Contingency fees are usually associated with plaintiff’s attorneys who litigate cases pertaining to personal injury, employment discrimination, civil rights, and many other case types. The contingency fee was born from a variety of issues like better aligning the interests of plaintiff and attorney, helping the destitute obtain justice even in the face of financial hardship, and making justice more accessible overall.
Most plaintiffs involved with civil litigation go in with the expectation that their attorney will work on a contingency fee basis. This means that they don’t have to pay their attorney upfront. Instead, their attorney covers all expenses necessary to litigate the case. The plaintiff only pays the attorney from the proceeds of a favorable outcome, whether it be in the form of a settlement or verdict.
Commercial litigation is when a business sues another business over a grievance, which could be breach of contract, bankruptcy, or a host of other types of lawsuits. Most people assume that commercial litigation wouldn’t be a good fit for the contingency fee model, as the attorneys are usually paid on an hourly basis. Their fee has no correlation with the outcome of the trial, but rather is a fixed fee based on the total number of hours worked.
However, according to an article by Steven Susser published in the Michigan State Bar entitled Contingency and Referral Fees for Business Disputes, contingency fee arrangements are appropriate for all types of lawsuits, including commercial litigation. He points out that the key to any contingent arrangement is to find that common ground between the lawyer and client.
With the traditional billing model for commercial litigation, law firms would bill by the hour and their motivation might be to prolong the trial for as long as possible. After all, the more hours they work, the more they get paid. The contingency fee model promotes quality work and efficiency. If the law firm’s fee is contingent upon a favorable outcome, they are motivated to negotiate the best possible settlement as quickly as possible, or litigate the trial with speed and efficiency. The law firm has the potential to make more money assuming there is a substantial settlement or verdict, of which they receive a percentage, compared to a flat hourly fee.
In his article, Stusser explains why contingency fees for commercial litigation are beneficial. Some reasons include the current economy, common ground between the attorney and client, access, and money. Since the recession of 2008, companies have been looking to cut costs, demanding that their attorneys reduce their fees. In terms of money, Stusser writes that there is a ceiling for hourly fees, but a percentage of the settlement or verdict can equate to a higher hourly fee. Common ground would apply to the way the attorney and client see the case, which keeps both of their motives aligned.
Stusser also points out the drawbacks of the contingency fee model. For example, law firms must have a cache of money to bridge their cash flow issues while fighting a case. In addition, because this model is riskier compared to the traditional hourly fee structure, the firm may require that the client pay for all costs, including expert witnesses, which can really add up if the litigation is complex. Other firms request a large upfront retainer, which they rebate to the client assuming a favorable outcome. According to Stusser, such obstacles make the litigation appear less attractive to the potential client.
Commercial contingency fee litigation will likely become more popular with time. Furthermore, there are some law firms that have created modified contingency fee arrangements. For example, with the hybrid model, the client pays the attorney a discounted hourly fee and assuming a favorable outcome, the lawyer receives a percentage of the plaintiff’s award. The bonus model has the client pay the attorney a reduced hourly fee plus a bonus contingent upon a favorable outcome. There is even the reverse contingency fee model, which can apply to a defendant. With this arrangement, the attorney’s fee is inversely proportional to the amount the defendant is assigned to pay.
Written by Lulaine Compere.