Among the several alternatives to the traditional hourly fee arrangement, contingency fees have been commonly used for decades. Under a contingent fee agreement, the attorney and client agree that the attorney will receive a particular percentage of the client’s recovery or of the savings obtained for the client as a fee for legal services, if there is a recovery. The attorney takes on the risk with the potential for significant reward. Not surprisingly, there are statutory requirements for these types of agreements—and failing to comply with them is risky, too.
Follow these statutory requirements whenever you enter into a contingent fee agreement:
- Put it in writing. Contingent fee agreements must be in writing to be enforceable, except those for the recovery of workers’ compensation benefits or certain merchants’ claims. Bus & P C §§6147-6147.5.
- Include certain specific provisions. In addition to a description of the contingencies entitling the attorney to a fee, the agreement must specify such matters as (Bus & P C §6147(a)):
- The fee rate agreed on;
- How the costs of prosecuting and settling the case will affect the fee and the client’s recovery (e.g., in the event of a structured settlement, whether the attorney is paid from first funds);
- A statement as to what extent the client is required to pay compensation for related matters arising out of his or her relationship with the attorney that aren’t covered by the contingency fee agreement; and
- A statement that the fee is negotiable.
- Follow additional requirements for medical malpractice claims. If the claim is for medical malpractice and is subject to the maximum fee limits on contingent fees (see Bus & P C §6146), then the fee agreement must include a statement that the rates set out in §6146 are the maximum limits for the contingent fee arrangement and that the attorney and the client may negotiate a lower rate. Bus & P C §6147(a)(5). You may want to attach a copy of Bus & P C §6146 to the fee agreement to ensure that the client is informed of its content.
- Specify the contingent fee rate. Contingent fee agreements must specify the contingent fee rate (Bus & P C §6147(a)(1)) and how disbursements and costs in connection with the prosecution or settlement of the claim will affect the contingent fee and the client’s recovery (Bus & P C §6147(a)(2)). Unless the claim is for medical malpractice and the agreement is thus subject to Bus & P C §6146, the agreement must also include a statement that the fee isn’t set by law but rather is negotiable between the attorney and the client. Bus & P C §6147(a)(4).
- Provide an hourly rate just in case. The agreement should provide an hourly rate so that the attorney may establish a baseline to recover quantum meruit in the event the attorney is discharged by the client before the completion of the representation. The hourly rate will also assist the attorney in providing a basis for attorney fee recovery in any potential attorney fee motion.
- Anticipate deferred payments or structured settlements. Whenever payment of the recovery, or any part of it, may be deferred, the fee agreement should specify when the attorney fees must be paid and, when appropriate, how they should be calculated. Otherwise, the agreement invites dispute and may be subject to being voided by the client for failing to fully comply with Bus & P C §6147. If the award for future damages in an action for injury or damages against a health care provider is at least $50,000 and either party requests that the award be paid by periodic payments, then the court must order that the future damages be paid, in whole or in part, by periodic payments rather than by a lump-sum payment. CCP §667.7. In that event, the court must also place a total value on the periodic payments and include that amount in computing the total award from which attorney fees are calculated for purposes of determining the statutory maximum fee. Bus & P C §6146(b).
- Provide for noncash awards. When the award might be partially or entirely in a form other than cash (e.g., reinstatement in a wrongful termination action), the fee agreement should provide for that possibility. This might be done by providing for a specified hourly fee if the award is not entirely in cash and a contingent fee if it is. It may also be accomplished by providing for a method for valuing noncash awards.
Failure to include any of the required items makes the agreement voidable at the option of the client (but you would still be entitled to a reasonable fee). Bus & P C §6147(b). See, e.g., Arnall v Superior Court (2010) 190 CA4th 360, 366 (failure to state in fee agreement that fees were negotiable rendered fee agreement void; fees recoverable by way of quantum meruit).
Get guidance on using contingent fee agreements, including a helpful sample agreement, in CEB’s Fee Agreement Forms Manual, chap 1.
Other CEBblog™ posts you may find useful:
- Time Records Are Not Just for Hourly Billing
- The Contract that Binds: Your Fee Agreement
- When Someone Else Is Paying Your Fees
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