Contingency Fees from Former Clients
Many professionals work on a contingency fee basis. If they achieve a favorable result for their client, they receive a percentage of the profit; no win, no fee. The basic arrangement assumes that the professional will continue to represent the client throughout the duration of the matter. But what are a professional’s rights when a client decides to hire new counsel in the middle of a case?
The Pennsylvania Supreme Court recently decided to hear a dispute over the enforceability of termination payments in attorney contingency fee agreements when a client hires new counsel before resolving a lawsuit. Earlier this year, the state appellate court issued a decision holding that a client was not required to pay his former attorney a contingency fee following termination, even though the retainer agreement expressly provided for one.
The client engaged the attorney to represent him in litigation stemming from a motor vehicle accident. The client then executed a contingency fee agreement with the attorney, which included a termination provision. The termination provision stated that if the client takes the case to another attorney, the client agrees to pay all the out-of-pocket expenses incurred by the original attorney and to pay an additional fee of 20% of the gross recovery to the original attorney.
Thereafter the attorney pursued an underinsured motorist claim under the client’s motor vehicle insurance policy, engaged the services of an expert witness, and prepared the case for arbitration. Before arbitration proceeded, however, the client terminated the attorney and retained new counsel to represent him at arbitration. The client received an arbitration award against his insurer. The client’s new counsel then sent a letter to the former attorney stating that he was not entitled to receive his 20% fee under the termination provision of the agreement, even though the client had terminated him and later achieved a favorable arbitration award. The original attorney responded by filing suit against the client for breach of the contingency fee agreement.
In deciding this issue, the appellate court noted that a client has an absolute right to terminate an attorney-client relationship. Because a client is entitled to terminate an attorney engagement agreement without penalty, the court determined that an attorney can only recover the reasonable value of his services and the costs expended on representing the client, and is not entitled to his contractual contingency fee. Accordingly, the court held that the termination provision of the contract was unenforceable.
Attorneys cannot assume that they have the right to collect a contractual contingency fee if they are terminated by a client. Professionals must therefore communicate regularly with their clients to ensure that they are meeting their client’s needs to the best of their ability. If the appellate court’s ruling stands, professionals who are terminated prematurely will be limited to the reasonable value of their services up to the time of termination and will not be entitled to a contractual portion of any recovery.