Can a lawyer waive his contingent fee and the costs he advanced to let a client accept a settlement?

Plain-English summary

The State Bar's Discipline Department asked about a lawyer (A) who represented a client (C) in a medical malpractice case on contingency, with C responsible for litigation costs under the contract. A advanced substantial costs. During settlement negotiations, A offered to waive his fees and all advanced costs if C accepted a pending offer; C agreed, the case settled, and A took nothing. The questions were whether this violated ER 1.8(e) and whether C had to be indigent for the cost waiver to be proper.

The committee explained that Arizona's ER 1.8(e) is stricter than the ABA Model Rule: Arizona rejected the Model Rule's language allowing repayment of advanced costs to be contingent on outcome and kept the former DR 5-103(B) requirement that the client remain "ultimately liable." Two rationales support that rule. First, advancing funds gives the lawyer a personal stake in the litigation that could put his interest in recouping the money ahead of the client's (citing Matter of Stewart). Second, financial assistance can be an improper inducement, leading clients to choose a lawyer by his willingness to lend rather than his skill (citing Matter of Carroll); for that reason, Opinion 89-03 allowed money gifts only to pro bono clients.

Applying those rationales, the committee concluded neither concern was present. By waiving all fees and all costs, A retained no personal interest in the recovery, so the independence concern from Stewart did not arise. And because A made the waiver at the conclusion of a representation he had already undertaken, not as an inducement to a prospective client, there was no improper-publicity concern, distinguishing Carroll. The committee held that A did not violate ER 1.8(e), and that it made no difference whether the client was indigent.

Currency note

This opinion was issued in 1991, before Arizona's 2003 adoption of the Ethics 2000 revisions to the Rules of Professional Conduct. Arizona's version of ER 1.8(e) has since been amended (Arizona now permits contingent repayment of advanced costs). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer waive his fee and advanced costs to help a client settle?

A: Yes, under this opinion. The committee concluded that waiving both the fee and the advanced costs at the end of the case does not violate ER 1.8(e), because the lawyer keeps no personal stake in the recovery.

Q: Does the client have to be indigent for the cost waiver to be proper?

A: No. The opinion concluded it made no difference whether the client was indigent, because the lawyer was forgiving costs at the conclusion of the case rather than financing the litigation.

Q: Why doesn't this count as prohibited financial assistance?

A: The opinion concluded the two concerns behind ER 1.8(e), a lawyer's acquiring a personal interest in the outcome and using assistance to attract clients, were absent: the lawyer took nothing and made the waiver only after representing the client, not as an inducement.

Background and rules framework

The opinion applies ER 1.8(e) (Model Rule 1.8), which barred a lawyer from providing financial assistance to a client in connection with litigation, except advancing court costs and expenses (with the client remaining ultimately liable) or paying costs for an indigent client. The committee stressed that Arizona deliberately retained the "ultimately liable" requirement of former DR 5-103(B) and rejected the ABA Model Rule's allowance of contingent repayment.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / AZ ER 1.8(e) (financial assistance to clients; advancing costs)
• Former DR 5-103(B), Code of Professional Responsibility (the "ultimately liable" requirement)

Cases:

• Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (Ariz. 1979), loans to a client for living expenses violate DR 5-103(B)
• Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (Ariz. 1979), cash payments to clients for living expenses; improper-inducement rationale

Other opinions cited:

• Arizona Opinions 75-17 (1975), 76-26 (1976), 81-3 (1981): advancing or loaning funds to clients
• Arizona Opinion 89-03 (1989): money gifts permitted to pro bono clients

See also

• AZ Ethics Op. 91-14: Advancing Versus Gifting Funds to a Client
• AZ Ethics Op. 89-03: Conflict of Interest

Source

• Landing page: https://tools.dev.azbar.org/RulesofProfessionalConduct/ViewEthicsOpinion.aspx?id=628

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

5/1991

Attorney's offer to waive his contingent fee and reimbursement of costs advanced, if client will accept a settlement offer, is permitted whether or not client is indigent.

FACTS

This inquiry is from the Discipline Department of the State Bar, which has provided the committee with the following set of facts.

Lawyer A represents client C in a medical malpractice cause of action on a contingency fee basis. Pursuant to the contingency fee contract, C is responsible for litigation costs. A lawsuit is filed, and substantial costs are incurred and advanced by A. During settlement negotiations, A offers to waive his fees and all costs advanced by him if C accepts a pending offer. C agrees, the case is settled, and A receives neither a fee nor reimbursement of costs.

