Contingent fee

A contingent fee (in the United States) or conditional fee (in England and Wales) is any fee for services provided where the fee is payable only if there is a favourable result. Although such a fee may be used in many fields, it is particularly well associated with legal practice. In the law, it is defined as a "fee charged for a lawyer's services only if the lawsuit is successful or is favorably settled out of court.... Contingent fees are usually calculated as a percentage of the client's net recovery."^[1]

In the English legal system, it is generally referred to as a conditional fee agreement or, informally by the public and press, as no win no fee. The usual form of this agreement is that the solicitor will take a law case on the understanding that if lost, no payment is made.

However, if the case is won, the lawyer will be entitled to the normal fee based on hourly billing, plus a success fee. The success fee in England must be as a percentage no greater than 100% of the normal fee. This contrasts with the contingency fee in the US, which gives the successful attorney a percentage of the damages awarded in favor of his client.

This makes it easier for the poor to pursue their civil rights since otherwise, to sue someone for a tort, one must first be wealthy enough to pursue such litigation in the first place. However, because of the high risk, few attorneys will take cases on a contingency basis unless they feel the case has good merit.

According to a 2004 book by law professor Herbert Kritzer, contingent fees were allowed as of that year in the following countries: Australia, Brazil, Canada, the Dominican Republic, France, Greece, Ireland, Japan, New Zealand, the United Kingdom and the United States.^[2] They are also allowed in personal injury actions in Lithuania.

Fee structure

A client is not charged attorney fees if he loses the case. If the client recovers damages from settlement or a favorable verdict, the attorney receives the fee from the recovery. The attorney's permitted fee varies depending on the country, and even local jurisdictions.

In the US, for example, the fee is generally based on the contractual agreement between the attorney and the party, but is also limited by local rules for "reasonableness". See e.g., Miss. Rule of Prof'l Conduct 1.5. In most jurisdictions, contingent fees are "reasonable" as high as 33% to 45% of recovery. Attorneys charging unreasonable fees may be subject to professional sanctions. The fee is calculated as a share of the eventual damage judgment or settlement won by the client. The percentage allowed is subject to the ethical rules of professional conduct, and in many circumstances, statutory limitations.

In the UK, on the other hand, the client is liable for the normal fee (based on hourly billing plus a profit element) plus a success (or bonus) fee (no more than 100%). Most lawyers charge a success fee much less than this, 25-50%. In English law, fees are subject to compliance with the statutory scheme.

Advantages and disadvantages

A contingency fee arrangement provides access to the courts for those who cannot afford to pay the attorneys fees and costs of civil litigation. Contingency fees also provide a powerful motivation to the attorney to work diligently on the client's case. In other types of litigation where clients pay the attorney by the hour for their time, it makes little economic difference to the attorney whether the client has a successful outcome to the litigation. Finally, because lawyers assume the financial risk of litigation, the number of speculative or unmeritorious cases may be reduced.

Contingency fees do not guarantee civil justice or even access to the courts. Lawyers sometimes "cherry pick" only the strongest claims which are most likely to succeed. Not all cases are immediately transparent. Some require extensive investigation before the chances of success can be properly assessed. Such cases might be turned away because even the initial assessment of their strength is costly and risky.

Contingency fees may also increase the tendency for corrupt or unethical practices, such as in legal proceedings, due to the fact that payment is only made if a case is won.

Alternatives

Legal expenses insurance

This can also be referred to as "before the event" insurance (BTE), and is insurance that the client may already hold as part of household contents or car insurance, either free or for a small fee. Some credit cards also include BTE insurance and it can also be taken out as a separate insurance policy. BTE insurance may pay for the legal costs when making a claim for compensation, whether the client wins or loses.

The solicitor will be able to identify if a client holds this type of policy and complete the necessary claim form.

A 2008 report from the Ministry Of Justice found that in 2007, 48% of those who took part had BTE Insurance incorporated into their car insurance, 35% had BTE Insurance as part of their Home insurance policy and a further 17% had the insurance as part of their Travel Insurance. This insurance covers any legal expenses in addition to costs for pursuing a personal injury claim and cost for legal expenses from the other side if the client's claim is unsuccessful.

Legal aid

Legal Aid is financial assistance which is funded by the Government. It is not usually awarded in cases of personal injury unless under extreme circumstances. But through all the circumstances it is still available for Clinical Negligence cases.

Paying for own legal costs

Due to the assistance that is available through insurance policies, it is rare for individuals to fund their own personal injury claim even if it is theoretically possible. As with all other legal fees, if the client's claim is successful, the client will be in a position to claim back the cost of expenses from the other side. If the claim is unsuccessful, the client will lose the money paid out.

Situation by country

Canada

Contingent fee agreements are legal in some provinces of Canada (Alberta, British Columbia (also in family law cases involving joint family business, Real Estate Investments etc.),^[3] Ontario^[4] and Quebec among others). In other Canadian provinces, an attorney may collect a percentage of recovery in case of a victory but must charge an hourly fee otherwise.

United Kingdom

In English law, conditional fees had caused much controversy in the 19th century, especially in the Swynfen will case, as they were held to offend ancient prohibitions against champerty and maintenance. However, they were introduced by the Courts and Legal Services Act 1990 (section 58),^[5] but the relevant statutory instruments were not made until 1995. Initially, the success fee was not recoverable from the losing party, but on 1 April 2000, section 27 of the Access to Justice Act 1999^[6] amended the Courts and Legal Services Act 1990 to allow recovery of success fees from the losing party.

