This issue will be discussed in greater detail later in this paper.

1.7 Litigants – The parties’ own resources are the most obvious source of finance for litigation. The costs rules determine which litigant shall pay how much, and the basis for determination of costs.

Relevant costs rules in Hong Kong

1.8 To assess the impact of the introduction of any event-triggered fees in Hong Kong, it is useful to set out an overview of the relevant costs rules. The word “costs” is sometimes used to denote the remuneration which a party pays to his own solicitor. It also means the sum of money which the court orders one litigant to pay to another to compensate the latter for the expense which he has incurred in



Chapter	Page

Preface	1

Terms of reference	1
The Sub-committee	1
What are conditional fees?	2
Terminology	2
Contingency fee, percentage fee, “no win, no fee”	3
Conditional fee, uplift fee, success fee	3
Speculative fee	3
Layout of this paper	3


1. The costs of litigation	5

Who pays for litigation?	5
Relevant costs rules in Hong Kong	7
Costs to follow the event - the costs indemnity rule	7
Bases of taxation in Hong Kong	8
Costs on the party and party basis	8
Costs on the common fund basis	8
Costs on the indemnity basis	9
Costs as between a solicitor and his own client	9
Costs on the trustee basis	10
Other costs aspects	10
Counsel’s fees	10
Costs of litigant in person	11
Legal aid as a source of finance for civil litigation	11
The merits test	11
The means test	12
Ordinary Legal Aid Scheme	12
Supplementary Legal Aid Scheme	13
Criminal Legal Aid	14
Provisions against conditional or contingency fee arrangements in Hong Kong	15


2. Contingency fee arrangements in the USA	17

Introduction	17
The percentage contingency fee	18
Other unique features of the American civil justice system	20
Costs do not follow the event	20
Trial by jury	20
Punitive damages	20
Specialised plaintiff bar	21
Precedents not binding	21
Discovery	21
Absence of legal aid	22
Class actions	22
Non-specific pleadings	22
Conclusion	23


3. Legislative changes in England concerning conditional fees	24

Introduction	24
Maintenance and champerty	24
Criminal Law Act 1967	25
Solicitors Act 1974	27
The Royal Commission on Legal Services 1979	27
Green Paper on Contingency Fees 1989	27
Risk of conflict of interest	28
The United States experience	28
Access to justice	29
Allowing the consumer to choose	29
Options set out in the 1989 Green Paper	29
Responses to the 1989 Green Paper	30
Courts and Legal Services Act 1990	30
Conditional Fee Agreements Regulations 1995 and Conditional Fee Agreements Order 1995	31
After-the-event insurance	33
Counsel’s fees	36
Evaluation of conditional fee agreements in 1997	36
Further reforms 1998 – 2000	37
Consultation Paper on “Access to Justice with Conditional Fees” 1998	38
Conditional Fee Agreements Order 1998	38
Access to Justice Act 1999	39
The Conditional Fee Agreements Regulations 2000	41
General requirements	42
Conditional fee agreements with a success fee	42
Information which must be given to a client before making a conditional fee agreement	43
Collective Conditional Fee Agreements Regulations 2000	44
The Civil Procedure (Amendment No 4) Rules 2003 – Fixed costs	45
Conditional Fee Agreements (Miscellaneous Amendments) Regulations 2003	46
Possible further legislative changes	47
DCA Consultation Paper June 2003	47
Conditional Fee Agreements Forum 2003	48
DCA Consultation Paper June 2004	48
The use of conditional fee agreements in England	52
The future of conditional fee agreements	53


