Alternative Fee Arrangements: Contingency Fees
In How Many Alternative Fee Arrangements Are There?, we identified five core types of AFAs and a sixth: a hybrid of any of the five. We’ll examine each in a little more depth. Here’s a closer look at Contingency Fees.
The Contingency Fee Arrangement. Seems like a simple concept: If the lawyer does their job, everybody gets paid. Sounds like a win-win, right? In a perfect world, yes. But there are many frustrations that can surface unexpectedly when using this type of payment system. Let’s break down the specifics of contingency fees so you can determine whether it’s a good fit for you and/or your clients.
Through contingency fees, lawyers accept a fixed percentage (usually one third) of the funds that are successfully recovered for the client. While the amount a lawyer can charge is not generally regulated by law, fee percentages are fairly uniform throughout the country due to high competition. Usually, more complex and time-consuming cases will require higher fees dues to higher risk to the firm and overall cost expenditure.
Thanks to today’s media representation of lawyers and firms, many clients who have had no experience with attorneys are under the impression that they all work on contingency fees. In reality, this kind of fee arrangement is only available for a handful of areas of law.
In the real world, contingency fees can only be used in cases where money is being claimed, including but not limited to:
- Car accidents, boat accidents, work accidents, and other personal injuries
- Fair Debt Collection Practices Act violations
- Defective products that cause injury
- Employment law and hourly wage issues
- Large debt collection
In theory, the contingency fee arrangement sounds like a dream. The client doesn’t pay unless the lawyer wins, which in turn incentivizes the lawyer to work extra hard on handling each case. While this “all or nothing” payment system might seem like the perfect arrangement, contingency fees have been a thorn in the side for many an attorney.
Clients will normally hire a lawyer on contingency when they cannot afford to pay the lawyer’s hourly rates. Though there is little investment for the client, there is always the risk that the firm will get paid nothing if the case is lost. There is also the risk that the payment will be delayed until it is collected from the opposing party.
Another factor that affects contingency fees is the amount of out-of-pocket expenses needed to cover a case. Some lawyers require the payment of costs expended if the case is lost, which is something that many clients are not aware of. Imagine the wrath of the unhappy client who loses and their case AND is forced to pay expenses? No thank you.
As an attorney, you must make sure that you do not take on contingency cases if it is a bad deal. For example, avoid this fee arrangement for small financial cases, complex cases, and overall time-consuming cases. On the other hand, contingency fees are perfect for simple cases that have the potential to win a lot of money. As long as you are highly selective about the cases that you work on contingency, both you and your client can reap the benefits of this highly varying fee arrangement.