A traditional hourly fee engagement is an agreement between a client and a law firm, where attorneys, paralegals and legal assistants are paid by the hour for the work they perform. Each attorney, paralegal, or legal assistant who works on a case records his or her time for each task, typically in increments of 1/10 of an hour, or 6 minutes. Approximately every month, the client receives a bill for the legal services provided (and expenses incurred) during the previous month. A bill consists of a list of entries showing the date, the timekeeper, a brief description of the tasks performed that day, and a figure consisting of the hourly rate multiplied by the amount of time spent that day. Occasionally, these amounts are adjusted or capped if a task requires an inordinate amount of time. This bill is presented to the client for payment, either by mail or email. If the client has paid a retainer, we may pay the bill from the retainer and either request replenishment of the retainer, or bill for a balance due if the retainer was insufficient to cover the amount of the bill.
Fortunately for both clients and law firms, there are a number of alternative fee arrangements (AFAs) that can be entered into. These alternative fee agreements allow the clients to pay for legal services other than by the traditional billable hour. The variations are almost unlimited.
AFAs are a way to spread the risks and rewards of litigation. In the appropriate case, legal fees should reflect the value the client receives from the representation, as opposed to the time the law firm spends on the case, while still allowing the law firm to make a profit. An effective AFA aligns the client’s interests and the law firm’s interest.
Some clients desire an AFA in order to help them better manage their budgets and financial risk by sharing with their attorneys both the risks and the rewards of a lawsuit.
For individuals, families or small businesses, contingent fee agreements or other AFAs may be the only way that the clients can obtain access to justice.
In a contingent fee agreement, the client’s obligation to pay the law firm an attorney fee is contingent on the law firm recovering a settlement or judgment for the client. If we lose the case, the client owes no attorney fees, and is usually responsible only for the litigation costs. The law firm’s fee is usually a percentage of the amount recovered by way of settlement or judgment.
In the proper case, both we and our clients can benefit from a contingent fee agreement because our interests are aligned with those of the client. We each want to see the other achieve a positive and meaningful result.
We routinely enter into contingent fee agreements with individuals and with businesses too. When businesses need to bring a lawsuit, a contingency fee agreement allows the client to manage budgets, cash flow and risk. Contingent fee agreements provide access to justice for individuals and companies who could not otherwise afford to litigate. But in some cases, even very financially successful people or businesses could not afford to pursue a lawsuit without a contingent fee agreement or some other alternative fee arrangement.
A contingent fee percentage is typically from 25% to 40% of the amount recovered for a client, though it can be higher or lower depending on the particular case. There are many reasons why the contingency fee percentage may vary. For one thing, not all cases pose the same risk or offer the same reward to the client and lawyer. Some cases are not as complex as others, and sometimes the client’s particular circumstances may influence the amount of a contingency fee percentage. For a simple breach of contract case, our contingent fee percentages might range from 20-25% to 33 1/3% of the recovery. For more difficult and high-risk cases, our contingent fee percentage can range up to 45% of the recovery.
In certain appropriate cases, we will agree to a contingent fee arrangement where there is a different percentage corresponding to when the case yields a recovery. For example, the fee agreement might provide that if the case settles before filing, the contingency fee will be 20%, if it settles after filing but more than 30 days before trial, the contingency fee will be 33-1/3%, and if it yields a recovery after trial or appeal, the contingency fee will be 40%.
The nature of the contingency fee arrangement requires that we select contingent fee cases carefully. We cannot accept every case on a contingency basis, or agree to do every contingency case that is offered to us. We owe it to our clients and to ourselves to analyze every potential contingency fee case very carefully before agreeing to proceed on that basis.
With some complex business and legal malpractice cases, often involving thousands of pages of documents or court records, we offer clients the opportunity to hire us on an hourly or fixed fee basis to analyze the case. In connection with that pre-suit analysis, we may recommend that the client hire one or more experts or consultants to help. By dedicating a relatively small amount of time and money up front, the client can make an informed decision about whether to proceed with the lawsuit, and we can make an informed decision about whether we want to accept the case under a contingent fee or other alternative fee arrangement.
Contingency fee agreements are not suitable for every type of case or every situation, even where the client has an excellent chance of winning. For example, if you are the defendant in a case, a win might be getting the case dismissed or obtaining a verdict in your favor, but these victories mean only that you do not have to pay a judgment or settlement. The victory does not generate any fund from which the attorneys could collect a contingent fee, so a contingent fee agreement would not be appropriate in such circumstances.
Moreover, even if a case is suitable for a contingent fee agreement, we must carefully manage our resources. Thus, we do not accept contingent fee cases where we believe that the case will be so demanding as to interfere with our ability to represent other clients, or too significant a drain on our resources, or where the potential return on our investment of time and money will not justify the risk. In such circumstances, we may represent the client on a traditional hourly fee basis, a hybrid contingent fee-hourly fee basis, or with other AFAs. We may also partner with other law firms to spread the risk and the reward.
What if a we take a case on a contingency fee agreement and the client gets sued in a counterclaim?
When we represent a plaintiff, we always try to foresee and anticipate how the other side will defend a case. Sometimes, that defense will include a counterclaim. A counterclaim is when a defendant in a lawsuit decides to sue the plaintiff for some perceived wrong that is usually related in some way to the circumstances that gave rise to the plaintiff’s claim, but isn’t always. If the dispute between the parties consisted only of the counterclaim, we would not represent the plaintiff on a contingency basis because when we are defending a claim, there is no sum of money that is generated by a successful defense from which attorneys fees can be paid. When it is clear that a counterclaim will be asserted against a client, we usually provide in our written fee agreement how that will be handled. Sometimes, there will be no extra charge for attorney fees related to defending the client on the counterclaim. Other times, it may be appropriate to anticipate that the counterclaim could take on a life of its own, and in such cases, the fee agreement will provide for a method of payment for the defense of the counterclaim. This could introduce an hourly component to the fee agreement, or a reverse contingency fee or success fee. Sometimes, we are unable to foresee the counterclaim and account for it in the fee agreement. If the counterclaim becomes the major dispute in a case, and poses the biggest risk to the client that is outside the scope of work defined in the contingency fee agreement, we would amend the fee agreement to ensure that we are compensated by the client for this important assignment.
