Navigating contingency fees

Because contingency fees are paid as a flat percentage of the amount recovered for the client, they can be an effective tool for clients to access justice meaningfully. For lawyers, however, they can be an ethical and procedural minefield.

In Alberta, rule 3.6-2 of the Code of Conduct allows lawyers to use contingency fee agreements (CFAs) in any matter provided the CFA complies with governing legislation, typically part 10, subdivision 3 of the Rules of Court. The Code stipulates that regardless of the file's subject matter, the fee charged must be fair and reasonable, based on factors such as the likelihood of success, the nature and complexity of the claim, the expense and risk of pursuing it, and the expected recovery. 

Lawyers can include party-party costs in their fee under a CFA. At first instance, costs received by a lawyer belong to the client. A lawyer on contingency may then only receive a portion of a costs award if the CFA satisfies rule 10.7(2)(f) of the Rules of Court. The CFA must state that the costs award is intended to be complete or partial reimbursement of the lawyer's charges; the client waives the right to any amount from the costs award payable to the lawyer; the amount retained will be in addition to the lawyer's fees; and the percentage must not exceed the percentage of the settlement or judgment to which the lawyer is entitled.  

The court has little leeway in interpreting rule 10.7(2)(f). If the CFA does not comply with the rules, the lawyer cannot rely on it and is entitled only to fees payable as if there was no CFA. Only where the departure from the rules might be of "diminished significance" can the court uphold a CFA which technically fails to satisfy them. 

The court has inherent jurisdiction to address the interpretation of a CFA and its reasonableness and an exceptional jurisdiction to vary, modify or disallow the agreement (see Morrison v RPPC). That jurisdiction is now found in Rule 10.18(3)(b). Relevant considerations include whether the agreement was unfair or oppressive at the time of signing, whether the lawyer ran an unusually high or low risk of not being paid anything for their services, whether the file evolved such that what was originally a fair fee became unfair to either party, whether the client did not understand how the CFA operated, or whether either party engaged in unreasonable conduct.

The leading case when considering applications that challenge the interpretation or fairness of a CFA is Rusk (Next Friend of) v Medicine Hat (City). It requires the court to consider the client's financial circumstances, who is responsible for paying the disbursements, the complexity and difficulty in determining liability and damages, whether liability is in issue, whether the opposing party is well represented, the risk assumed by the lawyer, their experience, the time they spent on the file, whether they efficiently identified the issues, the point at which the matter was resolved, how important concluding the litigation was to the client, and whether the settlement was a good one. Many of these factors are now codified in Rule 10.2 and are matters that lawyers should anticipate when drafting a CFA on a particular file. 

Of particular note, in Rusk, the court states that "any lawyer who fails to keep [time] records when undertaking contingency fee litigation in circumstances where there is a possibility of [their] fee being taxed is foolhardy – for lack of detailed time records deprives the Court of important information necessary to protect the legitimate interest of the provider of legal services." 

Lawyers also face potential challenges in withdrawing from and transferring a CFA file. At the outset of the retainer, they should anticipate whether they can withdraw, on what terms they can release the file to another lawyer (or to the client), and when and on what basis they will be paid. Indeed, commentary to rule 3.6-2 notes that, in CFAs, the lawyer undertakes the risk of not being paid if the suit is unsuccessful and can withdraw only for reasons set out in rule 3.7-5 (obligatory withdrawal): When the client discharges the lawyer, persists in instructing the lawyer to act contrary to professional ethics, or when the lawyer is not competent to continue handling the matter. However, Rule 3.6-2 contains an exception that a lawyer may withdraw from a CFA for other reasons than those in rule 3.7-5 if the CFA specifically addresses those reasons. For example, a lawyer may seek to withdraw from any file where there is a loss of confidence because the client has deceived the lawyer or has been persistently unreasonable or uncooperative, where the lawyer has difficulty obtaining instructions from the client, or where the client refuses to accept or act on the lawyer's advice on a significant point (such as settlement). If these factors are not specifically addressed in the CFA, the lawyer cannot rely on them to withdraw. The lawyer may also wish to contemplate what will happen in the event of an unexpected illness or leave of absence on their part.  

