The Role of Contingent Loans in Providing Equitable Access to Legal Aid

Abstract

Legal advice is expensive and the while it is highly likely that the pursuit of a claim for compensation or redress through the courts will take a considerable amount of time there is no such certainty around the likely outcome of such a case. Access to capital and appetite for risk, therefore, play a central role in understanding the willingness of individuals to use the courts to resolve disputes. Having outlined the very limited scope of government funded �Legal Aid� in Australia this paper presents survey data on the nature and extent of �unmet demand� for legal services which shows that the cost of legal services is the main reason that a large number of Australians choose not to pursue legal redress for damages they believe they have incurred. The paper then outlines the design of a Legal Expenses Contribution Scheme (LECS), a suggested contingent loan which could be used to fund cases for damages that have been deemed by a panel of lawyers to pass a �merit test� which includes the likelihood of success. The inclusion of an external evaluation panel is likely to reduce the risk of adverse selection and moral hazard in the operation of the scheme. At the conclusion of a case the recipient of the LECS loan satisfies their obligation by either paying to the Commonwealth a percentage of their income over the length of the loan, with payments set at a higher rate for recipients on higher incomes. Recipients would also have the option of repaying the loan immediately in a civil action with an advantageous and sufficient award of damages. Where a matter ends badly for a LECS recipient they would be shielded from extreme poverty or bankruptcy and have the opportunity to rebuild and continue to contribute to the community while repaying their loan.