Contingency Fee Lawyers Are Not Venture Capitalists

The Court of Appeal for British Columbia released a scathing judgment in Mide-Wilson v. Hungerford Tomyn Lawrenson and Nichols on New Year’s eve, upholding a Supreme Court decision earlier in the year which had reduced legal fees in a contingency arrangement from nearly $17 million to $5 million, in the interest of maintaining the integrity of the legal profession. The decision has implications for the understanding and application of contingency fee arrangements, which should be reviewed for contingency lawyers when evaluating the monetary worth of work in progress on their files.

The matter dealt with the million dollar estate of the defendant’s grandfather, who had suffered macular degeneration and other health issues towards the end of his life. The defendant’s grandfather made a number of testamentary changes transferring most of his assets between 2007-2008, prior to his death that same year. The plaintiffs attempted to have these revised testamentary instruments enacted. The defendant alleged these changes to the estate had occurred as a result of undue influence exerted upon her grandfather, and sought to oppose it.

The contingency fee agreement entered into by the defendant was on a progressive scale based on timelines and stages in the action as follows:

a) 20% of any settlement entered into before December 9, 2009; or

b) 25% of any settlement entered into after December 8, 2009 and before December 9, 2011; or

c) one-third of any settlement entered into on the earlier of:

a. December 9, 2011 or thereafter; and

b. six weeks before the first day of trial of any issue; or

d) one-third of any judgment.

The file was ultimately settled in 2009 for a payment of $8 million by the defendant to the plaintiffs. A proposal of $12 million in fees was made to the defendant by her lawyer, based on an estimated value of the estate of $100 million, less the settlement and $12 million in taxes owing, was rejected by the defendant. Following reports made by expert valuators the firm issued a final bill of $16,971,015, with total fees of $19,044,549.78 once disbursements and GST were included.

The defendant sought a determination under ss. 6870-71 of the Legal Profession Act, S.B.C. 1998, c. 9, of an appropriate fee, and review of the fairness and reasonableness of the arrangement. The firm had the view that the contract was made by sophisticated parties in objectively fair circumstances, and submitted that parties should be held to their bargains given the risks undertaken by the firm. The defendant client proposed that contingency arrangements, although used to facilitate access to justice, was a contract governed by equitable, fiduciary, and public policy considerations that can and should override the terms of the agreement where the circumstances are warranted.

The Registrar initially upheld the arrangement, on the basis that the client was a sophisticated business woman who knew what she was getting into, and the firm risked up to $2 million in expenses by taking on the file. The Registrar reviewed the value of the estate and identified $10,180,325.81 with taxes and disbursements as a fair and reasonable fee amount based on the agreement.

The Supreme Court decision by Justice Goepel did not find that the arrangement was unfair or unreasonable under s. 68, but instead scrutinized whether it was fair under the ss. 70-71 provisions, finding an error by the lower court decision on the basis that legislative changes allowed the Registrar to properly review the contents of the agreement. Justice Goepel reduced the fees to $5 million by recognizing that lawyers are entitled to larger fees in contingency fee arrangements and takes into account the risks the lawyers undertook in the file. He stated,

[173] A client need only pay a proper fee. I agree with Registrar Cameron’s comment in Parpatt that there is a point when the differential between the work done and the fees payable under the contingency agreement must be adjusted to maintain the integrity of the profession. In such circumstances the terms of the contract must be sacrificed to insure that the client pays no more than a proper fee.

[178] In order to maintain the integrity of the legal profession, a legal account must have some relationship to the actual work carried out. To allow the fees awarded in this case given the work the Solicitors actually did would call into question the integrity of the profession.

[180] A contingency fee agreement is not a lottery ticket. Success in the action does not guarantee a fee in the amount set out in the agreement. Even if the agreement was neither unfair nor unreasonable at the time it was entered into, the final account must be reasonable and proper given the services provided and the risk undertaken.

Justice Newbury of the Court of Appeal reviewed these decisions and said,

[77] In summary, if and to the extent that the chambers judge intended to approve a departure from Commonwealth No. 2 or to suggest that a registrar under ss. 70-71 should put the agreement in question to one side, he was, with respect, in error. But the chambers judge was here an appellate court, and he was not determining the proper fee anew or in so doing, adopting a “top-down” or “bottom up” approach. That was for the Registrar, who did take the terms of the CFA as her starting-point and to that extent followed Commonwealth No. 2. The task for the chambers judge, from whom this appeal is taken, was to decide whether the Registrar had erred in failing to consider or to give sufficient weight to all relevant factors…

Justice Newbury examined the background behind the integrity principles at stake, while emphasizing the need for contingency fees to facilitate access to justice, stating,

