Thursday, September 22, 2005

Will Conditional Fees Lead to More Frivolous Lawsuits?

"Conditional fees are a form of "no-win, no fee" arrangement. If the case is unsuccessful, the lawyer will charge no fees. In the event of success, the lawyer charges his normal fees plus a percentage "uplift" on the normal fees.

Conditional fees are different from the American form of contingency fee, where the lawyer's fee is calculated as a percentage of the amount of damages awarded by the court. At present, conditional fees, like other forms of "no win, no fee" arrangements, are unlawful for civil legal proceedings involving the institution of legal proceedings. The restriction has its origins in the ancient common law crime and tort of champerty and maintenance."

The above is from a consultation paper just released a few days ago here in Hong Kong, read more here.

Some commentators here have already voiced their concern about the rise of frivolous lawsuits if current ban on such payment scheme is lifted. I am no expert in this area, but I do have two observations to make regarding this legal service pricing scheme.

1) The current payment arrangement between lawyers and their clients here in Hong Kong might not be the most efficient one from an economic standpoint. Restriction on conditional fee arrangement artificially limits contractual forms that are available to parties involved in transactions. That inevitably will force some legal cases that would best be handled through such a pricing scheme to be handled instead by other pricing/contractual schemes that are less suitable. In other words, limited choice on payment arrangments between lawyers and their clients raises the cost of operating the legal system. (Note that I am only drawing out the implications of the prohibition on conditional fees here. There may be a very good reason why such a ban is introduced in the first place, but that is not my concern)

2) Though conditional fees arrangement as described above is not exactly like the contingency fee scheme used in the US, incentives generated by the two schemes are quite similar. And the US experience suggests, contrary to the dire consequences predicted by some pundits here, that "contingent-fee lawyers reduce the number of frivolous cases!" This is from a study conducted by my former classmate at George Mason, Alex Tabarrock, now a professor at the same university. Read on.

1 comment:

Sea Bottom Coconut said...

Edward Chan is an economist. Sadly, he evidently does not believe in supply and demand. The Law Reform Committee that he leads wants to introduce to Hong Kong the American system of contingency as a way to bring down legal cost.

The remedy clearly lies in increasing the supply of lawyers in Hong Kong. On a per capita basis, we have only one half of the number of solicitors and barristers in UK. The QC gap is much bigger: They have nearly 1,200 QC's over there, and we have only 64! There are only a handful (literally) of bi-lingual QC's in Hong Kong. Is it any wonder that they would charge sky-high fees!

If Professor Chan genuinely believes in bringing down legal cost, then why not try a little economics by lifting the barrier to practice law in Hong Kong? Surely, not a few bi-lingual Malaysan and Singaporean QC's would come -- if not out of a love for Hong Kong, then at least for the sky-high fees that we pay.