The Code also stipulates that the lawyer cannot withdraw if doing so would prejudice the client. Rule 3.7-6 requires a withdrawing lawyer to try to minimize expense and avoid prejudice to the client. If the file is at a crucial juncture, the lawyer may not withdraw or should at least consider applying to the court to allow them to withdraw. Indeed, rule 2.31 of the Rules of Court requires such permission after a scheduled trial date. Failure to do so renders the withdrawal of no effect. 

If the CFA requires the client to pay for disbursements and other charges while the file is ongoing, the lawyer may withdraw if the client fails to do so, provided it is clearly set out. 

Transferring a file governed by a CFA to successor counsel often results in disputes between the client and their former lawyer with respect to fees, liens and trust conditions. 

Some lawyers draft CFAs to require the client to pay the lawyer's fees on an hourly or quantum meruit basis if the client terminates the CFA prior to the matter's conclusion. However, the file's ultimate success may determine whether fees calculated on an hourly or quantum meruit basis are fair and reasonable. 

In Re Legal Profession Act, 1990 and MLG, the court held that a CFA provision requiring lawyer's fees payable "forthwith" upon transfer of the file to another lawyer was unenforceable. The lawyer had to wait until the triggering event in the CFA occurred. In McQuarrie, Hunter v Lord Estate, [1982] BCJ No 2153 (BCCA), the court noted that a client who must pay even reasonable fees at the time they discharge the lawyer would be forced to choose between continuing with a solicitor in whom the client has lost faith, or in some cases, discontinuing the action. This would defeat the underlying rationale of CFAs. Waiting until the happening of the contingency (typically settlement or judgment) enables both parties' interests to be balanced in light of the litigation's outcome. 

In another matter, the court left the enforceability of such a clause open (BBA v S, [1995] AJ No 1229, 33 Alta LR (3d) 81 (QB)). It held that while the clause was contrary to the underlying rationale of contingency fees, it was nonetheless valid and enforceable if a client, understanding its significance, agreed to it. In that case, the court held the clause was unenforceable because the lawyer did not discharge his duty of explaining it so that the client understood its significance.

A client may not terminate the solicitor-client relationship to avoid paying the lawyer. The courts are clear that a lawyer who has laboured on a file should not be deprived of a proper fee because the former client seeks to be paid the fruits of that matter without paying the lawyer. A lawyer can protect their entitlement to fees when the file is transferred to another lawyer by imposing trust conditions on that lawyer (A Client v A Law Firm, [1999] AJ No 1340). An appropriate trust condition may stipulate that the successor lawyer will hold in trust the fees portion of the funds recovered until each lawyer's share is determined on a quantum meruit basis. As the file belongs to the client, it is inappropriate to impose trust conditions that the successor will keep the file in its original form, and return the file at the end of the retainer. The transferring lawyer should keep a copy of the file, but must do so at their own expense. 

A difficulty may arise when the client decides to terminate the retainer and self-represent. Courts have held it is not appropriate to assert a solicitor's lien over a file that is subject to a CFA. The court will protect lawyers for their fees if this can be done without unduly interfering with the client's pursuit of their claim (see for example Law Firm v Solicitor, [1992] AJ No 1242 (QB) (Law Firm)). In Law Firm, the court ordered the defendant not to pay the litigation proceeds to the plaintiff, whether ascertained in the future by settlement or judgment, without first allowing time for determination and payment of the lawyer's account. 

Similarly, a client may discontinue or abandon their claim without achieving a settlement. Despite their interest in the outcome, a lawyer cannot prevent this. Instead, a lawyer may negotiate a proposed fee with the client and render an account for that amount, render an account to be paid or litigated, or seek the court's assessment and review. Lawyers should provide in the CFA for the client discontinuing or abandoning their claim.

The lawyer should be aware of the client's particular circumstances and goals in pursuing the litigation, ensuring they inform the CFA. If lawyers have questions about CFAs, they are welcome to contact the Practice Advisors.