Contingency Fee Agreements: Examples & Key Points to Consider
What is a Contingent Fee Agreement?
When a lawyer agrees to represent an injured person or a victim of some other wrongdoing, the standard arrangement is for the client to pay the attorney a fee at the end of the case based on a percentage of the recovery. If the case is lost, the client pays nothing. No matter what happens, the client will pay the attorney something for the work done. This is the model for 98% of the lawyers in the United States and is the arrangement most familiar to the general public.
The word "contingency" means "depending upon." A contingency fee agreement, therefore, depends upon success. This is a very different arrangement from the one most of us have with car repair or home repair businesses. If I pay a mechanic $500 to fix my car , that arrangement does not depend on the success of the repair. In contingent fee agreements, however, "success" is an ambiguous term. If the case settles, is that success? If the party I am suing loses at trial, does that mean I have been successful? If I lose at trial but prevail on appeal, does that mean I was right and so should recover a fee?
Depending on the terms of the agreement and the case, the answers to these questions vary. In most cases, only a plaintiff will be able to afford to hire a contingency fee attorney. If I defend a lawsuit, I can’t afford a lawyer who will only accept my case if and when I pay at the end of the case. Hence, the most common situation involves plaintiffs and contingent fee lawyers.
How Does a Contingency Fee Work?
Most commonly, contingency fees are used to pay lawyers who represent people seeking compensation for injuries or other damages. Typically, the fees are paid in personal injury lawsuits and workers’ compensation cases. Contingency fees are less commonly used in other personal matters because, as a general rule, lawyers don’t work on a contingency basis to recover damages owed by relatives or friends, or for damages owed by or to an insurance company or corporation.
If the plaintiff wins the lawsuit, the lawyer’s contingency fee is a percentage of the court-awarded damages — an amount between 25% and 40%. To illustrate: if a plaintiff wins $50,000 in damages and has a 30% contingency fee agreement with his or her lawyer, the lawyer would retain $15,000.
If the plaintiff loses the lawsuit, the plaintiff doesn’t have to pay the lawyer. But this can be a double-edged sword: because it’s risky to take a case on contingency, lawyers are often reluctant to take frivolous cases, and unlikely to invest much time in a case when the chance of success is too low. This could mean that the plaintiff or the case doesn’t get fully investigated or developed.
Contingency fees are generally based on the amount of damages awarded, as mentioned above. However, in medical malpractice cases, contigency fees are capped by the state, though the specifics vary from state to state. In non-medical malpractice cases, there is no cap like this, but many judges allow plaintiffs to request low contingency fee caps if they’re convinced the request is reasonable.
When to Use a Contingency Fee Agreement
Although hourly fee agreements continue to dominate the practice of law, in some cases, a contingency fee agreement may be desirable for both the client and the attorney. For the client, a contingency fee arrangement can keep the costs of litigation under control. For an attorney, a contingent fee agreement is an opportunity to get paid a fair fee for attempting to win a case without requiring the client to write a check, but only after the result has been achieved. Other factors may also weigh heavily in favor of a contingency fee agreement. Sometimes, the outcome of a case is very uncertain, and without a contingency fee agreement, the client would be hesitant to hire an attorney because there is virtually no chance that he or she would recover any money. In some cases, the attorney may decide that investing a considerable amount of time and money in a case is worthwhile, even if the probability of winning is quite low. Under those circumstances, using a contingency fee agreement is sensible.
For the right case, a contingency fee agreement is a great tool for both the client and the attorney. But what types of cases may merit a contingency fee agreement? Here are some examples:
Contingency fee agreements are contracts, and some clients and attorneys may have the impression that using a contingency fee agreement will make the case more contentious, or perhaps more likely to fail. This is simply not true. Contingency fee agreements are perfectly acceptable means of financing a lawsuit; and in many respects, they are a win-win proposition. Contingency fee agreements can help clients and increase the probability that clients can pursue lawsuits they might not otherwise have the time or financial wherewithal to pursue.
Contingent Fee Agreement Example
The Client hereby retains the Law Firm to represent Client in the following legal matter: (Description of Legal Matter). The Law Firm and Client hereby agree as follows:
- The Law Firm will act as Client’s attorney and Client’s case will be handled under the terms of this Contingent Fee Agreement. The Law Firm will take reasonable measures necessary to properly advise and protect Client’s interests with utmost diligence.
