What is Contingent Fee?
A contingent fee, commonly used term in United States, is a fee that is 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 Conditional Fee.
Contingent Fee is defined as the fee which a lawyer charges only when the lawsuit is successful. So say a lawyer helped in winning a lawsuit for a particular claim, and there is X amount that the lawyer helped the client to 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. So if a person is poor, then also he can run a case and win. Typical fee structures are really costly for poor people to manage.
How Does Contingent Fee Structure Work?
- Contingent Fee is generally opted by persons who don’t have money to pay for the lawsuit. So when a person approaches a lawyer, then 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 it is possible to win it, then he may agree to accept Fee on Contingent Basis. This Fee structure is costly for the lawyer; here, the lawyer will bear all the cost of the case. Say the paper works, filling, and other expenses related to the case.
- Once the lawyer starts with the case, then his primary focus becomes how to win it. It is because he will only be paid if he wins. A percentage is decided between the client and lawyer 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, then the client will have to pay 30% of the recovered money.
Importance and Uses
- The contingent fee structure in law is beneficial for a person who is financially weak and needs help to fight a case. So this kind of Fee structure is advantageous in legal practice. This structure helps lawyers to 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 who 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 underwriterUnderwriterThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there. 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 FundHedge FundA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques., 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.
Difference Between Contingent Fees and Hourly Fees
- The Contingent Fee is dependent on the outcome, so if a particular event doesn’t take place, then there is no fee charged. On the other hand, hourly fees are irrespective of consequences. That is, 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 is dependent on the outcome, so it is vital for the person to make sure that the result is positive.
- 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.
- The Contingent Fee net payout after a positive outcome may be more than the hourly fee. So it is at times costly if the recovery amount is too significant, then a certain percentage on the total will be huge as compared to the hourly fee that the person would have charged otherwise.
- When this structure is offered, then lawyers tend to pick only particular cases in which they are sure that they will win. So in those particular cases, the hourly fee structure will be cheaper, but as the client is financially not so strong, so lawyers use that as an advantage and go for the Contingent Fee structure.
The contingent fee structure is significant in the legal practice field. Many use this to win cases that would have been not possible else wise. It must be charged economically. One shouldn’t charge 70 – 80% of the recovery amount as a contingent Fee. So though this kind of fee structure is outcome-based and helps clients to pay only when there is a positive outcome, still the percentage should be checked and controlled.
This article has been a guide to contingent fees and its definition. Here we discuss how does the contingent fee in law practice along with importance, advantages, and disadvantages. You may learn more about financing from the following articles –