Contingency Fee Agreement

A fee arrangement under which counsel is compensated only if the client obtains a monetary recovery, with the fee calculated as an agreed percentage of the amount recovered rather than billed hourly. Contingency fee agreements are the dominant fee structure in plaintiff-side personal injury, mass tort, and increasingly commercial litigation, and are subject to state bar rule requirements that the agreement be in writing, disclose the percentage and how costs are deducted, and specify whether the percentage is calculated before or after case expenses are subtracted (net versus gross recovery). Some jurisdictions impose sliding-scale caps that reduce the percentage as recovery size or case stage advances, most notably statutory caps in several states' medical malpractice statutes, and courts retain authority to review contingency fees for reasonableness under rules modeled on ABA Model Rule 1.5. For a law firm, a contingency-fee book of business converts the firm's core asset into an uncertain, long-duration receivable: fees are earned only upon a future contingent event, and the firm bears the interim cost of prosecuting the matter. This economic structure — deferred, uncertain revenue funding present-day overhead — is the central reason contingency-fee practices require external capital that a pure hourly practice does not.

A firm's contingency-fee book is the collateral base for nearly every form of law-firm-level financing described in this glossary — a lender or funder providing a credit facility or receivables advance is ultimately underwriting the aggregate expected value of the firm's contingency fee agreements. Underwriting therefore turns on case mix, average case duration, historical settlement rates, and the percentage terms typical to the firm's practice area, since fee percentage and case duration together determine the timing and magnitude of the receivable being financed.

Capital providers also review whether the firm's contingency fee agreements comply with state disclosure and reasonableness rules, since an unenforceable fee agreement impairs the value of the very asset being pledged as collateral.