What is a contingency fee and when should a client consider it
This guide explains how contingency fees work and when clients should consider hiring an attorney on a contingency basis.
What is a contingency fee?A contingency fee arrangement is an agreement between an attorney and a client that the attorney will work on the case in exchange for a portion of the client's recovery from the case. This is most commonly used by personal injury lawyers who recover their fees from insurance carriers. It is not just for personal injury lawyers though; they can be appropriate in many scenarios.
When should a client consider hiring an attorney on a contingency basis?A contingency fee involves no out of pocket costs so it is always better for the client right? Not at all. There are several cases where a contingency fee is not in the client's best interest. One example is smaller disputes where an attorney's time can be predicted with reasonable accuracy and is known to be worth less than a contingency fee. For example, let us say that you sign a contract for $10,000 worth of work. You perform the work but are not paid and the contract has a $1,000 penalty for non-payment. You want your $11,000 so you hire a lawyer on a standard contingency for %33 of the recovery. The lawyer writes a demand letter and your money is promptly paid. Good for you, a quick and favorable result, right? Not at all. You could have paid a lawyer $200 per hour to write that letter and even assuming 3 hours to write a letter, 1 hour of phone calls, and 1 hour to draft a settlement agreement, you would only owe the lawyer $1,000. Compare that to the contingency fee agreement where you owe $3,667 (%33 of 11,000). While that example oversimplifies, it is illustrative. So, when is a contingency fee most appropriate? In a case where a client with limited resources has a solid claim for substantial recovery and a way to collect it. This is why personal injury cases are so often taken on contingency but there are many other times when it may benefit the client. A prime example is a landlord tenant dispute. When a landlord refuses to pay relocation fees, statutory penalties, and other damages a tenant can be in a difficult spot. The tenant is already concerned with finding a new place to live which means paying moving expenses and coming up with a new deposit, paying even more money in attorney's fees may not be possible. In fact, many landlords count on this and hire counsel to minimize a tenant's recovery and "get the tenant out faster." A good tenant's rights lawyer can take these types of cases on contingency and maximize the tenant's recovery without up front costs. Another good example is in a malpractice suit against against an attorney. A victim of malpractice may be wary of paying more legal fees for obvious reasons, while a contingency lawyer may be confident of a good result and of collecting from the lawyer's malpractice insurance. An informed client considers a contingency fee agreement but remembers that it is not always best for the client. If you have a strong claim and cannot pay up front legal fees do not despair, shop around for a lawyer who will work on contingency.
What is a reasonable contingency fee?The "standard" agreement involves a third of the client's recovery but varies widely. An attorney may charge more if it is a case with high risks and/or costs, or charge less if it is a case they expect to resolve quickly. Fees can also vary depending on when a settlement is reached because more resources are invested as a case goes along. A common example, is a contingency fee of %33 if settlement occurs before trial and %40 for recovery after jury trial. These considerations can also lead to agreements cut even more finely: %20 of a settlement reached after a demand letter, %25 after filing the complaint, %30 after discovery commences, and so on. The contingency fee can also vary depending on the amount, for example and attorney can agree to %50 of the first 100,000 but only %20 thereafter. The reality is that a contingency fee, like any other attorney fee is negotiable by a client. In turn, the parties should negotiate and reach reasonable terms based upon the specifics of a given case. Just be careful when shopping around because a lawyer who takes the case for a smaller percentage may be less interested in the case or may be taking your case on as only one in a high volume of cases. As a client you do not want someone who will put in minimal effort and simply withdraw from the case if it does not resolve quickly. On the other end of the spectrum, fees greater than %40 should be looked at with suspicion and the client should be apprised of why the contingency is so high. There are, of course, high risk and/or high cost cases that justify a higher contingency, but the reasons for it should be clear to the client. Like any other fee, shop wisely and choose someone you are comfortable is worth the fee you agree to and when you find that lawyer, get it in writing that only they will work on your case.