The contingency based fee agreement is a common form of representation. There are clear benefits to this arrangement for both attorney and client. Of course there are also risks. In a recent decision in New Jersey, the court concluded that attorneys must properly advise clients about the various billing options before proceeding with an engagement. In this case, despite a written fee agreement, the court struck over $280,000 in legal fees and costs.
In Balducci v. Cige, an attorney handling a discrimination claim entered into a billable hour agreement instead of the more traditional contingency fee. After a dispute arose over his fees of $286,000, Client terminated Attorney. The trial court ruled that although Client had signed the retainer agreement, Attorney did not properly explain the agreement, which was therefore null and void.
The Appellate Division agreed, finding that the agreement was “ambiguous and to some extent illusory.” The Court noted that there was no description of the amounts that would be charged for “routine expenses,” and that Attorney failed to tell Client that hourly billings could exceed $100,000 before even reaching trial. The Court concluded that the agreement was null and void because an attorney handling a case “that includes an hourly rate component [must] explain both the consequences on a recovery and the availability of other competent counsel likely willing to undertake the same representation based on a fee without an hourly component”.
The issue that this creates for plaintiffs’ attorneys is that they are almost certainly forced to make an initial assessment of value at the outset of the litigation before any discovery, or even pleadings, are completed. Once the potential cost of the litigation is explained, clients will almost certainly follow up with a request for expected value and the failure to reach that amount could create significant problems in the attorney-client relationship. Plaintiffs’ attorneys seeking to use an hourly arrangement should therefore proceed with extreme caution. The temptation to overpromise may lead to the above scenario, while undervaluing will likely lead the client to opt for an attorney who will take the case on a contingency fee basis.
Importantly, the Appellate Division has now made it a requirement that both scenarios be fully explained to the client in order for the agreement to be effective. Plaintiffs’ attorneys should therefore carefully consider their options and ensure not only that their agreements are clear, but that they have adequately explained all possibilities to the client. Failing to do so could risk shouldering all of the costs of the litigation without any of the reward.