'No win, no fee' contingency fees by the back door?

US-style no win-no fee contingency fees may be let into European countries by the back door. Political agreement has been reached on a new Directive aimed at improving access to justice in cross border civil and commercial disputes by establishing minimum common rules in relation to legal aid for such disputes. The text is expected to be formally adopted by all Member States, with the exception of Denmark, at the end of November 2002. Because some Member States, in particular the UK and Sweden, have found legal aid to be costly and have adopted other alternative mechanisms (for example the UK allows capped, regulated conditional fees which provide for a percentage uplift to fees charged), the Directive allows for Member States to provide effective access to other mechanisms that cover the cost of proceedings as an alternative to legal aid. Some countries may decide to provide such a mechanism in the form of contingency fees. In the US, contingency fees allow lawyers to take a percentage of any damages awarded as their payment if their client wins the case. Left relatively unregulated, as the system has been in the US, there is potential for lawyers to receive a large percentage of such damages and therefore for damages awards to be inflated.

The Basic Principle

The scope of this Directive is, in itself, not particularly contentious. The basic principle is that a cross border litigant shall be treated in the same way as if he resided in the Member State of the forum in which the case is to be heard if he meets the conditions provided for by the Directive. The same applies to third-country nationals who habitually and lawfully reside in a Member State. The Member State with jurisdiction shall therefore assume responsibility for provision of legal aid.

It is clear that there are in fact very significant differences between the Member States in their practical and financial provision for legal aid. The Commission would have liked, of course, to have moved straight into full harmonisation of legal aid rules, however, this would have been objected to by a number of Member States whose existing practical and financial arrangements for provision of legal aid have been criticised as being inadequate, indeed some do not provide state funding for legal advice or litigation at all. As a result, the Commission, in keeping with the principles of subsidiarity and proportionality, have limited the extent of their legislation to cross-border disputes. This fairly limited legislation can then be used as a foundation for building towards more extensive harmonisation in the future.

Scope of Legal Aid

The Directive does not specifically define the meaning of “legal aid” and so, as the concept means a different thing in each Member State, the effective meaning appears to be very broad. More relevant in defining legal aid, therefore, is what is excluded.

Most interestingly, under Article 5, legal aid “does not need to be granted to applicants insofar as they enjoy, in the instant case, effective access to other mechanisms that cover the cost of proceedings…”. Effectively “other mechanisms” could cover a whole range of funding alternatives, far broader than contingency style fee agreements. In the UK, contingency fee agreements are not permitted except in the form of highly regulated, conditional fee arrangements. The mechanism permitted by the UK regulations allows that a litigant does not pay his own lawyer’s fee if he loses his case, but he must pay his lawyer’s fee along with an uplift (a percentage of the fee, as opposed to a percentage of damages awarded) should he win. Not all Member States recognise this type of legal funding, however, so this section of the Directive may encourage lawyers in these countries to experiment in a relatively unregulated sphere of funding. The fear is that there could potentially arise a situation similar to that in the US where contingency fees have proliferated without suitable regulation.

The other main situation where an individual may be excluded from legal aid is where specific proceedings are designed so as to enable litigants to make their case in person, unless the court or tribunal decides otherwise due to the inequality of the parties or the complexity of the case.

There are also situations in which legal aid may only be provided for part of the funding of a case. In certain circumstances Member States may request that reasonable contributions are made by recipients towards their legal costs, or that they refund legal aid that they have already received if their financial position substantially improves or if they have provided inaccurate information to obtain legal aid.

Conditions for Receipt of Legal Aid

Chapter III of the Directive establishes the fundamental criteria that a litigant from a Member State must show to be eligible for legal aid in a cross-border dispute. The two main criteria are (a) the financial resources of the potential litigant and (b) the substance of the dispute.

