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Horton Law Firm Blog Understanding Contingency Fees: Risk and Reward

Understanding Contingency Fees: Risk and Reward

In many cases, a client can secure legal representation without any out of pocket expense for attorney fees by hiring a lawyer on a contingency fee arrangement. The way a contingency fee works is that a lawyer agrees to be compensated from the proceeds of a settlement and judgment. Usually, the contingency fee is 33% of the “gross amount recovered.” If the case is unsuccessful, the lawyer gets no fee. The contingency fee arrangement, which permits a client to fund their case with the anticipated proceeds of success, helps many folks have access to justice who otherwise could not afford it. This is a good thing.

Another advantage of a contingency fee is that it can motivate a lawyer to get the best result in the shortest amount of time.  Lawyers who work by the hour have to fight against the tendency to take their time, because time is money.   It is understandable why many clients prefer a contingency fee.

However, lawyers who advertise on television have created an expectation that all legal representation can be had without costs or fees.  Folks seem to think that lawsuits are free.  The availability of this arrangement can create a sense of entitlement to legal representation that fails to understand the economics of litigation or appreciate the risks it represents to the attorney.  Just because you do not have to pull money out of your pocket does not mean that lawsuits don’t cost money or that eventually you will not pay for your lawsuit.  It just means that you do not pay until the end.

On the other hand, many think 33% is too much.  My most rewarding cases involved helping really good people who had something really bad happen to them. Helping these clients changed me for the better, and it also paid well.  But helping others does not always pay well, and sometimes it does not pay at all. Sometimes (and hopefully not often) there are cases that amount to nothing. And even though a good lawyer chooses his cases wisely, it is inevitable that you will lose a case here and there.

But 33% only represents payments for the attorney’s time; there is still the matter of expenses. Filing fees, copying costs, long distance charges, computerized legal research, deposition costs, and mediation expenses are also costs of a lawsuit. Sometimes, there are expert witness fees.  Excluding legal fees, a lawsuit can cost anywhere from $1000 to $20,000. (Some cases it can be more.) Who pays for this?

It depends. In certain cases, a lawyer may advance these costs, and depending on the case, advancing significant costs may result in a higher contingency fee.  It is not uncommon for a lawyer who risks significant amounts of money in addition to significant amounts of time to get 40% of the proceeds plus reimbursement for expenses.  So, the lawyer must evaluate:  Can the lawsuit fund legal fees plus costs and leave enough to provide reasonable compensation for the harm suffered by the client? This is the question, and of course, there is always the chance of losing.

My Two Cents: In bigger cases, a client should opt to pay expenses if possible. The additional 7% is like interest since it compensates the attorney for the additional risks and the time value of money. In a case with potentially large damages, an additional 7% might be a significant amount.  I always work with my client to create an arrangement that is fair to us both.  But, a client should realize the risks to the lawyer as well as the impact on letting their lawyer fund their case.

Every case is different, and not all cases can work on a contingency fee. But, getting your attorney vested in the result means each of you have the same interests.  (The hourly fee can be an disincentive.) The only way to know for sure what your fee options are is to ask the lawyer you are interested in hiring. And realize that just because money might not be your primary motivation, our legal system not only costs money but compensates damages with money.  So, ask.  Take time to understand the economics of your case.  It does not mean you are greedy; it just means you understand the realities of our civil justice system.

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