Judicial acknowledgement of moral hazard under contingency fee agreements

In the section above it was explained that there may be financial incentives on plaintiff lawyers to handle cases in ways which may not be in the best interests of their clients. Courts have acknowledged the conflict of interest that may exist between a lawyer who may prefer to have a personal injury case settled, and a client who wants the case to proceed to trial:

 

The solicitors of course had other reasons for wanting the client to settle her case by accepting the outstanding offer. They had already paid out substantial sums for disbursements in trial preparation. If the case were to go to trial, further substantial disbursements would have been required. The solicitors knew that the client would not be able to pay those disbursements in advance, and they knew that the client had given unequivocal instructions that she did not wish to settle, but wanted her day in court. The solicitors also knew that if the case went to trial there was a risk that the recovery might be something less than had already been offered, and that their recovery for fees would be reduced accordingly.

(Morrison Voss v. Smith, 2007 BCCA 296 at para. 51).

 

It is not only in circumstances that the client wants to proceed to trial and the lawyer does not that there will be a conflict, and courts have indicated that there is an element of conflict in all contingency fee agreements:

 

There is a recognized element of conflict of interest in any contingency fee agreement.

(Oliver v. Ellison, 1996 CanLII 1606 at para. 30 (BCCA)).

 

Similarly:

 

Under a contingent fee agreement, the lawyer and the client enter a type of joint venture where they will either share in the fruits of the action or suffer the defeat together. Normally, I would expect that it is not a joint venture of equals, in that the law firm, generally, has a more thorough understanding of the law, the legal process and the potential outcomes of litigation than the client.

 

But this imbalance is tempered by the fact that the relationship is a fiduciary one; the law firm owes a number of duties to their client, not the least of which is the duty to act only in their client’s best interests.

 

(Anderson v. Elliott, 1998 CanLII 2129 at para. 67 – 68 (BCSC)

 

In the above passage from Anderson v. Elliott the court essentially acknowledges that as between the lawyer and the client the lawyer has more power but is obligated by the duty of loyalty to not abuse that power. This emphasizes the importance of trust in the lawyer-client relationship, especially in the contingency fee context.

 

However, it is not only lawyers who have incentives to act improperly under contingency fee agreements; there are also ways in which the client’s behaviour can harm the lawyer. For example, in the hope that it never gets found out a client may not tell the lawyer information which reduces the value of the claim, but that information may ultimately be uncovered resulting in the amount recovered being substantially reduced, to the detriment of the lawyer who receives a substantially reduced fee. Consider, for example, that due to her own carelessness the plaintiff fell at home and further injured the part of her body injured in a previous accident she is advancing a claim for. If she decided to not tell her lawyer for fear it would reduce the value of her claim, but the fall was subsequently found out through the evidence of the plaintiff’s now disgruntled ex-husband who was living with the plaintiff at the time of the fall, that could ruin the case and result in the lawyer being paid little or no fee for a substantial amount of work. Instead, the plaintiff should tell the lawyer about the subsequent fall and discuss how it affects the claim so that the parties may act accordingly.

 

Clients may also have incentives to act against the interests of the lawyer that that do not relate to the merits of the case. For example, there may be a temptation for a client to discharge a solicitor on the verge of receiving a large settlement in an attempt to take the full settlement without paying any fee to the lawyer:

 

If, on the other hand, a client, who sees success coming up, discharges his solicitor on the eve of the trial, the lack of any risk remaining in the contingency will be of very great significance.

(McQuarrie Hunter v. Foote, 1982 CanLII 489 at para. 19 (BCCA)).

 

Although, as indicated by the above, contingency free agreement may involve conflicts of interest and ethical grey areas, they are allowed because of the social utility they provide; see below.

 

 

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