Litigation with Legal Aid versus Litigation with Contingent/Conditional Fees

See for example Stephen (1998, 2001) and Goriely et al. (1997) on Scotland, and George (2006) on the US.

See Bevan (1996) and Bevan et al. (1994) for theoretical analyses based on a principal-agent model and Gray et al. (1999) for an empirical analysis.

We will not emphasize all systems of litigation financing, but in order to be complete, one should mention the existence of legal expenses insurance (LEI) and third-party financing. LEI is a contract in which a private insurer covers, in exchange for a premium, a policyholder’s legal expenses in certain categories of cases, whereas a third-party lender will finance all or part of a plaintiff’s legal fees in exchange for a share of any judgment in the plaintiff’s favor (Lyon, 2010; De Morpurgo, 2011). For analyses about LEI and third-party financing, see e.g. Heyes et al. (2004) and Abrams and Chen (2013), respectively.

This system was first introduced in England and Wales in 1990 by the Courts and Legal Services Act and became operational 5 years later.

Indeed, currently, many countries still do not allow lawyers to be paid in accordance with their results, since the system of contingent or conditional fees is prohibited. That is the case, notably, for most continental European countries.

Thus, whereas England and Wales devote relatively more resources in terms of legal aid to criminal cases, the Netherlands devotes more resources to non-criminal cases. Other countries, such as France, New Zealand and Canada, devote half of resources to each type of case (Bowles and Perry, 2009).

In our framework, only the victim/plaintiff may be entitled to legal aid because we mainly are investigating the question of access to justice: we will then be especially interested in the incentives to sue. The defendant does not have to access justice, since if he is sued, going to court will not be his choice. Moreover, this makes a comparison between contingent and conditional fees easier, since in these systems the fees transfer only applies to plaintiffs.

We focus on the incentives created by the contingent/conditional fees and legal aid systems. A crucial difference is that the cost of judicial actions is transferred from the public legal aid system to a private market for legal services (Rickman et al., 1999).

See infra for details on different legal aid systems, i.e. fixed versus proportional legal aid.

The European Commission for the Efficiency of Justice (CEPEJ) provides a detailed description of all existing systems in the EU as well as information about spending devoted to judicial systems.

As an example, in France the monthly resources for a person to be entitled to total legal aid must not exceed 929 euros, with this amount rising to 1,393 euros to receive partial legal aid (Tasca, 2011).

For example, in reality, this means that the litigant receives free pre-trial legal advice, but then decides whether to hire a lawyer in the case he wants to sue.

We assume for simplicity and without loss of generality that plaintiff’s assets are sufficient to cover the trial costs fee schedules. As cV is exogenous, this hypothesis allows our further analysis to focus on endogenous costs, i.e. the level of expenses chosen by the plaintiff.

We assume here without loss of generality that the level of expenses is decided by the lawyer.

Since g(LF)>0 and dLFdF<0.

Stating the social cost SCi=xi+πi(xi)Lˉ+(cI+cV)πi(xi)(1−G(Li)) with i={WC,F,P} and Lˉ the expected loss, then we have xF/P>xWC, πF/P<πWC and 1−G(LWC)<1−G(LF/P).

Of course, one could also find values of parameters illustrating the opposite case. But our point is to show a situation where this somewhat counter-intuitive effect arises.

This function is used by Emons and Garoupa (2006) to compare contingent and conditional fees.