The Firm: Who pays for contingency fees?

By Edward Poll

The Daily Record Newswire

Lawyers who bill using contingency fees have a personal financial stake in the outcome of a matter through compensation that goes up when the results justify it. The risk for the lawyer is in not meeting the client's goals; the reward is in meeting them or even doing better than required. Contingency fees are particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success. But there are risks as well, summarized in the line used in television advertising: "No fee unless we win."

Contingency fees are frequently used as the billing arrangement in such litigation engagements as personal injury and collection matters, structured as a flat percentage to the firm of the amount recovered for the client. This creates a difficult dynamic for a firm of any size: Until there is a recovery, the firm is spending money to resolve the matter but not getting money in. These costs, whether to maintain operations or to handle the specific matter, are hard to avoid. As matters drag on through inevitable delays, the financial strain on contingency lawyers is considerable.

Lawyers charging contingency fees may wish to advance the costs for essential case management activities like depositions and filing fees. Such costs can add up quickly, and if the lawyer is not successful in the case and no value is recovered, getting the client to pay the out-of-pocket costs can be difficult at best. Certainly from the firm's perspective, it is better for the client, rather than the lawyer, to advance the costs. Ideally this should be specified in the engagement agreement, but too many lawyers either don't want to ask this of the client or get clients who can't afford to pay except out of the recovery that the lawyer secures. And where the client is a corporate client, this may be the core issue of whether the lawyer will be engaged.

In such situations the important considerations are the size and complexity of the case, the amount that needs to be advanced, and the cash reserves that the lawyer has at hand. Stating in an engagement agreement that the client is responsible for expenses need not preclude accepting a case from a client who has limited means to pay. While lawyers tend not to enforce such provisions during the representation, on settlement or judgment, they often reduce the client's share by the expenses advanced on behalf of the client when stipulated in the engagement agreement. It is not possible to change an executed engagement agreement unilaterally. So if payment of expenses is not stipulated up front, it's too late to add such a provision retroactively. That makes advance planning a necessity when accepting a contingency fee.

If the client who has promised to pay expenses while the case is ongoing cannot or will not do so, Rule of Professional Conduct 1.16 allows the lawyer to withdraw from the case if the client has been given adequate warning and the withdrawal does not come within 60 days of a court date or otherwise prejudice the client. However, withdrawing without adequate communication on and careful records of the client's conduct may bring a state bar disciplinary action. The best course remains to choose contingency cases and clients carefully.


Edward Poll, J.D., M.B.A., CMC, a law practice management thought leader, is currently on a national tour to speak to bar associations and law schools.

Published: Wed, Aug 10, 2011