[80] This court’s reference in Commonwealth No. 2 to the integrity of the profession in the context of lawyers’ fee agreements has very deep roots. It has informed the matter of lawyers’ fees for centuries. In the dim mists of the common law, a barrister could not sue for payment of his fees and indeed could not make an express contract with a client for the payment of future fees…

[82] Historically, contingent fee agreements in particular were considered inherently incompatible with the integrity and honour of the legal profession…

[85] Leaving aside the various means available to the courts to prohibit contingent fee agreements, lawyers’ contracts of service, whether based on a contingency or otherwise, have long been reviewable by the courts in their supervisory capacity over lawyers. Since fee agreements became lawful, courts have had jurisdiction to tax (i.e., review and set) fees, as well as to interfere with or modify contracts between solicitors and clients: see Re A Solicitor[1931] 1 D.L.R. 315 (Ont. S.C.) at 316, per Middleton J.A.; Tweten v. Nichols 1985 CanLII 395 (BC SC), (1985) 61 B.C.L.R. 225 (S.C.) at 230-31. Equity also imposed a duty of fairness on solicitors in contracting with clients, requiring the solicitor to establish, for example, that the client understood the agreement, that the price was reasonable, and “that the transaction was in all respects fair, and such as an independent solicitor who had performed his duty, would have advised his client to enter into.” (Per Mowat, V.C. in Oakes v. Smith (1870) 17 Gr. 660 (Ont. Ch.) at 673-74.)

[86] A variety of objectives that are now subsumed in the phrase “integrity of the profession” have animated courts’ attitude to lawyers’ fee agreements generally and contingent fee agreements in particular. Early common law courts were concerned to forestall abuses of the legal system that could be perpetrated by lawyers on clients and on the court system in which lawyers held (and continue to hold) a special place of trust. Sharing in the proceeds of litigation could tempt lawyers to exaggerate their clients’ claims, to suppress evidence, to modify advice given to clients, or otherwise to depart from the professional attitudes and conduct expected of them.

[89] Nevertheless, the practical demands of “access to justice” have led courts and legislatures to recognize that the old rules and assumptions must give way, at least in part. Contingency agreements are obviously an important means by which not only “the poor” (see Minish, at 71) but the middle class may be enabled to bring their causes, public or private, to courts of law…

The firm submitted that there should be some predictability in contingency fee arrangements, instead of what they characterized as an “arbitrary compensation rule.” They suggested that contingency arrangements should be perceived as a joint venture with a client, and indicated that allowing the decision to stand would deter other lawyers from taking on large, complex or risky files.

Justice Newbury rejected this argument, finding that the arbitrary nature of the case was that the facts were unusual as the compensation would be based on the value of the estate, which was not based on any skill of the lawyers involved. There were no natural limits on recovery as in personal injury which could provide estimates of compensation. A contingency arrangement was not a true joint venture because the parties are not equal and the lawyer owes a fiduciary duty to the client. He concluded,

[97] I believe most members of the public would think it sensible for “services actually provided” to be accorded importance in any fee review. At issue here, after all, is a fee for service − not, as Mr. Macintosh observed, a winning lottery ticket. The Client was led to believe she would be treated fairly if her claim against Mr. Cewe’s estate settled quickly. Counsel seem to have agreed it did not settle “quickly”, but it did settle within eight months and with much less effort than anyone could have expected. No discoveries were held; no document exchanges took place; and any trial was far in the future when Home and Gibson “caved” on the second day of the mediation.

[98] The chambers judge found that the Registrar had given too much weight to the terms of the CFA and, at least implicitly, that she had failed to give sufficient weight to the integrity of the profession. Again, I am not persuaded he erred in so holding (and I would add that she overemphasized the importance of holding parties to their bargains in this context) or in finding that a fee of $9,000,000 did not strike the right balance between an amount that handsomely rewarded the Firm and one that grossly over-rewarded it. The chambers judge’s choice of $5,000,000 does in my view strike a reasonable balance, and I would not disturb it.

The implications for the bar is that where a lawyer charges a contingency fee as a percentage of a settlement which does not have a relationship to the work done, the difficulty of the file, the skill involved, or the experience of counsel, they should be aware that the fee may come under scrutiny and found to be unreasonable given the professional relationship between the lawyer and client. Although the risk of no recovery and an expectation of higher compensation than fee-for-services will still be applied, but courts will look at the entirety of the circumstances in evaluating such agreements.

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Comments

  1. I believe that should read “The file was ultimately settled in 2009 for a payment of $8,000,000 by the defendant to the plaintiffs.”

  2. Ben, Thanks and I have corrected.

    I was also pointed to a recent Ontario decision in Cannon v. Funds for Canada Foundation by Bob Muroe of Ross McBride.

