Contingent Fees & Litigation: Factors & Impact

• An experiment in the Netherlands started in 2014, allowing lawyers to provide services on a no-win, no-fee basis for personal injury cases
• Two conditional fee variants were introduced in addition to the standard hourly fee
• Examined is the implication of this experiment and the impact on access to justice, using insights from Law & Economics to present a simulation model
• Simulation model suggests that the experiment may not be successful

Introduction

• Until recently in the Netherlands, lawyers couldn't offer services on a no-win, no-fee basis, or have fees that varied with case outcomes
• Restrictions were traditionally supported by professional ethics, which stated that a lawyer should remain independent, impartial, and free from financial interest in the outcome
• Conditional and contingent fee arrangements are already present in countries like the UK and US, making its absence in the Netherlands questionable
• Restrictions apply to members of the Dutch Bar Association who have a monopoly over court advocacy
• Legal assistance in personal injury cases is often provided by claim agents and non-legal professionals
• Claim agents have gained market share by offering no-win, no-fee arrangements outside the Bar rules, leading lawyers to complain about competitive disadvantage
• Dutch Competition Authority agreed that regulations against no-win, no-fee arrangements violate competition law
• 2004: The Dutch Bar Association's proposal for a no-win, no-fee experiment was blocked by the Minister of Justice, citing traditional arguments
• Government budget issues have since led to increased court fees and cuts to Legal Aid
• January 1, 2014: A five-year conditional fees experiment in personal injury cases was launched, with lawyers and claimants able to opt for a no-win, no-fee arrangement
• Under this arrangement, if the case is lost, the claimant pays no fee
• The lawyer is entitled to the normal hourly fee plus a pre-specified mark-up to compensate for risk and costs (either 100% or 150%) if the case is won
• Mark-up depends on who bears the risk of additional costs like medical expertise and court fees
• Claimant's payment is capped at 25% or 35% of the financial result
• What consequences arise from these systems? How does this influence the behaviour of parties involved in a dispute?
• The Dutch experiment has taken place in a setting characterized by continental cost shifting, where the losing party pays for successful party's litigation costs
• Whether no-win, no-fee arrangements improve justice access in the Netherlands is examined
• Model built in this study aims to discover whether conditional fee arrangement is beneficial to claimants and lawyers in comparison to hourly fees
• The key parameters come from conversations with stakeholders in Dutch personal injury litigation.

Literature review

• Contingent fees: Principal funding for personal injury cases in the U.S. with direct/proportionate relationship with fees and damages
• Contingent fees have been studied extensively in Law & Economics literature
• It has been noted that contingent fees create a "complex web of effects because changes influence decisions taken at all stages of litigation “
• Contingent fees tend to enlarge justice access for strong cases with high stakes
• Claimants may be unable to finance hourly fees even when litigation has good prospects of success because capital markets are imperfect
• Risk sharing is increased by contingent fee arrangements if claimants are more risk-averse than lawyers, facilitating an increase in net utility
• Lawyers will filter out cases with lower value claims because bearing part of the risk
• The average quality of the claims filed will be higher under contingent fees
• A lawyer's willingness to take a case provides a strong signal about the quality of a case
• Contingent fee agreements align incentives more effectively by giving the lawyer a shared interest in the claim
• Hourly fee lawyers may be tempted to work more hours on a case than warranted and contingent fee lawyers will put in less effort
• Contingent fees do not create perfect incentive alignment, as the lawyer/client only gets a share of the award, therefore minimising efforts
• Clients usually lack information and knowledge to assess lawyers which gives them considerable control over clients in the settlement process
• There is an important check on contingent fee lawyers, "comes from the incentives created by the long-term need to maintain a profitable portfolio of cases"
• Conditional fee arrangements (CFAs) were made lawful in England & Wales in 1995/extended in 2000 by the Access to Justice Act (abolished Legal Aid)
• Under a conditional fee arrangement, the lawyer receives no fee at all if the case is lost, but gets the hourly fee + mark-up (the success fee) if the case is won
• Under a cost shifting, the unsuccessful claimant is protected from his lawyer's bill but still be subject to the defendant's legal costs
• This is why CFAs are combined with after-the-event (ATE) insurance policies, purchased when the claim is initiated, to cover these costs in return for a premium
• US DBA and English CFA Systems Comparison: American rule of cost allocation
• Contingent fees are more efficient - Conditional fee may solve problem of lawyers working to a minimum, but generates other problems
• Conditional fees result in more legal effort if litigation is determined by the lawyer and not by the client
• Cost allocation rule has no impact on the extent of legal effort under contingent and conditional fees

