A Contingency Fee Is Not a Lottery Ticket : Special Considerations for Contingency Fee Agreements

Transcription

1 COSTS 2015 UPDATE PAPER 2.1 A Contingency Fee Is Not a Lottery Ticket : Special Considerations for Contingency Fee Agreements These materials were prepared by Andrew Morrison of Shields Harney, Vancouver, BC, for the Continuing Legal Education Society of British Columbia, October Andrew Morrison

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3 2.1.1 A CONTINGENCY FEE IS NOT A LOTTERY TICKET : SPECIAL CONSIDERATIONS FOR CONTINGENCY FEE AGREEMENTS I. Introduction... 1 II. Requirements for Contingency Fee Agreements... 2 III. The Duty to Advise... 3 IV. Challenges to a Contingency Fee Agreement... 3 A. Review of the Contingency Fee Agreement... 3 B. Review of a Bill... 4 V. Termination of the Engagement... 5 A. A Client May Terminate the Engagement... 5 B. No Bill Prior to Recovery... 5 C. A Lawyer May Assert a Solicitor s Lien... 6 D. Fees Charged by Multiple Firms... 6 VI. Conclusion... 7 I. Introduction Many lawyers enter into contingency fee agreements with their clients. Indeed, in the personal injury bar it is essentially the only form of fee charged to clients. Done correctly, a contingency fee agreement benefits both the lawyer, who may be able to earn a fee in excess of a fee available on a quantum meruit or hourly basis, and the client, who may be able to pursue a lawsuit they may not have otherwise been able to afford. Contingency fee agreements create unintended consequences. They may create an incentive for a lawyer to settle cases for less than full value because the time spent preparing for and conducting a trial that may extract a bit more money for the client may not make financial sense for the lawyer. In addition, a quick and lucrative settlement may distort the fee a client may have to pay to a point that it is no longer makes financial sense for the client. The Law Society and the courts have attempted to create rules to curtail the difficulties that arise in contingency fee agreements. A failure to play by these rules can cause a contingency fee agreement to be unenforceable or disentitle a lawyer to a fee he or she believes they have earned. Even worse, a lawyer may have to justify their conduct to the Law Society. It is important that lawyers understand the rules that apply to contingency fee agreements so that they can avoid difficulties with clients and the Law Society.

4 II Requirements for Contingency Fee Agreements A lawyer representing a client on a contingency fee basis owes the same duties to a client as a lawyer acting on any other basis, including an obligation to act in the best interest of the client at all times and an obligation to ensure that any bill rendered to a client is fair. In addition, the Law Society Rules and Legal Profession Act each contain a number of provisions pertaining to the content of contingency fee agreements. Particularly: (a) a contingency fee agreement must be in writing (Law Society Rules, Rule 8-3(a), Code of Professional Conduct Rule 3.6-2); (b) there are maximum contingency fees in some cases (Law Society Rules, Rule 8-2(1), Legal Profession Act, s. 66(4)); (c) a contingency fee agreement must not provide that the lawyer is entitled to a percentage fee both on the amount recovered and on any amount of costs awarded (Legal Profession Act, s. 67(2)); (d) (e) (f) (g) (h) (i) if a lawyer intends to accept the costs recoverable by a client instead of a percentage fee, that term must be recorded in the contingency fee agreement and the contingency fee agreement must contain a mandatory statement in the form required by the Law Society (Law Society Rules, Rule 8-2(2) and 8-4(3)); a contingency fee agreement must include a statement, in the form required by the Law Society, advising the client of their right to review the fee agreement (Law Society Rules, Rule 8-3(b)); a contingency fee agreement in a personal injury or wrongful death case must include certain statements in the form required by the Law Society (Law Society Rules, Rule 8-4); a contingency fee agreement must not contain terms limiting the client s ability to discontinue or settle their claim without the consent of the lawyer or prohibiting the client from terminating the engagement (Legal Profession Act, s. 65(3), Law Society Rules, Rule 8-3(c)); a contingency fee agreement must not prohibit the client from changing lawyers (Law Society Rules, Rule 8-3(c)); and a contingency fee agreement must not contain a term relieving a lawyer of their professional responsibilities or from their negligence (Law Society Rules, Rule 8-3(c)). Any lawyer who intends to enter into a contingency fee agreement with their clients should familiarize themselves with the provisions of the Legal Profession Act, the Law Society Rules, and the portions of the Code of Professional Conduct which relate to contingency fee agreements. The failure to comply with the Law Society requirements may render a fee agreement automatically unenforceable or vulnerable to challenge and scrutiny by the court. More importantly, even if the contingency fee agreement remains enforceable, a lawyer may have to address a complaint to the Law Society.

