The Basics: What is a Contingency Contract?
A contingency contract is not a standard legal contract, but rather a contract where one party agrees to pay consideration (typically a percentage of any recovery or the value of services provided) only upon a particular outcome occurring. For example, in the context of a lawyer’s contingency fee with a client, the client will agree to pay the lawyer a specified percentage of the recovery only if there is a recovery. These types of contracts are commonplace in modern society, appearing regularly in the employment context with various commission, bonus, and stock option plans. Accordingly, these types of contracts have gained blessing from legislators and courts alike.
This is because contingency contracts, including the modern contingent attorney fee, are a shift from the legal rule, dating back to the Roman Empire, forbidding contracts in circumstances that would deprive an injured party of a remedy. See Geraty v. Superior Court (1970) 3 Cal.App.3d 670, 682 ("Contingent fees derived from the rehabilitated Roman-Dutch principle of pactum de quota litis are now a common practice in American jurisprudence."). As a result , courts construe contingency contracts narrowly. See id. In addition, courts reject construing contingency contracts too broadly, as in Scherer v. Spiva, 2015 U.S. Dist. LEXIS 2306 (N.D. Aug. 4, 2015), in which the court refused to enforce a contingency contract with excessive caps on the value of services furnished. Instead, the Scherer court construed the disputed contract according to its plain terms, ultimately rejecting the argument that the attorney could also charge for its out-of-pocket costs and expenses. See also, Levy v. Lerner, 2009 U.S. Dist. LEXIS 127775 (D.N.J. Oct 16, 2009) (construing legal contingency contract according to its plain terms).
Accordingly, a contingency contract must have an express condition providing for the consideration to be paid only once a legally valid and enforceable obligation to pay does in fact arise. Because the loss of the cottage industry of acquiring contingent legal fees or commissions could have drastic effects on the public good, a contingency contract that purports to recover reasonable consideration must be for a lawful purpose. See Dworkowitz v. Hammarskjold, 1985 U.S. Dist. LEXIS 1132 (E.D. Pa. Mar. 15, 1985).
An Overview of the ABA Guidelines for Contingency Contracts
The American Bar Association (ABA) outlines its guidelines for contingency contracts in an effort to promote uniformity in the industry for these fee agreements, to which both attorney and the client agree. The ABA’s Model Rules of Professional Conduct provide clear guidance on how and when attorneys can enter into these contracts. The following are some key rules that apply to contingency contracts:
Rule 1.5 – Fees
This rule prohibits lawyers from entering into contingency contracts that are "illegal, in clearly excessive, or contrary to the Colorado Rules of Professional conduct or other law." Rule 1.5 (c) states a contingency contract must provide a "express statement as to the method by which the fee is to be determined in the event the client is the prevailing party in the matter, including whether the appellate process is included." This means, before a client agrees to the terms of a contingency agreement, they must fully understand the various costs that are potentially associated with the litigation. For instance, if the client is successful in recouping damages, then the terms of the contingency contract may change for the appellate process that follows. This rule does not require a lawyer to consider the financial circumstances of the client because this is too difficult to apply. According to the Commentary, The 1983 ABA amendment provides that the fee agreement "shall not be deemed unreasonable" solely because the amount of the fee "exceeds the amount the client has paid in the past or will pay in the future for the same legal service." This rule allows lawyers to provide their services on a contingency basis provided there isn’t an illegal activity, or there aren’t excessive terms that would take advantage of a client’s financial hardship. What’s more, the agreed upon terms in a contingency contract must be reasonable and cannot take undue advantage of a situation where the client cannot afford legal services. The ABA makes it clear that any discussions pertaining to a retainer for a case that involves contingency fees, should ultimately be recorded in the case file. The information should include: Essentially, this rule requires lawyers to fully discuss the anticipated costs of litigation with their clients, and ensure that each piece of information is accurately recorded in case the client has questions or disputes the contract or its terms at some future date. This rule establishes the guidelines on how a lawyer must maintain original documents that could potentially be a conflict of interest. For example, if a lawyer represents multiple clients that have similar claims or cases against the same opponent, this rule requires that if one of the clients takes issue with this representation, the lawyer must continue to take the appropriate steps to inform the clients and adjust their representation as their needs and demands change. The founder of the ABA commissioned the Ethics Commission in 1965 to study the legality of contingency contracts, and after carefully reviewing the contracts in conjunction with other ethical opinions, they essentially determined that there was nothing that would prevent the use of contingency contracts as a method of compensation for legal services in most states.