    Justice Belobaba suggests that contingency arrangements should be presumptively upheld, and granted counsel’s request for a one-third fee award. The supplementary decisions do not share the cases cited by counsel in support of this amount, and the case does involve a class-action, where the risks are typically much higher for counsel. He did state the following though, which also has implications for access to justice:

    [4] I initially approved class counsel’s legal fees at the 25 per cent level (rather than the full one-third that had been agreed to in the retainer agreement) because, frankly, that’s what other judges were doing. I reviewed several of the decisions, expecting to find persuasive reasons for capping the legal fees at say, 20 to 25 per cent and not allowing the 30 per cent or one-third that had been agreed to in the retainer agreement. What I found, instead, were well-intentioned judicial efforts to rationalize legal fee approvals by discussing arguably irrelevant or immeasurable metrics such as docketed time (irrelevant) or risks incurred (immeasurable.) By using these metrics, judges felt comfortable building up a reasonable legal fees award that was capped at the 20 to 25 per cent level, sometimes 30 per cent but rarely, if ever, approved at the one-third level.

    [5] I couldn’t understand this reasoning. Why should it matter how much actual time was spent by class counsel? What if the settlement was achieved as a result of “one imaginative, brilliant hour” rather than “one thousand plodding hours”?[1] If the settlement is in the best interests of the class and the retainer agreement provided for, say, a one-third contingency fee, and was fully understood and agreed to by the representative plaintiff, why should the court be concerned about the time that was actually docketed? This only encourages docket-padding and over-lawyering, both of which are already pervasive problems in class action litigation.

    [6] If “risks incurred” was something judges could really measure on the material provided, then this metric might make sense. Everyone understands that class counsel accept and carry enormous risks when they undertake a class action. But I don’t understand how a judge, post-hoc and in hindsight, confronted with untested, self-serving assertions about the many risks incurred, can measure or assess those risks in any meaningful fashion and then purport to use this assessment as a principled measure in approving class counsel’s legal fees. And why are we approaching legal fees approval as a building blocks exercise to begin with, working from the bottom up rather than from the top down? Why not start at the top with the retainer agreement that was agreed to by the clients and their solicitor when the class action began?

    [7] In my view, it would make more sense to identify a percentage-based legal fee that would be judicially accepted as presumptively valid. This would provide a much-needed measure of predictability in the approval of class counsel’s legal fees and would avoid all of the mind-numbing bluster about the time-value of work done or the risks incurred.

  3. Jasminka Kalajdzic

    The B.C. Court of Appeal’s decision in Mide-Wilson, and usefully summarized by Omar Ha-Redeye here, comes less than two weeks after the Ontario Superior Court of Justice’s decision in Cannon v. Funds for Canada Foundation, in which Justice Belobaba displayed a starkly different view of contingency fees. Although Cannon arises in the context of a settled class action, the same tension between respecting freedom of contract, on the one hand, and on the other, maintaining the integrity of the profession, is at the fore. Unlike the B.C. Court of Appeal, Justice Belobaba prefers the sanctity of contract and the predictability of a contingency fee.

    Central to the B.C. court’s decision is the normative view that a “legal account must have some relationship to the actual work carried out… the final account must be reasonable and proper given the services provided and the risk undertaken” (para. 79). While acknowledging that contingency fees are needed to facilitate access to justice, the Court clarified that policy goal of reducing barriers to legal services is but one factor to consider, and that the policy of maintaining the integrity of the profession is a primary concern with deep roots.  Access to justice does not, says the court, displace the need for judicial oversight and restraint.

    Contrast such statements with those in Cannon, where Justice Belobaba approves a one-third contingency fee of a $28.2 million settlement. Referring to previous class action decisions in which judges had considered time spent and risks incurred before approving fees of up to 25%, Justice Belobaba concludes that a one-third contingency fee is presumptively valid and should only be departed from in exceptional circumstances. He dismisses the factors of work performed and risks incurred as “irrelevant” and “immeasurable”, asking rhetorically “[w]hy should it matter how much actual time was spent by class counsel? …This only encourages docket-padding and over-lawyering, both of which are already pervasive problems in class action litigation” (paras. 4-6). 

    Leaving aside the perplexing charge that class action lawyers routinely pad their dockets, Justice Belobaba’s approach to contingency fees is remarkable for its departure from well-established statutory authority and judicial precedent. The Class Proceedings Act requires that all fee agreements be approved by the court. Although there is some ambiguity in the language of the Act, the Ontario Court of Appeal has concluded that all agreements – whether based on a multiplier approach or a percentage calculation – must be judicially approved based on the usual factors (including time spent and risk incurred). In the Money Mart decision, the Ontario Court of Appeal stated: “The proper view is that the court acting under s. 32(4)(a) has the authority to determine the fees owing to the solicitor after considering and weighing all relevant factors. It is within the court’s discretion to test the reasonableness of the quantum of a lump sum fee by looking at the result as a multiplier” (para. 72). Work actually performed by counsel, therefore, does matter.

