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Origins of Legal Contingency Fee Agreements

Contingency Fee Agreements

“Contingency Fee Agreements” … No fee unless we recover for you” … “The no fee promise” … “No charge unless we win!” …

We see and hear these and similar Contingency Fee Agreement ads daily. But where did these arrangements come from? And how did they develop into the wide-spread use that we see and hear constantly?  Thanks to the Professor Peter Karsen’s 1998 article, Enabling the Poor to Have Their Day in Court: The Sanctioning of Contingency Free Contracts, a History to 1940, we have a bit of an answer.

The typical legal contingency fee agreement is a contract in which the fees are payable only if there is a favorable result.  Legal contingency fee agreements are typically calculated as a percentage of the client’s recovery through a settlement or trial verdict.  And if there is no settlement or verdict, the attorney and client recovery nothing.

Contingency fee-like agreements trace their roots to thirteenth century England where the practice of third parties “financing” litigation, called champerty, was deemed illegal.  The prohibition originally sought to stop wealthy individuals from financing litigation against competitors in an effort to take their land and property to increase their own wealth through a proxy. These prohibitions, however, had the ultimate effect of limiting the lower classes access to the courts.  Indeed, without the means to pay an attorney the poor where without a means to effectively enforce their rights.

Even today, English courts manage lawyer funded litigation differently than the U.S.  English solicitors typically enter what known as a “conditional fee agreement.”  If the case is won, the solicitor may recover a nominal hourly fee, plus a “success fee” that is be no greater than 100 percent of the nominal fee.

From the beginning, attitudes in America were quite different.  Indeed, America’s founders had the radical notion that the criminally accused had a right to counsel which was preserved in the Constitution’s Sixth Amendment. England didn’t adopt a similar right to counsel for another 50 years.

The belief in a right to an attorney and access to courts filtered into the civil justice system as well.  This notion pushed American courts to reject England’s “loser pays” system removing the Sword of Damocles over a losing party of potentially having to pay the winner’s attorney’s fees. And gradually, the same sentiment advanced the use and acceptance of contingency agreements.

In 1813, Pennsylvania Justice Hugh Henry Brackenridge wrote “parties not monied” sometimes “stipulate for something out of what was recoverable,” with attorneys “taking what are called contingency fees.”  Though the practice was still not accepted by all courts and attorneys of the day, notable attorneys such as Henry Clay and Daniel Webster worked under contingency agreements.

Reported cases from across the country in the early 1800s illustrate America’s growing acceptance of contingency agreements though still tinged with some skepticism.  For example, in 1823 arguing before the Kentucky Supreme Court an attorney in Rust v. LaRue, noted “[a client] may not have anything else to give, and without the aid of the matter in this contest, he can never sue for his right, not having otherwise the means to employ counsel…” By the mid-1800s these agreements continued to gain approval.  In Lytle v. State, Arkansas Justice Scott in 1857 expressed the general sentiment spreading across the county that “rights are nothing without the means of enforcing them.”  And, around the same time, state legislatures were redefining the broad scope of champerty to provide for contingency fee agreements.

And by 1875, U.S. Supreme Court Justice Morrison Waite in Write v. Tebbitsnoted the wide-spread use and acceptance stating that contingency fee agreements ‘legitimate and honorable.’

Today, such contracts are common and permeate the legal community.  While still not practical or available to all matters, for better or worse, they remain entrenched in our legal system.

 

2018