When Contingent Fees Are Allowed

Contingent Fee Requirements and Limits

When Contingent Fees Are Allowed

Rule 1.5(c) permits a lawyer to charge a fee that depends on the outcome of the matter.¹ The permission comes with conditions: the matter must be one in which a contingent fee is available, the fee must be reasonable, and the lawyer must account to the client when the matter ends. The sections that follow cover the written agreement and the closing statement. This one covers the first two conditions, along with a threshold question that precedes them: whether the arrangement is a contingent fee at all.

The permission is an exception, and an exception needs a justification. The ethics rules generally prohibit a lawyer from purchasing or otherwise obtaining a financial interest in a client's matter, both to discourage unnecessary recourse to litigation and to reduce the distracting influence that a personal stake in the outcome can have on the lawyer's professional judgment.² A contingent fee gives the lawyer exactly that kind of stake, since the fee ordinarily is a percentage of whatever the client recovers.³

American law accepts the arrangement anyway, for two practical reasons. It enhances access to legal services for people who otherwise could not afford them, and it encourages lawyers to take cases in which there is a substantial risk of loss.⁴ Wunschel Law Firm, P.C. v. Clabaugh states the traditional bases in similar terms. A contingent fee often is the only practical way for a person with a claim to afford, finance, and obtain a competent lawyer, and a successful claim produces a res, a pot of recovered money or property, from which the fee can be paid.⁵

A fee is contingent when the lawyer's compensation turns on the result. The familiar form is a percentage of the recovery, most often in a personal injury claim.⁶

The method reaches well beyond the personal injury case. A lawyer and client may agree to a reverse contingency fee, measured by the money the client saves as a defendant in resolving the dispute. In a transactional matter, a fee may depend on achieving a particular objective, a set price, or a savings, so long as the amount can be reasonably ascertained without resorting to mere speculation.⁷ A company sued for an unliquidated sum, for example, may agree to pay its lawyer a percentage of the amount by which the result falls below the plaintiff's demand, and nothing if the result saves it nothing. The lawyer's payment depends on the result, so the fee is contingent, and no category in paragraph (d) reaches it.

Whether an arrangement is contingent can itself be contested, and the answer has consequences. A Pennsylvania court considered a fee to be fixed at the end of the matter by the value of the lawyers' services and owed whatever the outcome. It held that the arrangement was not a contingency fee, reasoning that a fee owed regardless of result carries no risk of nonpayment. As a result, neither the writing rule then in force nor the ethical disapproval of contingent fees in domestic relations actions applied to it.⁸ A New Jersey court reached the opposite characterization on a different arrangement. An hourly rate plus an additional charge for the same service based on other factors resembled a contingent fee, and the agreement was invalid because the lawyer had not put it in writing or stated an exact formula for calculating the additional charge.⁹ The label therefore decides whether the writing rule applies, and a fee that mixes time charges with results-based add-ons invites the dispute. The later discussion of disguised contingent fees returns to that problem.

Two outer limits mark the edge of the permission. Paragraph (d) removes two categories from it. One is any fee in a domestic relations matter whose payment or amount is contingent upon securing a divorce or upon the amount of alimony, support, or a property settlement in lieu of them.¹⁰ The other is a contingent fee for representing a defendant in a criminal case.¹¹ For family cases, Wunschel gives the traditional reason for distrust: because of the human relationships involved and the unique character of the proceedings, contingent fees in domestic relations cases are rarely justified.¹² The second limit is other law. A fee that looks reasonable in amount is still improper if it is charged or collected in violation of provisions regulating fees for particular services, such as statutory or court rule limits on the timing and amount of fees in probate matters.¹³ A lawyer who proposes to take a percentage of the alimony a client wins has therefore left Rule 1.5(c) behind, however careful the paperwork.

A third limit operates inside the permission. Comment 3 to Rule 1.5 states that “[c]ontingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule.”¹⁴ Paragraph (a) names whether the fee is fixed or contingent among the factors for judging a fee.¹⁵ In litigation where the risk of loss is significant, a substantial contingent fee is unremarkable, and one-third of the recovery is common. When the case demands unusual attorney time and resources and the risk of loss is greater than normal, a larger percentage may be reasonable.¹⁶ The justification for a large percentage, in other words, is the risk the lawyer carries. Where that risk is slight, the same percentage is harder to defend.

In a heavily contested case where loss is a real possibility, the identical percentage rests on a risk the lawyer actually carries. The percentage is the same in both situations; the risk behind it decides the reasonableness question.

Permission also does not end the lawyer's duties when the matter ends. Upon conclusion of a contingent fee matter, the lawyer must give the client a written statement of the outcome and, if there is a recovery, must show the remittance to the client and the method of its determination.¹⁷