    Further, Justice Belobaba’s presumption of validity is diametrically opposed to the B.C. court’s view of the contractual arrangement between counsel and client. As Justice Newbury points out, lawyer and client are not typical contracting parties and are not equal; among other things, the lawyer owes a fiduciary duty to the client, owes professional duties to the court, takes on most or all of the financial risk, and possesses expertise that the client lacks (para. 92). This is all the more true in class proceedings, where class counsel have far more to gain in the litigation than any class member, and where the contingency fee agreement entered into with the representative plaintiff is essentially a contract of adhesion that purports to bind hundreds, thousands or tens of thousands of other “clients”. In such a scenario, Justice Newbury’s caution against overemphasizing the importance of holding parties to their bargains (para. 98) is the preferable approach.

    Whatever one’s view of the correctness of the Cannon and Mide-Wilson decisions, the cases raise an important, almost existential question about the business of law: how much is too much?  Both courts are sensitive to public perceptions about lawyers. Justice Belobaba concludes that a $9.4 million fee in a $28.2 million class action settlement is not “unseemly”, and that the predictability of a one-third contingency fee (which in turn should increase class actions and therefore improve access to justice) is the more laudable goal. Justice Newbury states that public cynicism resulting from professionals who exploit the system for personal gain should give lawyers pause. In her words, “One must question whether members of the Bar, who occupy positions of special trust and confidence, should chafe too strongly against rules designed to ensure that the line between lawyers and others trading on their own account does not become blurred” (para. 88).

    If these two decisions are any indication, the line between proper compensation and over-compensation of lawyers has never been more blurred.

  4. It is disappointing that the billable hour is so highly regarded by judges in this country.

    Unfortunately they don’t understand that time spent on a file bears no relationship whatsoever to the value received by the client.

    This does not bode well for alternative fee arrangements (even between sophisticated parties) or value-based billing.

    It seems that this law firm would have been better off if it had been grossly inefficient and dragged on the negotiations before settling for the final amount. At least the courts would have then been able to count the hours……

    **head shakes**

  5. Michael McKiernan of The Law Times just wrote a piece on Cannon in today’s issue.

    Mitch,
    I agree that it’s important to have a discussion about value, but there is some discussion in the court of how this might be possible. Cannon is interesting because it arises under the Class Proceedings Act, where “multipliers” are available. In Nantais v. Telectronics Proprietary (Canada) Ltd., Justice Brockenshire stated the following:

    10 Counsel for Pacific Dunlop Ltd. argues that the fee agreement of plaintiff’s counsel is illegal as not being authorized by the Act, and as offending the Solicitors Act, R.S.O. 1990, c. S.15, and An Act Respecting Champerty, R.S.O. 1897, c. 327. Much is made of the “multiplier” provision of the Act, which this counsel portrays as the only permitted contingency arrangement.
    11 In my view, this interpretation flies in the face of the wording of the Act. I find the wording to be clear, but also find the arrangement of the sections somewhat confusing. The special provisions as to costs are found in ss. 32 and 33 of the Act. In my view it would have been clearer if s. 33(1) and (2) had come first, followed by s. 32 and then followed by s. 33(4) through (9). Section 33(1) and (2) make it clear that generally under the Act, despite the Solicitors Act and the Act Respecting Champerty, there can be an agreement between a solicitor and a representative party (on behalf of that party and those represented by that party) for the payment of fees and disbursements only in the event of success. Section 32 makes it clear that any fee arrangement entered into is not enforceable unless approved by the court, and unless it estimates the expected fee, whether contingent or not, and states the method by which payment is to be made, whether by lump sum, salary or otherwise. If so approved, any amounts owing thereunder are a first charge on any settlement funds or monetary award. Section 33(3) through (9), in my view, creates a special type of “otherwise” under s. 32(1)(c) — an arrangement under which hourly rates are quoted, with a provision for applying to the court after the fact, for an increase in such hourly rate, based on the risk incurred in undertaking the case under an agreement to be paid only if successful.
    12 I do not view the special provisions relating to “multipliers” for hourly rates as preventing, in any way, other arrangements as specifically authorized under s. 32(1) (c). I view s. 33(1) and (2) as permitting, despite other statutes, all kinds of fee arrangements contingent upon success, and not just hourly rate multipliers. I reject the contention that the fee agreement is illegal, as not authorized under the Act.

    If judges regard the billable hour so highly, it’s only in part due to our history and legal traditions. Judges interpret statutes, and as this comment states the statutes are in need of rewriting. Perhaps your work Mitch can inspire some creative legislative drafting.

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