5 2.1.3 III. The Duty to Advise The relationship between lawyer and client imposes a duty of utmost good faith on the part of the lawyer. The engagement creates a relationship of trust and confidence from which obligations of loyalty and transparency flow (Nathanson Schacter & Thompson v. Inmet Mining Corp., 2009 BCCA 385 at para. 48). A lawyer owes a duty of candour to his or her client that requires the lawyer to be candid with the client in all matters concerning the retainer, including ensuring that in any transaction between the two from which the lawyer receives a benefit, the client has been fully informed of the relevant facts and properly advised upon them (Inmet, para. 49). The duty to advise is codified in the Law Society of British Columbia Code of Professional Conduct, which requires a lawyer to fully disclose to the client the basis on which the client will be billed at the beginning of the engagement (Law Society of British Columbia Code of Professional Conduct, Rule 3.6-3, Commentary # 1). The duty to advise is particularly acute in a contingency fee situation. At the beginning of an engagement, a lawyer should ensure that the client understands: (a) (b) (c) (d) the manner in which the fee will be calculated; the rights of the client and lawyer to terminate the engagement; what will happen if the engagement is terminated; and the client s right to review both the contingency fee agreement and any bill rendered by the lawyer. A lawyer should be particularly diligent in discharging their duty to advise when a client may have a cognitive injury or may not be well educated or experienced in litigation. As a matter of practice, lawyers should recommend that potential clients obtain independent legal advice before entering into a contingency fee agreement. In many cases, it will not be practical to require clients to obtain independent legal advice before signing contingency fee agreement. However, if a lawyer is contemplating taking on a risky, time-consuming or complicated matter on a contingency fee basis, requiring the client to obtain independent legal advice before executing the contingency fee agreement may insulate the lawyer from any claim that it has failed to fulfill his or her duty to advise or that the contingency fee agreement is unfair. IV. Challenges to a Contingency Fee Agreement The Legal Profession Act provides a client with a right to review both the contingency fee agreement and the contingency fee charged pursuant to the contingency fee agreement. A. Review of the Contingency Fee Agreement Section 68 of the Legal Profession Act permits a client to review a contingency fee agreement to determine whether it was fair and reasonable at the time it was executed.

6 2.1.4 The time limit for applying to review a contingency fee agreement is short. A client must obtain an appointment to review a contingency fee agreement within three months of the date on which the agreement is made or the solicitor-client relationship ends. The court has very limited discretion to extend the time limit. A contingency fee agreement can be reviewed even if the client has paid any bills rendered pursuant to the contingency fee agreement. It is particularly important for a lawyer who is taking over a file begun by another lawyer on a contingency fee basis to advise his or her new client that their right to challenge the fairness of the original contingency fee agreement may expire three months after the end of the relationship. A client who waits to determine the result of their case before challenging the fairness of a contingency fee agreement may be out of time and the court has very limited discretion to extend the time limit for reviewing a fee agreement. A client who challenges the fairness of a contingency fee agreement must establish that the agreement was fair and reasonable, given the circumstances existing at the time it was made. A Registrar reviewing a contingency fee agreement will first consider whether the client understood the agreement, whether there was any pressure or undue influence placed on the client and whether the lawyer took advantage of the circumstances. If the contingency fee agreement was obtained fairly, the Registrar will consider whether the fee structure set out in the contingency fee agreement is reasonable. For example, a Registrar may consider a contingency fee agreement to be unreasonable if it called for a contingency fee of 60%, even if it was obtained fairly. If the Registrar concludes that a contingency fee agreement is unenforceable because it is unfair or unreasonable, the lawyer may render a bill on a quantum meruit basis and the client may seek a review of that bill. If the Registrar concludes that a contingency fee agreement is fair and reasonable, the client may still seek a review of the bill rendered pursuant to the contingency fee agreement. B. Review of a Bill Section 70 of the Legal Profession Act permits a client to challenge the fee charged pursuant to the contingency fee agreement. The fee charged pursuant to a contingency fee agreement must be fair, even if it is calculated pursuant to the terms of a contingency fee agreement. It is possible for the fee calculated pursuant to a fair contingency fee agreement to be unfair. For example, a fee agreement may be fair, but if the matter settles quickly for a large sum, the fee charged pursuant to that agreement may be unfair as it may over compensate the lawyer for the work he or she did. In Mide-Wilson v. Hungerford Tomyn Lawrenson and Nichols, 2013 BCSC 374, the court refused to allow a fee charged pursuant to a contingency fee agreement even though it had concluded that the contingency fee agreement was fair and reasonable, because: A client need only pay a proper fee there is a point when the differential between the work done and the fees payable under a contingency fee agreement must be adjusted to maintain the integrity of the profession. In such circumstances the terms of the contract must be sacrificed to insure that the client pays no more than a proper fee.