• Legal aid need only be granted to persons who are partly or totally unable to meet the costs of proceedings as a result of their financial situation. It is the obligation of the competent authority in the Member State in which the case is brought to assess the economic situation of the applicant. The Member States may also define their own thresholds above which legal aid applicants are presumed to be able to bear the costs associated with their dispute. Such thresholds are optional, but if they are imposed, they must be defined in the light of “various objective factors such as income, capital or the family situation, including an assessment of the resources of persons who are financially dependant on the applicant.” In addition, in view of the different levels of cost of living between Member States, the thresholds will not be allowed to prevent legal aid applicants who are above the thresholds from being granted legal aid if they prove that they are unable to pay the cost of the proceedings as a result of differences in the cost of living between their country of domicile and the country of jurisdiction.
• In order to be eligible for legal aid an applicant must not only show financial necessity, but also that their case merits such support. Any action which appears to be manifestly unfounded may be rejected. Even if a person is legally aided for pre-litigation advice, a Member State can withdraw that funding in relation to continuing the case on grounds related to the merits of the case. When deciding on the merits of a case certain matters must be considered; the importance of the individual case to the applicant; the nature of the case where the applicant is claiming damage to his or her reputation but has not suffered financial or material loss; and when the application concerns a claim arising out of the applicant’s employment.

Which Costs Are Covered By Legal Aid

Under Article 3 of the Directive Member States shall be obliged to grant legal aid to natural persons involved in a dispute in their jurisdiction. Such assistance should cover (a) pre-litigation advice with a view to reaching a settlement prior to bringing legal proceedings and (b) legal assistance and representation in court and exemption from the cost of proceedings and the fees of persons mandated by the court to perform acts during the proceedings.

Costs related directly to the cross-border nature of the dispute, such as interpretation or translation fees and in some circumstances travel costs, are to be included in eligible costs where legal aid is granted. In addition, in Member States in which a losing party is liable for the costs of the opposing party, legal aid shall cover such costs where the legally aided person loses.

Finally, if legal aid is granted, for as long as the financial conditions and merit test for receiving legal aid continue to be fulfilled, it must cover the entire proceedings, including the expense of making or defending any appeal or enforcing a judgment of the court with jurisdiction.

Procedure

The applicant may submit an application either to the authorities of the Member State in which he habitually resides (transmitting authority) or to the competent authority of the Member State in which the court is sitting or where the decision is to be enforced (receiving authority). Where the application is made to the transmitting authority, such authority shall transmit the application within 15 days of receipt to the receiving authority, without charge and without need for legalisation of the documents.

The transmitting authorities may refuse to transfer an application if it is manifestly unfounded or is outside the scope of the Directive, such as, for example, if the dispute is not a civil or commercial matter.

Applications and their supporting documents must be translated into the official language or one of the languages of the Member State of the receiving authority, or into another language indicated by the Member State. Member States shall provide the Commission with a list of relevant authorities and acceptable languages. The transmitting authority shall ensure that the applicant provides all the documents necessary to his application and shall assist in and cover the costs of translation of these documents. The transmitting authority may charge for translation of the application and supporting documents if the application for legal aid is rejected by the receiving authority.

The national authorities responsible for ruling on the legal aid application must ensure that the applicant is kept informed of the progress of the application and shall give reasons where an application is fully or partially rejected. Some sort of appeal process must be established by each Member State.

A standard form of application is to be introduced by 30 November 2004 at the latest and a standard form for the transmission of legal aid applications shall be established by 30 May 2003.

Conclusion

The lack of unanimity in the European Community in relation to provision of legal aid presented the Commission with a challenge. The result is a Directive that goes only a short way to harmonising European access to justice, but presents us with a bridgehead from which further legislation shall follow. In the meantime, the legal profession in some Member States may seek to utilise alternatives to legal aid, such as contingency fee arrangements, as permitted by Article 5 of the Directive.

For further information, please contact Chris Hodges by telephone on +44 (0) 20 7367 2738 or by e-mail at [email protected], or Fiona Baldwin by telephone on +44 (0) 20 7367 3614 or by email at [email protected]