- Contingent Fees. Client agrees to retain the services of the Law Firm on the terms set forth in this Contingent Fee Agreement, and in return for the service to be provided by the Law Firm, Client agrees to pay the Law Firm, and only the Law Firm, a legal fee equivalent to Twenty-five Percent (25%) of the net amount recovered, if any, whether by way of settlement or judgment. A net amount is defined as the total of any and all proceeds obtained through recovery of damages, costs and fees, from the settlement of or judgment entered in favor of Client, less any costs or expenses reasonably incurred to obtain same. The Law Firm will advance any costs or expenses reasonably necessary to carry out the diligent representation mandated by this Contingent Fee Agreement. After deducting such advanced costs and expenses from any settlement or recovery, the Law Firm will then deduct its Contingent Fee from the balance and remit any remainder to Client. The Client understands that the contingency upon which the payment of the Contingent Fee depends is the Law Firm’s successful resolution of Client’s legal matter.
- Statutory Fees and Costs. Client further agrees to reimburse the Law Firm, by advancing all litigation costs and expenses reasonably incurred in prosecuting or resolving Client’s legal matter through the completion of the law suit. Any costs or expenses not advanced and recovered will be borne entirely by Client, and the Law Firm will have no responsibility or liability to pay or reimburse any such costs or expenses, or any balances due after payment of the Contingent Fee, even if such amounts exceed the reward for Client’s recovery in Client’s legal matter.
Pros and Cons
A contingency fee agreement has both advantages and disadvantages for clients and attorneys. The main advantage is that the client does not have to pay any legal bills unless their case is successful, and there are no bills to pay if unsuccessful. Some clients fit into this category and may feel that it would be challenging to come up with the cash to pay out of pocket as their injury or accident was devastating. A contingency fee agreement makes it is a win-win situation for you, the client. Your lawyer only gets paid if you are awarded damages as a result of the successful prosecution of your case.
The downside of a contingency fee agreement is that if you are successful and win your case and get a monetary award, your attorney will receive a percentage of the amount that you received as their fee. In addition, it is possible that other fees are taken "off-the-top" such as health insurance, outstanding liens, etc. You may be confused because honesty and integrity are what lawyers are known for, however , that is why it is so important that you thoroughly read what you are signing and make sure you understand what you are signing.
It is also important you agree on the amount you will be paying your lawyer’s legal fees. A good lawyer will be able to provide you with a list of fees they charge. For example, an attorney may take as legal fees 10-40 percent of the recovery plus costs, but they don’t all take the same percentage of the recovery as their fee. That is the beauty of the contingency fee – every case is different, and lawyers are flexible on the contingency fee they will accept for every case.
Below is a list of some of the many factors that go into what a lawyer will accept as a contingency fee. Each lawyer has a different opinion, but here are some factors that many lawyers agree upon: Many lawyers have a baseline for what they will accept as a contingency fee however each case is different, and many highly skilled lawyers have the ability/skills to argue for a lesser amount than their baseline.
Considerations and Regulatory Issues
Depending upon the jurisdiction, various regulations govern contingency fee agreements; however, in Canada, contingency fees are allowed and are subject to the approval of the court. For example, in British Columbia and Alberta, a court’s approval is only required for contingency fees above 30%. In Manitoba, an attorney must get a client’s informed consent before a contingency fee agreement can be made, and the "win fee" must not exceed one-third of the amount payable to the client up to $10,000, one-quarter of the amount above $10,000 up to $30,000, and one-fifth of the amount above $30,000.
The Canadian Bar Association has provided minimum guidelines regarding contingency fees. For non-personal injury matters, net fees should not exceed 50% of the recovery, and for personal injury matters, net fees should not exceed 33.3% up to $100,000, 25% from $100,000.01 to $350,000, and 20% from $350,000.01 to $500,000. In addition, the Bar Association encourages lawyers to agree to a fixed fee for their services in the case of an unsuccessful outcome with an additional success-based fee should there be a successful outcome. Further, the fixed fee and the success-fee must be agreed upon at the outset of the agreement, so the client knows how much money they will owe no matter how much work is performed by the lawyer.