The regulations that accompanied this change in the law (the Conditional Fee Agreements Regulations 2000) were far from clear, and the result was that a great deal of satellite litigation took place. On 1 November 2005, these regulations were revoked, and now it is much easier to enter into conditional fee agreements than before. The chances of having a case accepted on conditional fee are greatly increased if the case is investigated by a legally qualified professional.

On 29 March 2011, Justice Secretary Kenneth Clarke announced plans to reform contingent fee arrangements, as part of reforms to the justice system prompted by a review of civil litigation costs carried out by Lord Justice Jackson.^[7] The changes were prompted by large rises in litigation costs and the proliferation of ambulance-chasing advertisements and claim farmers.^[8] The National Health Service has been forced to pay out hundreds of millions of pounds in recent years.^[8]

These reforms occurred in the Legal Aid, Sentencing and Punishment of Offenders Act 2012.^[9] Under the new arrangements, claimants still will not pay upfront fees, nor have to cover their lawyers' costs if the case is lost.^[9] If they win then they will pay the "success fee", although this is capped at 25% of the awarded damages.^[9]

The position is different in Scotland, where it is lawful to agree that the lawyer gets paid only if the case is won (the speculative action). It is not lawful, however, to fix a percentage of the client's winnings as the amount of the fee. It has, however, been legal since 1990 for the lawyer and client to agree a percentage increase in the lawyer's fee in case of success in the action (Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 s. 36). This assumes, of course, that an initial fee was beforehand agreed by lawyer and client.

United States

Most jurisdictions in the United States prohibit working for a contingent fee in criminal cases or certain types of family law claims, as made clear in Rule 1.5(d) of the Model Rules of Professional Conduct of the American Bar Association.^[10] Some jurisdictions, however do allow contingent fees in criminal cases. In the United States, contingency fees are the standard in personal injury cases and are less common in other types of litigation.

Most jurisdictions require contingent fees to be "reasonable," resulting in a typical contingent fee of 33-45% of any eventual recovery. In rare cases, the contingent fee is equal to or more than 100% of the recovered damages. These rare cases, criticized by some as an inappropriate vehicle for vengeance, result from a greater desire on the part of the injured to punish the defending party than to personally recover damages so that they offer a very large contingency to their attorney in order to assure the highest chances of winning. However, these arrangement are exceedingly rare and even illegal in many jurisdictions.

A notable exception is Nevada, in which it is common vehicle for prosecution, by casinos, of petty thefts against them. In these cases, a fractional contingency fee would not represent sufficient motivation for their attorneys, with the casinos motivated more by the fear of losing these cases than in recovering the petty damages involved.

As of 2003 16 states (California, Connecticut, Delaware, Florida, Illinois, Indiana, Maine, Massachusetts, Michigan, New Jersey, New York, Oklahoma, Tennessee, Utah, Wisconsin, and Wyoming) have regulated contingency fees for medical malpractice cases with caps. Some states cap fees at a flat rate; for example, 33.33% of net judgment or recovery in Tennessee and Utah. More often a sliding scale is used; for example, 40% over the first $50,000 of recovered damages, 33.33% over the next $50,000, 25% over the next $500,000 and 15% over the rest in California. Florida establishes different limits depending on the stage the case gets to. For example, it allows a higher limit if the case goes to trial and even more if the case is appealed. Four of these states (Illinois, Maine, New York, and Wisconsin) explicitly allow a court to authorize a larger fee, and Wyoming explicitly allows the client and attorney to contract for a larger fee. Instead of a specific limit or a sliding scale, six states (Hawaii, Iowa, Maryland, Nebraska, New Hampshire, and Washington) require or authorize court approval of the reasonableness of attorney fees under various circumstances.^[11]

South Africa

Contingent fees have been allowed in South Africa since 1997, as discussed by K.G. Druker in The law of contingency fees in South Africa.^[12]

Any fees higher than the normal fees of the legal practitioner concerned may not exceed such normal fees by more than 100%. However, in claims sounding in money, the total of any such success fee payable by the client to the legal practitioner may not exceed 25% of the total amount awarded or any amount obtained by the client in consequence of the proceedings concerned, which may not, for the purposes of calculating such excess, include any costs.^[13]

South Korea

Contingent fees or "success fees" (성공보수금) are a widespread practice in South Korea. Until 2015, they were used in both criminal and civil litigation.^[14] In some civil cases, courts have rejected fees exceeding 10% of the award as unjust enrichment of the attorney, requiring the attorney to refund the excess to the client.^[15]

On July 23, 2015, the Supreme Court of South Korea ruled that contingent fee agreements for criminal representation were void as against public policy, under Article 103 of the Civil Act.^[16] The judgment was unanimous, with four justices concurring separately.^[17] The decision provoked widespread outcry from criminal defense lawyers, particularly former judges and prosecutors who had been able to charge very high success fees due to clients' belief that their connections could help them win the case.^[14]

Spain

On November 4, 2008, the Supreme Court of Spain annulled a prohibition originated from the General Council of Spanish Bar that forbade the use of contingency fees, known in Spain as cuota litis. The rationale of the annulment was that the prohibition did not respect the principles of free competition. From that year onward, lawyers can pursue legal claims based on that type of retribution.^[18]

See also

• Attorney's fee
• Pay for performance
• Tort reform in the United States
• Pricing
• Pricing strategies

References

Further reading

• Black, Stephen; Black, Katherine D.; Black, Michael D. (2010). "Taxation of Contingency Fees: Deductions or Expenses". Tax Notes. 2009 (229-4).  External link in |title= (help)
• Black, Stephen; Black, Katherine D.; Black, Michael D. (2009). "Taxation of Contingency Fees After Banks and Banaitis". Tax Notes.  External link in |title= (help)

External links

• CLS Direct Information Leaflet 12, Oct 2006
• The Law Society - No win no fee arrangements