The Pros and Cons for the Client and the Lawyer
Contingency contracts can be beneficial to both the client and the attorney. For the client, it can provide immediate relief from upfront bills. If the case is lost, nothing is paid out by the client. For the attorney, it presents a way to engage with a client who may not have an initial case to put in front of them. Many case types can be handled on a contingent basis, allowing the client to pursue a case they normally would not.
There are many case types that can be handled on a contingent basis. Personal injury, medical malpractice, consumer fraud, class actions, tax cases, business dispute, patent infringement, employment claims, product liability and workers compensation are just some of the examples of case types that can be handled on a contingent basis.
The potential for monthly retainer fees be kept in the wallet of clients allows for the attorneys to get cases in front of them who may not be able to afford the daily expense of retaining a law firm. The client pays the attorney a percentage of the reimbursement with the understanding that their firm takes up all the costs of bringing the suit. The advantages in this scenario can provide earnings to the attorney which in turn provides for the monthly bills of the firm.
The disadvantage to the client is they are still on the hook for other case costs and facing up to an attorney fee of 20-40%. The fees may be a lower percentage than if they were paid hourly. However, the added case costs and the percentage can really chip away at the recovery the client receives.
The disadvantages to the attorney consist of the time and resources applied to the case. The calculated risk is, if the case is lost, it will be time and money wasted as no recovery is given to the client and no fees are paid to the attorney.
Types of Cases for which Contingency Contracts are Commonly Used
There is a limited range of cases where contingency contracts might be appropriate. Such cases generally involve claims or lawsuits in which a person seeks redress for the injury or loss of something of value, such as property. The types of cases that most commonly are found to be appropriate for contingency contract arrangements are personal injury, employment law, and tort cases.
Personal injury cases are civil claims brought due to the loss of physical, emotional, or monetary welfare, including loss of or damage to person or property. Contingency contracts are often used by clients who have been injured by another and desire to seek monetary damages or non-monetary compensation. Personal injury subjects can include breach of contract claims, wrongful death claims, and claims for vehicular accidents, slip-and-fall accidents, dog bite attacks, assault and battery, fraud, negligence, defamation and other civil torts. Little or no financial risk exists to the client due to the fact the lawyer/vLawyer(s) agree to accept the representation in return for a portion of the awarded damages as payment.
Employment litigation falls into one of three categories: wage and hour lawsuits, employee discrimination (i.e., wrongful termination), or employee harassment. These cases are well suited to contingency contracts due to the fact the majority of the states have already enacted laws that require employers to pay all of the employees within a prescribed time and restrict the denial of opportunity for employment and promotion of employees on the basis of race or gender. Even though these laws may be laxly enforced by government agencies, they continue to exist so as to justify the elevation of employee rights. Thus, employees are able to bypass many of the upfront costs associated with litigation simply by agreeing to pay their attorneys/delegated vLawyer(s) a percentage of any awarded damages.
Negotiation of the Contingency Contract
A few factors will be important to you as you negotiate a contingency contract. First, make sure the terms of the contract are clear and easily understood. Second, make sure that the right fee arrangement and fee type is the one that will be applicable to your case. Fourth, understand the jurisdictional issues for the collection of expenses. As in any contract, both you and the attorney should agree to written amendments as necessary. Fifth, if you have multiple defendants, try to have the entire contingency fee arrangement apply, to each separately, not just on a "cumulated" basis, for example, as to one-third of each individual recovery.
The contract should clearly specify the amount of the contingency fee chargeable and how it will be calculated. This has become an area for potential misunderstanding and dispute due to the increasing use of contingency fee percentages smaller than the traditional one-third. Therefore, the fees must be calculated accordingly, and appropriate provisions must be made in a complex case where different percentages apply to different recovery amounts, for example. After-the-fact increases in the base contingency fee are not recommended, especially where the law firm has entered into a representation contract with the client on a specific basis. This is especially true where a higher percentage of the recovery is agreed to by the parties, and where additional agreements are needed to deviate from that initial agreement as to additional fees .
