Avoiding Uncontrollable Legal Fees with Alternative Fee Arrangements: Part I – Contingent Fees and Mixed Contingent Fees
by: Arend J. Abel, Attorney
One of the biggest issues facing a business when hiring an attorney is not only the fact that legal fees are costly, but that they are also unpredictable. When an attorney is hired on an hourly basis, as most still are, the business person may have no idea what the ultimate price tag may be. In an effort to address these issues, lawyers sometimes offer various alternatives to hourly billing. Two of those alternatives, the contingent fee and mixed hourly/contingent fee, are examined below
A common alternatives is the “contingency” fee, in which the attorney receives a percentage of the amount recovered. This approach is a staple of plaintiff’s personal injury work, but may be adapted to any case where the client’s goal is to recover a sum of money, including collections, contract cases, fraud and defamation. Typically, the attorney also receives out-of-pocket expenses, although in some cases, the attorney will take the expenses out of the recovery, and may also agree not to be repaid unless there is a recovery.
A key advantage to the contingent fee is that it reduces or eliminates the client’s cash outlay. It also reduces the risk to the client from losing the case, or winning but not being able to collect. A contingent fee arrangement shifts some or all of that risk to the attorney. The client’s risk may be limited to not obtaining a recovery, rather than not obtaining a recovery and paying thousands of dollars in attorneys’ fees and expenses. Another key benefit is that the attorney has a very strong incentive to do well in the case, because the attorney’s fee depends on the result.
The key downside is that the client often will wind up paying more than on an hourly basis. In fact, if properly assessed by the attorney, the client should pay more, with the difference representing a “risk premium” to the attorney for taking the risk of non-recovery or nonpayment. Accordingly, clients who are very confident about their cases, and the collectibility of a judgment may not want to a contingent fee, if they can afford to hire the attorney on some other basis. Conversely, an attorney’s assessment of liability, damages and collectability may lead him to decline to agree to a contingent fee.
The principles underlying a contingent fee, shared risk and incentives for success, can also be adapted to a non-recovery situations, such as the defense of a lawsuit. To do so, client and attorney agree in advance on a result or range of results that will be considered success, and on the fees to be paid in the event those results are achieved. Of course, a business would generally consider a finding that it has no liability at all a success. However, there may be other results, such as settlement or judgment below a particular threshhold, that could also be considered “successful.”
Blended or Mixed Contingent Arrangements
Depending on the case, client and the attorney may agree to share the risk of loss and costs of the representation. In such a circumstance, part of the attorney’s fee is dependent on success, with the remainder payable on an hourly or flat fee basis. For example, if a standard contingent fee on a recovery case would be 33% to 40%, and the attorney’s normal hourly rate is $400 per hour, it may be appropriate to enter into an arrangement with an hourly rate of $250 per hour and a contingency of 20% to 25%.
The benefits of the arrangement include the fact that the attorney may be more willing to take a case where his down side risk is smaller. In addition, both the attorney and the client have an interest in the efficiency of the representation. If the hourly rate is set at or near cost, the attorney will have no incentive to bill additional hours or perform unnecessary work, because the extra work will be unprofitable, even if it doesn’t represent a loss (other than opportunity cost). Conversely, the client has no incentive to request unnecessary work because, while unprofitable for the attorney, unnecessary hours still represent a cost to the client.
The contingency element again aligns the attorney’s and client’s incentive to work toward a successful result. Again, however, the contingency part of the arrangement will likely carry with it a risk premium.
The down side is that the hourly component introduces a similar uncertainty to that in a straight hourly arrangement. However, the cost is lower, and the attorney has an economic incentive to be efficient in the representation, an incentive that may not exist in a straight hourly arrangement. In a variation on the mixed hourly/contingency arrangement, the hourly component may be capped, to provide more certainly.
As with a full contingency arrangement, a mixed arrangement can be adapted to a non-recovery case by arriving at an agreed definition on what constitutes “success” and agreeing to an incentive payment that depends on the result.
In my next article, I will explore in more detail flat fees, task-based billing, blended rates and capped hourly arrangements.