QUESTIONS

1. Does A's conduct violate ER 1.8(e)?

2. Must C be indigent for A's waiver of costs to be ethically proper?

ETHICAL RULE INVOLVED

ER 1.8. Conflict of Interest: Prohibited Transactions

(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, provided the client remains ultimately liable for such costs and expenses; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

RELEVANT PRIOR ARIZONA OPINIONS

Opinions Nos. 75-17 (September 8, 1975), 76-26 (December 29, 1976), 81-3 (February 19, 1981), and 89-03 (April 18, 1989).

OPINION

A lawyer may not provide any financial assistance to a client in connection with pending or contemplated litigation, except that he may advance court costs and expenses of litigation. The client must remain ultimately liable for the advanced costs and expenses, unless the client is indigent. Rule 42, Ariz.R.S.Ct., ER 1.8(e).

Arizona's version of ER 1.8(e) is not the same as the version adopted by the American Bar Association in its Model Rules of Professional Conduct. The A.B.A. rule allows an attorney to advance court costs and expenses of litigation, "the repayment of which may be contingent on the outcome of the matter." Arizona specifically rejected this language and retained the language of former DR 5-103(B) of the Code of Professional Responsibility, which required that the client remain “ultimately liable” for any advances. Therefore, despite a relaxation in the requirement by the American Bar Association, the Arizona Supreme Court decided that there is still significant danger involved in allowing an attorney to advance costs and expenses of litigation for a client who is not indigent, unless the client remains ultimately liable therefor.

Arizona cases and ethics opinions specify two reasons for this: first, by advancing funds to a client, the lawyer acquires a personal interest in the outcome of the litigation. This conflict will result in the attorney potentially placing his own interest in recouping the advanced funds ahead of his client's interests in the litigation. See Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (1979) (under-former DR 5-103(B), loans to clients for living expenses, to be repaid out of temporary welfare stipends, are unethical). By requiring that the client remain ultimately liable for court costs and expenses advanced by the attorney for him, regardless of the outcome of the case, ER 1.8(e) ensures that the attorney's independent judgment will not be affected.

Second, financial assistance to clients encourages prospective clients to seek out an attorney's services for improper reasons. A prospective client might select an attorney on the basis of his willingness to lend money rather than upon his legal skills. In Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (1979), an attorney was suspended from the practice of law in Arizona for one year for, inter alia, making cash payments to his clients for living expenses in violation of former DR 5-103(B). The court concluded:

We are compelled to point out that the practice of making advances to clients, if publicized, would constitute an improper inducement for clients to employ an attorney. . . .It is obvious that as between a lawyer who offers [a fee agreement which relieves the client of his obligation to pay costs and expenses unless money is obtained through judgment or settlement] and a lawyer who does not, the client will choose the lawyer who offers the lesser financial obligation, regardless of the skill of the lawyers involved, and regardless of the other factors to be considered in the employment of legal counsel.

124 Ariz. at 86, 602 P.2d at 467. See also our Opinions Nos. 75-17 (September 8, 1975) and 76-26 (December 29, 1976). Because of this potential for improper publicity, our Opinion No. 89-03 (April 18, 1989) allowed money gifts to clients only where the lawyer represents the client pro bono. This is because pro bono clients do not select their lawyers, do not incur a financial obligation with a lawyer, and have no incentive to choose on« lawyer over another. Opinion No. 89-03 at 3.

Turning to the facts of the present inquiry, it is clear that the inquiring attorney will have no personal interest in obtaining repayment of the advanced costs. By waiving all fees as well as all costs, the inquiring attorney will receive nothing from his representation of the client. Therefore, the fear expressed in Stewart, that the expectation of repayment would affect an attorney's independent judgment on behalf of his client, is not present in the facts of this inquiry.

It is also very unlikely that any improper publicity will be generated by Lawyer A's waiver of fees and costs. He is not offering the waiver as an inducement to a prospective client to retain him. Rather, he is making a judgment at the conclusion of the litigation to waive the fees and costs of a client he has already represented for some time. This distinguishes the present inquiry from Carroll, which discussed a fee agreement with a provision in which the attorney agreed to assume the costs and expenses of litigation. 124 Ariz. at 85, 602 P.2d at 466.

Therefore, it is the opinion of the committee that Lawyer A does not violate ER 1.8(e) when he waives all fees and all costs at the conclusion of the case. It makes no difference whether or not the client is indigent.

**Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. **

©State Bar of Arizona 1991