A lawyer will be paid a contingency fee out of the money recovered from the other party if the case they are handling is successful. Under this arrangement, the attorney does not charge a fee if the case is unsuccessful.
According to a contingency fee agreement, an attorney will only be compensated if they (contingently) obtain a predetermined amount from the case as a settlement or compensation. As a result, the lawyer is not paid by the hour but rather with a certain percentage of the money collected as a settlement after the ruling. The cost will typically exceed the hourly rate the attorney would have received.
Contingency fees are a popular option for many people who need legal representation but cannot afford the standard hourly rate. This alternative is also chosen by attorneys because it can be financially rewarding if the case is successful.
This article discusses what a contingency fee agreement is and the advantages and disadvantages of using one.
Using Contingency Fee Agreement
Contingency fee agreements are frequently used when an attorney is attempting to collect money on behalf of a client.
The following are the most common applications for contingency fee agreements:
- Personal injury (car accidents, work accidents, defective products)
- Fair Debt Collection Practices Act (FDCPA) violations against creditors for harassing debtors
- Employment law and hourly wage issues
- Nursing home or medical malpractice
- Real estate
- Collection of large debts
- Business Litigation
Generally, contingency fee agreements are not used in the following areas:
- Drafting a will, trust, contract, or other legal documents
- Registering a trademark, copyright, or a patent
- Starting a business
- Divorce and similar family law issues
- Criminal defense (DUI, traffic, drug, and other charges
As such, the agreement is standard for payment in personal injury cases. Additionally, lawyers need reassurance that they will receive the money, such as a deposit in an escrow account.
Variations of Contingency Fee
The client and the lawyer must agree on the terms of the agreement before it can be signed into effect. However, two variations of the standard contingency fee agreement are common in legal representation.
These variations include:
In this contingency arrangement, there is no payment to the lawyer unless there is a recovery. The lawyer will charge a fee for the case based on the hours for which they offer their services to the client. Thus, there ought to be a pre-determined hourly rate by which the final payment to the lawyer will be determined.
This type of arrangement is typical in cases where the law permits attorneys to recover fees from the losing party.
The lawyer must track how many hours they have offered their services for, and if they win the case, they will be paid for those hours based on the pre-determined hourly rate agreed upon in the contingency fee agreement. For example, if the predetermined hourly rate is $100 and the lawyer spends 10 hours on the case, the final payment will be $1000.
Mixed hourly arrangement
In a mixed hourly arrangement, clients can pay a portion of the lawyer’s hourly rate up front, with the remaining amount to be paid if their case is successful after the lawsuit. This requires the client to pay the lawyer the agreed-upon partial payment until they get the final compensation.
If the agreed hourly rate is $150, the client and lawyer may agree to a partial payment of $40, while the remaining $110 will be paid after the case is decided.
The attorney will also probably get a percentage of the recovery in addition to the hourly rate. However, it will be lower than that offered in a standard contingency fee.
Factors Affecting Amount of Contingency Fee
Contingency fees will vary from one case to another and from one lawyer to another. This is so because the amount is based on specific aspects of a case.
The significant factors to consider when determining whether a contingency fee arrangement is an appropriate alternative to an hourly rate include the following:
Complexity and risk
The complexity of the case is a significant consideration for lawyers. Complex cases require more work hours as more issues must be addressed. As a result, attorneys will typically demand a higher contingency fee than they would for simpler cases.
The expected contingency fee is also influenced by the level of risk the attorney will assume in representing the client; the riskier the case, the higher the contingency fee.
There are various litigation costs that need to be paid even if there are no lawyer’s fees. The amount of fee a lawyer will receive will depend on whether these costs are paid before a case is decided or after. Since the contingency fee is always a percentage of the recovery amount, whether the percentage is calculated after deducting all expenses or before will impact the total amount a lawyer will receive as a contingency fee.
Examples of such costs include written pleadings, court and filing fees, discovery expenses, court appearances, eyewitnesses and experts to be hired, overhead, and incidentals.
If the litigation costs are $1500 in a $10,000 settlement case, a contingency fee of 25% can be charged as follows:
-Before litigation costs are deducted – The lawyer will receive $2500, and the client will receive $6000 after paying $1500 in litigation expenses
-After litigation costs – The $1500 will be deducted, and the lawyer will be paid 25% of $8500, which is $125, while the client receives $6 375.
How to Hire Lawyer on Contingency Fee Basis
Before deciding to choose a contingency fee arrangement, it is imperative to know how the entire process works and prepare accordingly.