In the U.S. jurisdictions have had differing views on contingency fees. Sanctioned at the federal level by the Lanham Act, the legal validity of contingency fees has been upheld by both California and Illinois. However, some courts have disallowed contingency fees based upon the principle of champerty and maintenance, and based upon concerns that they would violate the American Bar Association’s prohibit of nonrefundable retainer fees.
Contingency fee arrangements have also been criticized for several reasons. Some scholars argue that it is economically inefficient, as they require the lawyer to raise funds to bring a lawsuit, and therefore imposes a cost that the lawyer must later recoup. It has also been argued that contingency fees lead to overzealous representation. However, in favor of contingency fee arrangements is that they result in increased access to the courts to those otherwise unable to afford legal counsel.
Negotiating a Contingency Fee
There are a number of points that a client needs to be aware of when negotiating the terms of a contingency fee agreement with a lawyer. Getting the fee structure right is a crucial aspect of any lawsuit, and you need to protect your interests.
One of the most important things for a client to do is to take the time to read what they are signing and not to be pressured into signing the agreement. Many clients, out of a desire to move forward or an eagerness to retain the lawyer in question may skip the fine print and not understand the terms of a contingency agreement. This can lead to serious problems when the lawyer is then bound only by the agreement signed.
Some of the important financial details a client must understand before entering into a contingency fee agreement are:
• the percent or commission the lawyer will be paid upon the successful completion of the lawsuit;
• whether the lawyer enters into any "sub agreements", such as a "cost and fees" agreement between the client and the lawyer;
• whether the lawyer enters into a co-counsel agreement with other lawyers participating in the lawsuit that might reduce the settlement amount to the client;
• how the lawyer calculates the amount awarded to a client;
• how and how frequently the lawyer will pay the client once they receive payment for the lawsuit;
• whether the lawyer will request that the client compensate them for their time during the lawsuit and how much time, if any.
Other Types of Fees
Sometimes contingency fee agreements are not a perfect fit for a client or case. In that instance, the range of other possible fee arrangements is vast and can be "built" to suit any situation. For example, a client and a lawyer could agree to pay on an hourly basis but with a substantially reduced fee (or deferred payment of the fee) in the event of success in the case. A client seeking to maintain control of litigation may wish to pay a lawyer on a monthly basis going forward but to preserve the right to offer a bonus to the lawyer or a percentage of the recovery if the case is resolved before trial.
In an intellectual property context, a client may be able and willing to pay a lawyer a flat monthly fee to secure the lawyer’s availability for a certain number of hours each month for advice and planning during the period leading up to the filing of a patent application or a copyright registration. That arrangement provides a client with the time, expertise, and experience to help it make decisions to maximize its rights without the costs and risks of a "good faith" dispute over ownership of patent rights or copyrights.
If there are specific milestones in the course of litigation, such as the filing of a motion, a response to a motion, the taking of a deposition, or the notice of the deposition of a client, a lawyer could agree to reduce the fee upon the completion of each milestone. The client will have additional incentive to follow the lawyer’s plan and to inform the lawyer when the case reaches a milestone, and the lawyer will have an additional incentive to remain attentive to the case. On the client’s side , the client is more likely to obtain appropriate value for the legal services. In a class action suit, for example, the submission of a motion for class certification may take 80 hours of firm time and may be the most intense and expensive stage of the procedure, at least as compared with what follows. It may be appropriate to agree in advance that the filing of such a motion will be sufficient for at least a 50% reduction in the lawyer’s hourly rate for the remainder of the case.
Another possibility is a "blended" rate. For example, for every hour a lawyer works on a contingency basis, the contingency amount will decline by $2,000, which is the difference between the hourly rate ($500/hour) and the rate the lawyer would agree to charge ($300/hour) without the risk of a contingency. So, if a case has a projected gain of $400,000 and the full 1/3 contingency fee is $133,333, but for each hourly hour the fee is reduced by $2,000, the final fee in the same case may be $200,000, to be collected only upon obtaining a favorable result in the case.
The possibilities are limited mainly by the creativity and the desire of the lawyer and the client to negotiate an arrangement that can capably protect their rights and interests in both a business and a legal sense. In many cases, a combination of arrangements is appropriate. It is also important to keep in mind the rules of professional conduct that regulate lawyer fees. In Minnesota there are, for example, specific requirements designed to protect clients against potentially unfair fee arrangements.