Contingent Fee

A contingent fee, a commonly used term in the United States, is a fee charged only when there is a favorable outcome; though this kind of fee structure can be applied in any field, it is common in law practice. In England and Wales, it is known as a Conditional Fee.

The contingent fee law restricts the implication of these fees for a few services such as examination or scrutinizing a financial report or similar cases. This concept helps individuals who cannot afford to pay for their suits. It is usually in the form of a percentage of the recovery fee and is usually not applicable for criminal cases.

Key Takeaways                                                               

• A contingent fee is a fee that is charged only if a favorable condition or outcome is achieved.
• Commonly practiced in the USA and Canada, contingent fees are often used by lawyers who charge their fees to clients only if the case is won and the client's rights are protected.
• Contingent fees are particularly helpful for individuals who may not have sufficient financial resources to cover the costs of legal representation up front.
• The contingent fee structure is also employed in the hedge fund industry, where hedge fund managers charge fees based on the fund's performance.

Contingent Fee is defined as the fee a lawyer charges only when the lawsuit is successful. For example, if a lawyer helped win a lawsuit for a particular claim, and there is X amount that the lawyer helped the client recover. This fee will be a percentage charged on the recovery for the client. This kind of fee structure will be documented and signed by both parties. Hence, if the client comes from a humble background, they can also file a lawsuit and claim justice. However, typical fee structures are costly for poor people to manage.

This fee structure is generally opted by people who don’t have money to pay for the lawsuit. So, when a person approaches a lawyer, the lawyer will study the case properly to see if it is possible to win the case and claim damages. Once the lawyer feels that the case is strong and can win it, they may agree to accept the fee on a contingent basis. This fee structure is costly for the lawyer; here, the lawyer will bear all the case costs. Say the paper works, filling, and other expenses related to the case.

Once the lawyer begins the proceedings with the case, their primary focus becomes how to win it. A percentage is decided between the client and the lawyer in their contingent fee agreement before starting the case. It may be agreed that the lawyer will charge 30% of the recovered amount. So once the lawsuit is over and it is won, the client will have to pay 30% of the recovered money.

The contingent fee structure is significant in the legal practice field. Many use this to win cases that would have been not possible otherwise. However, it must be charged economically. For example, one shouldn’t charge 70 – 80% of the recovery amount as a contingent fee. Though this fee structure is outcome-based and helps clients pay only when there is a positive outcome, the percentage should still be checked and controlled.

Let us understand the importance of contingent fee law for claimants, lawyers, and the overall morale of citizens towards the justice system within a country through the discussion below.

• The contingent fee structure in law is beneficial for a financially weak person who needs help to fight a case. So this kind of fee structure is advantageous in legal practice. This structure helps lawyers fight cases more attentively as they know the only way to get paid is by winning the case.
• It can be used in finance during new security issues. The company that is planning to issue new securities in the market may enter into a contingent fee structure with the underwriter, where the company may mention that if the underwriter is being able to raise X amount of capital, then only the company will pay a fee to the underwriter, else not.
• This Fee Structure is also used in the Hedge Fund Industry. The fee that the Hedge Fund Manager earns depends on its performance. So there are watermark provisions in Hedge Fund, which says that the Hedge Fund Manager will receive a fee only if the performance of the Hedge fund crosses, e.g., 20% in profit.

Let us understand the advantages of drafting a contingent fee agreement before the proceedings in the court begin. These points help claimants from a humble financial background to fight for justice as the conventional form of payment is too expensive even for the middle-class citizens of an economy.

• No upfront fee needs to be paid. So it is beneficial for persons from financially weaker backgrounds to file lawsuits that would have been difficult otherwise.
• No Fee is paid first, so the client is safe from being charged wrongly. So when an investor pays Hedge Fund manager only when he crosses a mark, then it is a relief for the investor that he is not charged otherwise.
• It makes the person more responsible for creating a positive outcome.

Despite the various advantages mentioned above, there are factors from the other end of the spectrum that prove to be a hassle for both lawyers and clients. Let us understand the disadvantages of contingent fee law through the discussion below.

• After a positive outcome, the contingent fee net pay out may be more than the hourly fee. So it is costly if the recovery amount is too significant, then a certain percentage of the total will be huge compared to the hourly fee that the person would have charged otherwise.
• When this structure is offered, lawyers tend to pick only particular cases in which they are sure they will win. So in those particular cases, the hourly fee structure will be cheaper, but as the client is financially not so strong, lawyers use that as an advantage and go for the contingent fee structure.

These fee structures are common features between lawyers and their clients. However, there are stark differences in the fundamentals and implications of both hourly fees and the contingent fee agreement. Let us understand the differences through the comparison below.

• The contingent fee depends on the outcome, so there is no fee charged if a particular event doesn’t occur. On the other hand, hourly fees are irrespective of consequences. It will be levied whether or not the outcome is positive.
• Persons from economically weak backgrounds can file lawsuits under this contingent fee structure. In an hourly fee structure, upfront money needs to be paid, which is difficult for many to arrange.
• As in hourly fees, the person who is getting paid knows that he will receive money anyway, so the dedication level drops. As the fee depends on the outcome, the person needs to ensure that the result is positive.