The new contracting scheme, which cut the number of firms allowed to offer civil legal aid by more than half to just 5000, is having a "profound and immediate effect" on law firms in England and Wales, Richard Gordon QC told the court.
Organisations which refer people to solicitors, he said, were having "massive difficulty" in finding lawyers to deal with cases, thanks to the new regime.
Gordon is acting for two-partner London firm, Macintosh Duncan, in its test challenge of the Government's new civil contracting scheme. The case is being funded by the Law Society.
The case was yesterday adjourned for two weeks by Lords Justices Roch and Brooke, sitting with Mr Justice Gage, to allow the Legal Aid Board and Lord Chancellor's Department to consider new arguments recently submitted by the opposition.
The Lord Chancellor is also understood to want to instruct separate counsel to act for him in the case