Clients Can Abuse Contingency Fee Arrangements

As many people within the legal profession already know, contingency fee arrangements involve a lawyer working without charging a client during the pendency of a matter in exchange for a percentage of any recovery obtained. Such arrangements can be risky since lawyers may end up with nothing after being involved with a matter for an extended period. However, contingency fee arrangements can also be lucrative, and I have earned considerable fees from contingency fee arrangements over the years. In any event, contingency fee arrangements can lead to conflict between lawyers and clients, and sometimes, clients take advantage of lawyers who offer contingency fee arrangements.

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Clients often have the sole authority to settle a matter, and of course, this makes sense. Clients are the ones who have a claim, and the clients should be the sole deciders of when a matter resolves before trial. However, this sometimes gives clients considerable power over their lawyers and can lead to some awkward situations.

I was involved, years ago, with a matter in which the fee was partially calculated on a contingency basis. There were early settlement talks in the case, which is always great since lawyers and clients can avoid tons of issues by resolving a matter early. The client approached our firm about lowering our contingency fee percentage in exchange for the client settling the matter early.

Under normal circumstances, this would not seem to be an unreasonable request. If a law firm performs less work than expected, it is not too unreasonable to ask that the law firm forgo a percentage of the fee in exchange for an earlier resolution. However, the terms offered to this client were extremely generous in the first instance, and the contingency percentage was low to start out with. As a result, it really stung when the client asked our law firm to lower the percentage even further.

Perhaps the client did not know that the contingency percentage was already low, or perhaps the client did not care and was only looking out for their own bottom line. In any event, our firm was tempted for a time to take the offer since the client had so much power over whether the firm would have to do additional work in the case if the matter did not resolve early, and the firm definitely felt taken advantage of by the client.

Sometimes if one party to a litigation has a contingency fee arrangement with a client, and another has an hourly fee arrangement with a client, this can lead to unusual outcomes. If the client who has the contingency fee arrangement wants to bleed the other side of resources, they may not wish to resolve a case since they know that they will not need to go out-of-pocket in litigation costs and the other party will. As a result, the lawyer might need to put a lot more work into a matter than they otherwise would if this situation did not exist.

Of course, there are solutions to such an issue if the client is being patently unreasonable. Lawyers can always request to be relieved as counsel if a client is taking a course of action with which they fundamentally disagree. However, judges may not always grant such requests depending on the stage of the litigation, and this can put lawyers in very awkward situations.

In other situations, clients can essentially use contingency fee arrangements to get free legal services in the defense of claims. For instance, even if a plaintiff files a lawsuit, a defendant has the ability to file counterclaims, and this often happens. A lawyer working in a contingency fee arrangement may need to deal with the counterclaims as part of the litigation prosecuting claims on behalf of a client. If the counterclaims against a client are successful, they can be larger than any amount a plaintiff recovers, and this can lead a lawyer to receive nothing from the matter. Of course, lawyers can try to anticipate this situation in retainer agreements and help ensure that they will not have substantial financial issues if counterclaims are filed against a client, but it is difficult to anticipate every situation a client may face.

All told, although contingency fee arrangements are a mainstay of the legal profession, they need to be approached with significant caution. Clients can use such arrangements to take advantage of lawyers, and there may be little a lawyer can do to avoid the negative impact of such conduct.

Jordan Rothman is a partner of The Rothman Law Firm, a full-service New York and New Jersey law firm. He is also the founder of Student Debt Diaries, a website discussing how he paid off his student loans. You can reach Jordan through email at jordan@rothmanlawyer.com.