NYCLA COMMITTEE ON PROFESSIONAL ETHICS
Date Issued: 9/21/06
Propriety of fee agreement changing legal fee prospectively from contingency to hourly fee if client refuses settlement offer.
IN A RETAINER AGREEMENT WITH CLIENT IN A PERSONAL INJURY MATTER, A LAWYER MAY NOT ETHICALLY INCLUDE A PROVISION THAT PERMITS THE ATTORNEY UNILATERALLY TO CHANGE THE LEGAL FEE PROSPECTIVELY FROM A CONTINGENCY TO HOURLY FEE BASIS IF THE CLIENT REFUSES A SETTLEMENT OFFER DEEMED REASONABLE BY THE LAWYER.
DR 2-106(A), DR 5-l0l(A), DR 7-l0l(A)
EC 2-19, EC 7-7
In a retainer agreement with a client in a personal injury matter in which the lawyer represents the plaintiff, may a lawyer ethically include a provision that permits the attorney to unilaterally change from a contingency to hourly fee basis if the client refuses a settlement offer that the lawyer considers fair and reasonable?
The question posed to the Committee is whether, in a personal injury matter, a lawyer may ethically propose or enter into a fee agreement with the plaintiff-client that begins as contingent but may become hourly if the client declines a settlement offer deemed fair and reasonable by the lawyer. We conclude that such conduct is ethically prohibited.
The contingency fee is not unique to the personal injury field, and is utilized in a variety of areas of practice. Here, our primary concern is with the most typical use of the contingency fee: on behalf of an injured personal injury plaintiff. A contingency fee makes representation possible for personal injury clients, many of whom cannot afford an hourly fee. If after a period of ongoing litigation representation, a lawyer were permitted to invoke the proposed arrangement and require the client to begin paying by the hour, we believe that the resulting financial pressure to settle would violate the client’s right to make that settlement decision.
This conclusion is supported by authorities from jurisdictions outside New York.
For example, ABA 94-389 states that:
All contingent fee agreements carry certain risks: the risk that the case will require substantially more work than the lawyer anticipated; the risk that there will be no judgment, or only an unenforceable one; the risk of changes in the law . . . and the risk that the client will require the lawyer to reject what the lawyer considers a good settlement or otherwise to continue the proceedings much further than in the lawyer’s judgment they should be pursued.
Thus, the uncertainty that accompanies a contingency fee case cuts both ways, and can result in a quick windfall (to the lawyer’s benefit) or unanticipated months of extra work for the lawyer. This is a risk that the lawyer accepts by entering into the contingency fee arrangement and may not eliminate by including the proposed provision.
Nebraska Opinion 95-1 concludes that it is unethical for a lawyer to have a contractual arrangement with a client that provides for a contingency fee unless the client elects to settle for less than the lawyer believes reasonable, in which case the lawyer may charge an hourly fee for hours incurred to date. Specifically, because the client would have to take the arrangement into account in evaluating a settlement offer, that committee found the arrangement “an impermissible transfer of the authority of the client to the attorney … arguably in violation of DR 7-l0l(A) and EC 7-7” of the Nebraska Model Code of Professional Responsibility. In addition, the arrangement had the potential to produce an excessive fee in violation of Nebraska’s DR 2-106(A), because the:
large attorney’s fees which are generated by the contingent fee can only be justified because of the risks the lawyers must bear of not making an adequate recovery to cover his or her time in certain cases. The client’s desire to accept a less than satisfactory settlement is part of that risk. To suggest that a lawyer can have it both ways with the use of the proposed clause is not acceptable to the committee.
In New York, DR 7-l0l(A) provides that a lawyer shall not intentionally “fail to seek the lawful objectives of the client. … “ EC 7-7 provides that, generally speaking, “the authority to make decisions is exclusively that of the client and, if made within the framework of the law, such decisions are binding on the lawyer,” and that “it is for the client to decide whether to accept a settlement offer . . . .” We find, therefore, that the proposed provision would violate the client’s right to decide whether to settle because the lawyer, as fiduciary for the client, is best positioned to evaluate the implications of the provision at the outset. For example, the New York Court of Appeals has written that the attorney client relationship:
is imbued with ultimate trust and confidence. The attorney’s obligations, therefore, transcend those prevailing in the commercial market place. . . To the public and clients, few features could be more paramount that the fee — the costs of legal services. Accordingly, attorney-client fee agreements are a matter of special concern to the courts and are enforceable and affected by lofty principles different from those applicable to commonplace commercial contracts.
In a retainer agreement with a client in a personal injury case, a lawyer may not ethically include a provision that permits the attorney to unilaterally change from a contingency to hourly fee basis, prospectively, if the client refuses a settlement offer that the lawyer considers fair and reasonable.