7 2.1.5 A contingency fee agreement is not a lottery ticket. Success in the action does not guarantee a fee in the amount set out in the agreement. Even if the agreement was neither unfair, nor unreasonable at the time it was entered into, the final account must be reasonable and proper given the services provided and the risk undertaken. (paras. 173 and 180) In Mide-Wilson, the Court of Appeal confirmed that a contingency fee could be reviewed even if the contingency fee agreement was fair and reasonable: Rather than bearing some relationship to the work done (or the difficulty of the file, the skill required or the firm s standing), the fee was simply a percentage of the value of [the settlement]. Where a lawyer charges a fee that is a percentage of a settlement of this kind, he or she must realize that the dollar amount might well turn out to be unreasonable when judged in to context of the Legal Profession Act and the professional relationship between lawyer and client. Mide-Wilson v. Hungerford Tomyn Lawrenson and Nichols, 2013 BCCA 559 at para. 102 V. Termination of the Engagement A. A Client May Terminate the Engagement A client has an absolute right to terminate their relationship with their lawyer. A client may terminate the relationship for cause (for example, if the lawyer is refusing to act on the client s reasonable instructions, has become suspended or is otherwise unable to fulfill their professional obligations to the client) in which case the lawyer may not be entitled to any fee. A client may also terminate the relationship with their lawyer without cause, in which case the lawyer is entitled to a reasonable fee for the work they did prior to the termination of the engagement. A lawyer is not ordinarily entitled to end the lawyer-client relationship without good cause, which typically includes a request by the client to do something unlawful or unethical or a total loss of confidence between the lawyer and the client. A lawyer s right to withdraw is limited by both the Law Society Rules and the Rules of Court. A lawyer who is considering withdrawing should carefully consider their options, as well as the provisions of the Code of Professional Conduct, which restrict a lawyer s ability to withdraw as counsel (Code of Professional Conduct, Rule 3.7). If a lawyer withdraws from a case without cause, they may be disentitled to any fee for the services they provided (Slater Vecchio LLP v. Cashman, 2014 BCCA 6 at paras ). Ideally, a contingency fee agreement should set out the circumstances in which a lawyer may withdraw and the manner in which the lawyer will be paid if the lawyer-client relationship is ended. B. No Bill Prior to Recovery Regardless of the terms of the contingency fee agreement, it appears that a lawyer who has entered into a contingency fee agreement with his client cannot render a bill until the client s recovery is known, even if the client ends the lawyer-client relationship prior to recovery.

8 2.1.6 In McQuarrie Hunter v. Foote, 41 B.C.L.R. 123 (C.A.), the Court of Appeal held that although the client s obligation to pay a lawyer crystalized on discharge, no money is due until the value of the lawyer s services are determined, which requires a consideration of the result of the matter. C. A Lawyer May Assert a Solicitor s Lien A lawyer, acting on a contingency fee basis, whose engagement has ended may be entitled to both a possessory lien and a charging lien pursuant to s. 79 of the Legal Profession Act. In FitzGibbon v. Ma, 2012 BCCA 269, the court held that a lawyer who had agreed to act on a contingency fee basis, but withdrew before recovery, was entitled to claim a solicitor s lien over any amount eventually recovered by the client, if the lawyer can establish that: (a) (b) (c) the lawyer was retained by the client; the lawyer is unlikely to be paid unless a lien is granted; and property was recovered or preserved through the lawyer s efforts. A lawyer who takes over a file midway through should be particularly alert to the possibility that the original lawyer may have asserted a solicitor s lien, as the second lawyer may be liable to the first lawyer if funds are paid out to the client despite a claim for a solicitor s lien (FitzGibbon, paras ). D. Fees Charged by Multiple Firms The transfer of a contingency file from one lawyer to another can lead to complicated fee disputes: (a) (b) (c) (d) the client may contest the fairness of the fees charged by both lawyers; the client may challenge the fee charged by one, but not both of the lawyers; one of the lawyers may challenge the fee charged by the other lawyer; or both the client and the lawyers may challenge the fees charged. These disputes can become even more complicated if the second lawyer charges a contingency fee that is different from the first lawyer or charges the client on a quantum meruit basis. Fortunately, in most cases, the lawyers and their clients are able to work out a reasonable resolution. However, if either the client or the lawyers challenge the fees charged, the court is likely to determine a fair fee based on quantum meruit, not some sort of pro-rated division of the entire fee chargeable pursuant to the contingency fee agreements. Any lawyer who renders a bill pursuant to a contingency fee agreement must be certain that the total fee payable by the client is reasonable given the circumstances existing at the time the bill is prepared (Law Society Rules, Rule 8-1(2)). Accordingly, the lawyer should review the work he or she did and derive a fee based on the extent and quality of that work, rather than attempting to carve out a portion of the total fee available to be charged pursuant to the contingency fee agreement.

9 2.1.7 VI. Conclusion Contingency fee agreements can be a useful tool to ensure access to justice and level the playing field between individual litigants and large insurers. However, it is important for lawyers who enter into contingency fee agreements with their clients to ensure that they comply with the Law Society requirements, treat their clients fairly, and place the clients interests ahead of their own.