What is Contingent Fee?

Explanation

Contingent Fee is defined as the fee a lawyer charges only when the lawsuit is successful. So say a lawyer helped win a lawsuit for a particular claim, and there is X amount that the lawyer helped the client 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, he can also run a case and win. However, typical fee structures are costly for poor people to manage.

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How Does Contingent Fee Structure Work?

  • Contingent Fee is generally opted by people who don’t have money to pay for the lawsuit. So when a person approaches a lawyer, 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 can win it, he may agree to accept the fee on a contingent basis. This fee structure is costly for the lawyer; here, the lawyer will bear all the case costs. Say the paper works, filling, and other expenses related to the case.Once the lawyer starts with the case, 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, the client will have to pay 30% of the recovered money.

Importance and Uses

  • The contingent fee structure in law is beneficial for a financially weak person who needs help to fight a case. So this kind of fee structure is advantageous in legal practice. This structure helps lawyers 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 that 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.read more 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.read more, 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 depends on the outcome, so there is no fee charged if a particular event doesn’t occur. On the other hand, hourly fees are irrespective of consequences. 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 depends on the outcome, the person needs to ensure that the result is positive.

Advantages

  • 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.

Disadvantage

  • After a positive outcome, the contingent fee net payout may be more than the hourly fee. So it is costly if the recovery amount is too significant, then a certain percentage of the total will be huge compared to the hourly fee that the person would have charged otherwise.When this structure is offered, lawyers tend to pick only particular cases in which they are sure they will win. So in those particular cases, the hourly fee structure will be cheaper, but as the client is financially not so strong, lawyers use that as an advantage and go for the contingent fee structure.

Conclusion

The contingent fee structure is significant in the legal practice field. Many use this to win cases that would have been not possible otherwise. However, it must be charged economically. For example, one shouldn’t charge 70 – 80% of the recovery amount as a contingent fee. Though this fee structure is outcome-based and helps clients pay only when there is a positive outcome, the percentage should still be checked and controlled.

This article has been a guide to contingent fees and their definition. Here we discuss the contingent fee in law practice and its importance, advantages, and disadvantages. You may learn more about financing from the following articles –

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