New South Wales law has historically barred contingency fee arrangements, aligning with the core ethical rule that lawyers must avoid holding a direct financial stake in litigation outcomes for their clients. The prohibition is explicitly codified in section 183 of the Legal Profession Uniform Law (NSW) (LPUL), which defines the scope of permissible billing practices for law firms.
According to Section 183, law firms are prohibited from entering agreements where their fees are calculated based on the amount of any settlement or award. Violating this rule is capable of constituting unsatisfactory professional conduct or professional misconduct on the part of any principal of the law practice or any legal practitioner associate or foreign lawyer associate involved in the contravention.
Contingency Fees vs. No Win-No Fee Arrangements
There is some confusion about contingency fees and ‘no win – no fee’ arrangements. No win – no fee arrangements are legal and generally used where a client has limited finances to pay for legal services, and where a solicitor believes there is a realistic chance of winning the case. In a ‘no win, no fee’ agreement, solicitors agree that a client only needs to pay their legal costs if they ‘win’ the case.
These arrangements allow clients without upfront funds to pursue legal action by eliminating initial costs. However, contingency fees differ as they involve solicitors taking a percentage of the settlement, which is banned in NSW to prevent solicitors from prioritizing profit over client interests or justice.
The key reasons for the prohibition include conflict of interest, ethical obligations, and the risk of excessive fees. A direct financial stake in the outcome may incentivise solicitors to either settle too early or settle without consideration as to whether the settlement terms are beneficial to their client.
Exception in Victoria
While generally banned in Australia, Victoria allows contingency fees for class actions in its Supreme Court since amending the Supreme Court Act 1986 in 2020. This exception has led to an increase in class actions in Victoria.
This has led to many class actions being commenced in this jurisdiction. However, for NSW, the Courts’ reluctance to accept contingency fees was dealt with by the High Court of Australia in the matter of Kain v R&B Investments Pty Ltd.
The Applicants applied to the Federal Court for approval to distribute a notice to group members, stating that if a settlement or judgment results in compensation payable to the group members, the Applicants would ask the Court to make an order that a portion of the compensation be used to remunerate the Applicants’ solicitors.
In 2024, the Full Court of the Federal Court held that the Federal Court had the power to order a CFO in favour of both litigation funders and solicitors. This decision was appealed to the High Court, which held that the Federal Court Act of Australia 1976 (Cth) (FCA) could not properly be thought “just” if seeking or giving effect to the order would involve a contravention of the Legal Profession Uniform Law.
The High Court further held that the making of the solicitor’s CFO would be “illicit”, as it had the effect of contravening a state law regulating the legal profession. While the prohibition on contingency fees continues to attract debate, for now, the position in NSW remains clear, that contingency fee arrangements are prohibited in NSW. Solicitors must comply with section 183 of the LPUL.
A solicitor in the Professional Support Unit (PSU) of the Law Society of NSW, Nick Satouris, has been a solicitor for 39 years and provides free and confidential guidance to solicitors in NSW. The PSU can be contacted at [email protected] or on (02) 9926 0116.
The High Court’s decision in Kain v R&B Investments Pty Ltd can be found on the High Court of Australia website, which provides judgment summaries and other information on court decisions.
The Legal Profession Uniform Law (LPUL) is available on the NSW Legislation website, which provides access to legislation and other legal information in NSW.
Seeking Further Information
For any further information on contingency fees, solicitors can contact the costs team of the Professional Support Unit at the Law Society of NSW at [email protected] or on (02) 9926 0116.