Here are some pointers to assist clients in selecting a lawyer for such fee agreements:
Research attorneys in your area
Ask for recommendations from family, colleagues, and friends. Also, searching the internet will help you find attorneys willing to work under contingency fee arrangements. Download their profiles, research their charter, recent cases, experience, qualifications, ratings, and any recommendations or reviews they have. This will help in selecting the right lawyer for your case.
Meet with qualified attorneys
Discuss the case with different lawyers to learn about their interests and fees. The first consultation is typically free of charge, as most qualified attorneys will want to be considered for your case. Determine whether the lawyer wants to take up the case and if he agrees to your stance about the case. After having initial discussions with different lawyers, compare their strategies.
Next, ask for quotes from different lawyers. Different lawyers will have varying rates. The rate will depend on an array of factors, including the chances of winning the case and the type of defendant. For example, if the client is suing a large corporation and expects the recovery to be a large sum, the lawyers will consider this factor when deciding their fees for the services offered.
Choose attorneys for the case
After comparing lawyers based on strategy, the nature of the attorney-client relationship, and offers, choose the one best suited to your needs and have an upfront discussion about the contingency fee agreement. Discuss each term of the agreement, and if the lawyer requires a retainer payment, it should be paid to ensure that the lawyer can begin working on the case.
Prepare the agreement
Lastly, the agreement needs to be formalized and clarified in writing. You must discuss the standard terms applicable to contingency fee arrangements with your lawyer. Then, make the agreement and sign it.
Samples and Forms
You can download the following free templates of the contingency fee agreement;
Standard Sections of Contingency Fee Agreement
The agreement should be written to avoid misunderstandings about the terms and conditions between the two parties.
The following are the essential components of a standard contingency fee agreement:
- Patent and information offered by the client
- Client’s patent rights
- Contingent fee compensation to the lawyer (or law firm)
- Additional monthly fixed fee compensation to the lawyer (or law firm)
- Client payment of enforcement expenses
- Quarterly budget
- Court award of lawyer fees or costs
- Defense of counterclaims and declaratory judgment actions
- Law firm (or lawyer) association of other lawyers or assignment
- Remedies for breach
- Successors and assigns
- The Governing law
- Legal construction
- Waiver and integration clause
- State bar notice
- Arbitration of disputes
- Client’s indemnity
- Joint and several obligations
- No guarantees
- Law firm authority to act for a client
- Assignment of ‘672 patent or any rights therein
- Termination of engagement
- No representation or warranty by the law firm
- Client option for hourly rates
- Other documents
Advantages and Disadvantages of Using Contingency Fee Agreement
A contingency fee agreement, like any other arrangement, has advantages and disadvantages. These include the following:
In most cases, such an arrangement will be beneficial for clients. The advantages of using a contingency fee agreement are as follows:
- The chances of being overbilled in such an agreement are lowered because the lawyer is not paid solely based on how much time they spend on the case.
- Lawyers will be motivated to close these cases quickly because of the incentive being paid after the decision and will not prolong the case unnecessarily.
- Contingency fee arrangements are more efficient since the client’s and lawyer’s interests will often be aligned to a great extent.
- In such a lawsuit, the client does not lose money if the case is lost because no attorney fees or expenditures are paid upfront.
- With this arrangement, clients can be sure that the lawyer will be committed to the case as the lawyer is aware that their success on the case determines their fees payment.
There are also some disadvantages with this fee arrangement, such as the following:
- Not every lawyer or law firm will consider contingency fee agreements due to the risk involved.
- Such arrangements are not suited for all cases, and as such, they are limited to cases with a monetary compensation as an outcome.
- For more difficult and dangerous lawsuits, there is always a chance of overcharging the client. As a result, the attorney will demand a high contingency fee to justify the risk.
- Contingency fee agreements will lead to more expenses than hourly payments for legal services. For example, if the case is decided quickly, the contingency fee may be much higher than the hours the lawyer would have spent working on it.
Frequently Asked Questions
The percentage of the amount a lawyer can charge is dependent on a lot of factors, such as the type of case. The law does not specify a required percentage, but some courts have standards for what is acceptable. Typically, this percentage can range from 25% to 45%.
According to the American Bar Association (ABA), lawyers typically charge on average one-third (1/3) of the recovery amount. The attorney, however, has the discretion to alter this percentage in accordance with the circumstances and other case-specific factors, such as the length of time it took to settle the case.