Dutch experiment, three options

• On 1 January 2014, a five-year experiment with conditional fees in personal injury cases began
• During the experiment, claimants and lawyers may opt for no-win, no-fee instead of the normal hourly fee arrangement
• Two variants of the no-win, no-fee arrangement:
  • Variant 1:
  • The lawyer is entitled to an hourly rate with a mark-up of (at most) 100% if the case is won
  • The lawyer's total invoice cannot exceed 25% of the financial result, which is defined as the sum of the damages and any legal costs that are reimbursed by the defendant as a result of cost shifting
  • A lawyer receives no fee at all if the case is unsuccessful
  • The claimant bears all the specific costs such as medical expertise and court fees. The claimant is responsible for any legal costs that shift from the defendant's side
  • Variant 2:
    • The lawyer pays for all the specific costs such as medical expertise and court fees and for any cost shifting from the defendant's side upon losing the case
    • A lawyer receives no fee at all if the case is unsuccessful
    • Lawyer receives an hourly fee with a mark-up of (at most) 150% if the case is won
    • The lawyers total invoice cannot exceed 35% of said financial result as well as is entitled to any specific costs that are reimbursed by the defendant as a result of cost shifting
• Claimants have three options to choose from, as long as they can find a lawyer

Set-up of the model

• Explored are the implications of the conditional fee experiment to justice access using a simple theoretical model of the process of handling a personal injury dispute
• To manage the complexity of computer simulation, the model is supposed to be an abstract representation of the dispute handling process that focuses key elements
• The reflections are based assumptions the model make as to the real world circumstances, also how they affect the results

General structure

• Model Structure:
  • Person A allegedly injurer caused an accident causing personal injury in person B, the victim
  • If the victim sues the injurer, the victim becomes the claimant and the injurer becomes the defendant
  • The claimant consults a lawyer for advice, leading to 2
  • Whether lawyer in the case is willing to take it on
  • The claimant verifies legal action is positive
  • The defendant can credibly offer this via credible civil proceedings will be pursued
  • The defendant makes an offer to settle to avoid bringing the case to court immediately
  • The matter is then for claimant B, or his representative, to decide whether the offer made by the defendant is acceptable, leading to court if so
• The model assumes claimant and defendant are risk neutral, beginning with the supposition the claimant has enough funds for legal costs
• It's assumed the settlement decision is controlled by the claimant, though impact of contingency will be handled later, the liquidity constraint is also discussed

Hourly fees

• Claimaint B wants defendant A to clarify relationships of this model. The model shows a backwards induction that follows the parties' first stage for the last one in the said process.

Settlement or Court proceedings?

• The final step is for B to choose between A's settlement offer and court proceedings to see B's net benefit of the litigation.
  • the lawyer sends an invoice for all hours, h, at the current remuneration rate,w, totaling wh
  • B's costs also encompass any specific costs for medical expertise (s) and court fees
  • B's subjective probability of success in court is PB with the continental rule saying; A has to fully compensate harm, and B must pay the incurred legal costs
  • the expected net benefit of litigation is then: LB = - (wh + s) + PB(H + wh + s) - (1-PB)t = PBH(H + wh + s + t) If B does not accept the settlement offer where the settlement brings the same results as court proceedings, then: Z = LB + a(ah + s) = PBH - (1-PB) x (wh+s+t) + x(wh + s) as the offer must amount to this amount, otherwise the offer goes to court with no more offer.

Court proceedings or settlement offer

• Step deals with the defendant A and wait for process
  • Expected total costs of litigation is: LA=1 - PA(H+wh+s+t)

Credible treat

• Step deals to decide if it is credible for civil proceedings
  • = = PB > (wh + s + t)/(H + wh + s + t.)

Finding a Lawyer

• Lawyers is said to be one as long as it gives current remuneration rate to whatever is spent, assuming that the remuneration (w) covers the opportunity
• It is a 3 step process

Conditional fee arrangement

• First variant of conditional fee experiment: lawyer receives no amount if lost, and if success, payment is not to exceed 25 per cent of the financial result

Conditional fee: variant 4

• Process is to choose court or acceptance of offer
• B will be interested in acceptance by amount, leading to the total net process PB > (s + t)/(H + wh + s + t –

Finding a lawyer

• Steps to decide which the client can proceed with to court

Set-up

• Models show simple processes in litigation based on choice of lawyer
• Can the costs of the lawyer be covered.

General fees

• Lawyers costs related to level of ham and settlement in the form, as well as of the specific settlement
• .25 of level harm.

Lawyer remuneration

• Lawyer reminuation equals hours due to the various causes

Expected threat of damages

• Relates to amount of harm H

Conditional fees: variant 2

• Deals with additional costs and cases for the payment of financial compensation

Compensation rates

• Goes up as claimant is success with the harm factor playing a role. This is a win, win by the claimaint.

Simulations

• Found from that lawyer is key in any condition of fees.
• Lawyer with know how, the chance of success is certain

This content explores how contingent fees impact litigation, particularly concerning access to justice. It investigates the conditions under which these fees are most effective in improving access, especially when capital markets are flawed. A study simulates conditional fee arrangements within the Dutch legal system using real-world data.