In particular, you should ensure that the following principal issues are covered:
(a) Different fee percentages apply to plaintiffs and defendants that are, for example, referred off to attorneys outside. (In such a case, appropriate provisions in the contract must be made for the former attorney’s protection if he/she refers the case to different counsel.)
(b) The basis for allowance of reimbursement of expenses must be crystal clear. In some instances, the scale of expenses can be greater than the amount of the recovery, such as where experts are involved. Alternatively, the recipients of the funds that attorney is supposed to collect can refuse to honor the contingent fee arrangement, especially when the amount of the recovery is great. Further, the expenses paid by the client and paid by the attorney are sometimes difficult to verify.
(c) If beginning with the commencement of the action, either you must pay interest on the funds expended, that the plaintiff from which the recovery is to be made, bears the charges for interest on the loan for advances in legal fees and the payment of expenses, or that the attorney bears the interest. The contingency fee contract may in some instances assign the cost of interest on advances for trial preparation to the client rather than to the law firm. In many instances, this will be appropriate. In other instances, the law firm will want to assume the responsibility for this additional expense.
Ethical Considerations for the Lawyer
There are several ethical issues concerning contingency contracts that attorneys must be cognizant of as they ensure compliance with their professional responsibilities, both individually and as a firm. Contingency contracts present multiple opportunities for conflicts of interest, noncompliance with the rules of professional conduct, and accusations of legal malpractice to arise from either breach or neglect of these duties that are not specifically related to other actions by the attorney or firm.
Maintaining compliance with your legal ethics is achieved by avoiding contractual conflicts in which the firm or an individual attorney is negotiating a case with itself, such as referring a case from one office to another. Reorganization of law firm ownership should also be carefully documented and approved by clients to avoid future concerns about equity in cases that require allocation of specific awards to individual members of the firm.
Contingency contracts are not appropriate in matters of domestic law, where specific legal violations are not clearly defined, contractual law, or where trademark rights are at issue in the dispute. They are only allowed in the case of personal injury, wrongful death, fraud, theft, conversion, or negligent property damage.
Many reports of legal misdeeds involve clients alleging attorney malpractice. It is important to constantly remind yourself of the ethical dangers of working on a contingency basis without consulting your states Rules of Professional Responsibility, to ensure continued compliance with its requirements and to avoid malpractice allegations.
What’s Ahead for Contingency Contracts
As with most sectors of the economy, technological advancements will continue to shape the future of contingency contracts, especially with regard to the drafting and the payment process. Technology will also increase litigation regarding contingency contracts. The standard practice for lawyers is to take a retainer at the start of a matter, and to apply it to the final retainer at the end of the matter. When lawyers take the retainer, the law should require lawyers to advise clients that they have a right to a written fee agreement, that they can opt to take their chances and represent themselves, or that they can obtain representation at a lower price, such as an unbundled service. Clients should have the opportunity to sign a fee agreement that breaks down the work to be done and wages a small portion of the retainer as a contingency fee. The client should have the right to use the retainer for costs as they are incurred, and to sign a subsequent contingency agreement with any unused retainer. In addition, the client should be able to add contingent work down the line, at the original discounted rate. In addition to technology affecting the contracting process, technology will have an even greater impact on the payment process. On startups and tech transfers, clients will only pay a fixed amount if the startup makes it to the next stage. As tech transfers move more into the commercial realm , investors will only pay if the tech transfer receives patent protection. Additionally, due to the increased mobility of individuals, contracts may more often extend across state lines. For example, one partner may set up a business in Texas, and hire someone from California. These new patterns may complicate enforcement of contingency contracts. Changes in the law may also impact the use of contingency contracts. The American Bar Association’s Formal Opinion 93-379, that states that when two or more reasonable fees charged for a specific legal task can be equated, then the lowest fee can be inferred to be the reasonable fee (See ABA Informal Opinion 88-156), may provide the basis for attack by those seeking to avoid paying a contingency contract. Admittedly, while the deference would only apply to the same firm, it poses a concern for contingency contracts that are based on a small discount or discount scale from the ordinary hourly billing of the firm. In addition, the duty to prosecute a case is a contingency that usually lasts only one or two years, following which the lawyer "stands in the shoes of the client." (see Massachusetts Rule 41.2(g)). Even if a contract is enforceable after one or two years, it may not be enforceable at the time the work is due to be performed.