4. Problems and litigation in England	55

Introduction	55
Litigation on the recoverability of success fees and insurance premiums	55
Callery v Gray	55
The jurisdiction issue	56
The prematurity issue	56
Court of Appeal decision	57
Government policy	57
Policy and practical considerations	57
The House of Lords decision	59
Reasonableness of the success fee	61
Court of Appeal decision	61
Two-stage success fee	62
House of Lords decision	62
Reasonableness of the ATE premium	64
Court of Appeal decision	64
House of Lords decision	64
Comments on Callery v Gray	65
Halloran v Delaney – from 20% success fee to 5%	65
Comments on Halloran v Delaney	66
The effect of BTE insurance on the recoverability of ATE premiums	67
Sarwar v Alam – 2001	67
Sarwar v Alam – 2003	69
Re Claims Direct Test Cases	70
The position of event-triggered fees at common law and problems with the costs indemnity rule	71
British Waterways Board v Norman	71
The indemnity rule	72
Public policy	72
Aratra Potato Co Ltd v Taylor Joynson Garrett	74
Thai Trading Co v Taylor	74
Legislation and rules	75
Differentiating maintenance and champerty	76
Changing public policy	77
Absence of implied contract as to costs	78
Conclusion	79
Bevan Ashford v Yeandle Ltd	79
Post Thai Trading Co and Bevan Ashford decisions	80
Cases not following Thai Trading Co	80
Hughes v Kingston-upon-Hull City Council	80
Awwad v Geraghty & Co	81
Claims intermediaries	82
English v Clipson	82
The scope of application of section 58 of the Court and Legal Services Act 1990	85
R (Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No 8)	85
Hollins v Russell	86
Spencer v Wood	87
King v Telegraph Group Ltd	88
Atack v Lee and Ellerton v Harris	89
Summary of main issues	90


5. Event-triggered fees in other jurisdictions	93

Introduction	93
Australian jurisdictions	93
Australian Law Reform Commission, Managing Justice – A review of the federal civil justice system 2000	93
Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd	96
Smits v Roach	97
The Attorney General’s Department – The Justice Statement 1995	98
The Law Institute of Victoria, Funding Litigation: The Contingency Fee Option, July 1989	98
Legal Practice Act 1996, Victoria	99
Comments of the Law Institute of Victoria	101
Legal Profession Act 1987, New South Wales	101
Legal expenses insurance in Australia	103
Group insurance	104
Canadian jurisdictions	105
Ontario	106
Joint Committee’s proposed regulatory scheme	106
Ireland	108
Mainland China	108
Northern Ireland	108
Scotland	109
South Africa	109


6. Arguments for and against conditional fees and related issues	113

Introduction	113
Lord Chancellor’s Department’s Green Paper on Contingency Fees 1989	113
South African Law Commission’s Report on Speculative and Contingency Fees 1996	116
Conclusions of the SALC	118
Contingency or conditional fees	119
Criticisms of the American contingency fee	119
Frivolous litigation	119
Conflict of interest	120
Excessive fees	121
Advantages of conditional fees	122
Frivolous litigation	122
Conflict of interest	122
Excessive fees	122
The English Court of Appeal in Awwad v Geraghty & Co – pros and cons of conditional normal fee agreements	123
Other criticisms of conditional fee agreements	125
Other issues to be considered	126
Counsel	126
Insurance	129
Intermediaries	129
Regulation of claims intermediaries in England	131
Mode of operation of claims intermediaries in Hong Kong	131
Relevant regulations and rules	132
Pros and cons	133
The impact of allowing legal practitioners to charge event-triggered fees on claims intermediaries	134
The Hong Kong situation	134
Access to the courts	134
Why people are unrepresented	135
Impact of unrepresented litigants	135
Additional arguments for and against event-triggered fees in Hong Kong	137
Issues for consideration	139


7. Proposals for reform	140

Should we allow conditional fees?	140
Types of cases for conditional fee agreements	141
Recoverability of insurance premium and success fee from the unsuccessful party	142
Methods/criteria for fixing the success fee	144
Capping the success fee	146
Safeguards to protect defendants from nuisance claims	147
Simple conditional fee agreements	148
Policing the legal profession	149
Collective conditional fee agreements	150
Types of event-triggered fees to be validated	151
Insurance	153
Expansion of SLAS	154
Setting up of a privately-run contingency legal aid fund	154
Observations	157
Conclusion	157


8. Summary of recommendations	158