Another change to the way solicitors carry on their business maybe on the horizon with the Law Reform Commission's recent recommendation that solicitors be allowed to enter into conditional fee arrangements with their clients. The corollary of a conditional fee system, is the possible creation of a market for After The Event insurance. But will this be an opportunity that insurers writing business in Hong Kong will want to take?
On 14th September 2005, the Law Reform Commission recommended that the current ban on Hong Kong solicitors entering into conditional fee arrangements with their clients be lifted. A conditional fee arrangement is one whereby payment of the solicitor's fees is conditional on the plaintiff obtaining compensation. If the plaintiff obtains compensation, the solicitor will receive his fees along with an uplift on those fees – a so-called 'success fee'; if the plaintiff obtains nothing by way of compensation, however, then the solicitor gets paid nothing.
The proposal itself borrows heavily from the English experience, where conditional fees were introduced some years ago. As in England, the driving force behind the recommendation is the need to widen access to justice for those who presently cannot afford it, as demonstrated by the astonishing statistic of 42% of civil trials in the Hong Kong High Court in 2004 in which at least one of the parties went without any sort of legal representation. In addition, as in England, the Law Commission's proposal recommends that conditional fees (an arrangement in which a solicitor gets an uplift on his fees in the event of success) be introduced in favour of the American contingency fees (where the successful lawyer obtains a percentage of the damages) or the Scottish speculative fee (where the solicitor, in the event of success, is only entitled to charge his normal fee).
After the Event insurance – a potential opportunity?
Hong Kong insurers will be interested to know that the Law Commission, in making its recommendation, emphasized that a conditional fee regime can only work effectively if After The Event (ATE) insurance is available in the region. ATE insurance is taken out by the plaintiff who funds his litigation by a conditional fee arrangement; it covers the contingency of the litigant losing his case and becoming liable to pay his opponent's costs. In a market that is already burgeoning with capacity, this may be a business opportunity that insurers would welcome, if the price is right.
Unlike in England and Wales, however, the Law Commission felt that success fees and ATE insurance premia should not be recoverable from defeated defendants, something which will no doubt provide some comfort to the insurance industry in Hong Kong that usually finds itself having to defend actions brought against their insureds. The Law Commission's reluctance to impose these increased costs on unsuccessful defendants, arises from the fact that ATE insurance premia and success fee rates are agreed between the plaintiff and the ATE insurance provider and the plaintiff's solicitors respectively. If these amounts were ultimately to be paid by the defendant, therefore, there would be no financial incentive on the part of the plaintiff, his solicitor or the insurance company to keep the pricing low.
If not ATE, then what?
The authors of the Law Commission's paper have raised doubts about whether ATE insurance will become available in Hong Kong at affordable rates. As a possible alternative to ATE insurance, therefore, a peculiar hybrid called a "Contingency Legal Aid Fund" (CLAF) has been suggested.
The CLAF would be a self-funding statutory body that would brief out cases to private solicitors, finance the litigation, and pay the opponent's legal costs should the litigation prove to be unsuccessful.
The way in which the CLAF would fund itself is as follows. The CLAF would enter into a contingency fee arrangement with plaintiffs it supports, whereby it would take a percentage of any compensation recovered by the plaintiff (in return for finding the plaintiff a solicitor and paying any costs the plaintiff becomes liable to pay if he/she loses his case). The CLAF would then enter into a conditional fee arrangement with the solicitors it engages on behalf of the plaintiff, (thereby paying the solicitors no fee if they lose the case, or their fees plus a success fee if they win). Accordingly, in the event that a plaintiff loses a case and became exposed to paying his/her opponent's costs, CLAF would meet this liability from the fund it would have built up from the percentage of damages it would have received from the successful plaintiffs it supported.
Applicants to the CLAF would not be means-tested (unlike under the current Legal Aid Scheme, which would continue along side the CLAF), but their cases
would be "merits-tested" for suitability for CLAF funding.
Concluding remarks
Whether the CLAF route or the ATE insurance route are the way forward, very much depends on the Hong Kong insurance industry's ability to provide ATE insurance at affordable rates. ATE insurance would appear to be the firm preference of the Law Commission, with the CLAF idea a clear fall back if insurers don't step up to the mark. The ball, as they say, will be in the insurance industry's court.
