Can a contingent-fee agreement make the client repay advanced litigation costs if the client rejects a settlement the lawyer considers fair?

Plain-English summary

A medical-negligence firm asked whether a written contingent-fee agreement could require a client to pay litigation costs the firm advanced if the client rejects a pretrial settlement offer the firm considers fair and reasonable. The contemplated provision would make the client's obligation to repay all or part of the advanced costs contingent on the client following the lawyer's settlement advice.

The committee answered no. It explained that revised RPC 1.8(e)(1), effective September 1, 2006, dispensed with the prohibition on making repayment of advanced litigation costs contingent on the outcome of a matter, treating advanced costs as "virtually indistinguishable" from contingent fees that help improve access to the courts (citing Comment 10 to RPC 1.8). But RPC 1.2(a) provides that a lawyer shall abide by a client's decision whether to settle, and the committee said a client has an unfettered right to be free from economic coercion in accepting or rejecting a settlement offer. Conditioning cost repayment on the client's acceptance of the lawyer's settlement advice could reduce the client's net recovery and let a lawyer "wield the repayment of costs as a sword to force settlement" the client deems inadequate, undermining the goal of improving access to the courts.

The committee distinguished a permissible provision: a contingent-fee agreement may require the client to reimburse reasonable costs advanced toward litigation (citing Hagans, Brown & Gibbs v. First National Bank of Anchorage), but that reimbursement obligation cannot be based on any contingency.

In practice

Under this opinion, and under the Washington rules as they stood at the time, a contingent-fee agreement can require a client to reimburse reasonable advanced litigation costs, but it cannot tie that obligation to the client's settlement decision. The committee held that making cost repayment depend on the client following the lawyer's settlement advice violates RPC 1.2(a) because it pressures the client's right to accept or reject a settlement free of economic coercion. The committee read revised RPC 1.8(e)(1) to allow outcome-contingent cost arrangements generally, but treated a settlement-conditioned repayment term as a different problem governed by the client's settlement autonomy.

Common questions

Q: Can a contingent-fee agreement make the client repay advanced costs if the client turns down a settlement the lawyer recommends?

A: No. The committee concluded that such a provision imposes adverse financial consequences that impermissibly restrict the client's freedom to accept or reject a settlement under RPC 1.2(a).

Q: Can a contingent-fee agreement require the client to reimburse advanced costs at all?

A: Yes, for reasonable costs advanced toward litigation, but the committee said that reimbursement obligation cannot be based on any contingency.

Q: Didn't the 2006 rule change allow outcome-contingent cost repayment?

A: The committee said revised RPC 1.8(e)(1), effective September 1, 2006, dispensed with the prohibition on making repayment of advanced costs contingent on the outcome. The problem here was different: tying repayment to the client's settlement decision implicates RPC 1.2(a).

Q: Why is conditioning costs on the settlement decision a problem?

A: The committee said it could reduce the client's net recovery and let the lawyer use the repayment of costs "as a sword to force settlement" the client deems inadequate, undermining access to the courts.

Background and rules framework

The opinion applies Washington RPC 1.2(a) (scope of representation; a lawyer shall abide by the client's decision whether to settle; the counterpart to Model Rule 1.2), RPC 1.5 (fees; the counterpart to Model Rule 1.5), and revised RPC 1.8(e)(1) (financial assistance to a client; the counterpart to Model Rule 1.8(e)), which took effect September 1, 2006. The committee read RPC 1.8(e)(1) to permit outcome-contingent cost arrangements but held that the client's settlement autonomy under RPC 1.2(a) bars conditioning cost repayment on the client's settlement decision.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.2 / Washington RPC 1.2(a) (a lawyer shall abide by the client's decision whether to settle)
• Model Rule 1.5 / Washington RPC 1.5 (fees)
• Model Rule 1.8(e) / Washington RPC 1.8(e)(1) (financial assistance to a client; advancing litigation costs)

Cases:

• Hagans, Brown & Gibbs v. First National Bank of Anchorage, 783 P.2d 1164, 1167 (Alaska 1989), a client may become liable to the attorney for failing to exercise control over the litigation consistent with the parties' reasonable expectations

Other opinions cited:

• WSBA Formal Opinion 191 (1994): RPC 1.2(a) violated by a contingent-fee agreement basing the fee on the larger of the recovery or the settlement offered
• Philadelphia Bar Association Professional Guidance Opinion No. 88-16 (1988): disapproving a contingent-cost agreement requiring the client to pay costs after rejecting a settlement counsel viewed as fair and reasonable

See also

• WA Ethics Op. 191: Contingent Fee Penalizing a Rejected Settlement
• WA Ethics Op. 1911: Repayment of Advanced Costs Contingent on Outcome
• WA Ethics Op. 2149: Paying a Nonprofit Client's Litigation Costs

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1586

Original opinion text

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

Advisory Opinion: 2148
Year Issued: 2007
RPC(s): RPCs 1.2(a), 1.5, & 1.8(e)(1)
Subject: A clients obligation to pay all or part of advanced costs being conditioned on clients acceptence of attorney`s advice with respect to settlement of the claim

May a lawyer properly include a provision in a written contingent fee agreement requiring a client to pay costs advanced towards litigation if the client rejects a settlement offer that appears to counsel to be fair and reasonable under the circumstances? ANSWER

No. An imposition of adverse financial consequences impermissibly restricts a client’s freedom to accept or reject a settlement offer pursuant to RPC 1.2(a). INQUIRY

“We represent clients in medical negligence cases where the costs and risks of going to trial are often quite high. If the defendant makes what we believe to be a reasonable offer prior to trial, given the risks, costs and likely recovery at trial, and if the client refuses to accept our advice to accept that offer and instead insists on going to trial, we would like to be able to say that while we will continue to advance the costs to do so, if we lose, the client would have to be responsible for at least the additional costs if not all the costs which we have advanced in this case. I am assuming that the amount of the offer which is refused would have been sufficient to repay all the costs which had been advanced in the case. …. What I would like to know is whether it is ethical for the fee agreement to provide that the contingent nature of the client’s obligation to repay all of part of the advanced costs is further conditioned upon the client’s acceptance of the attorney’s advice with respect to settlement of the claim.”

APPLICABLE RULES

Rules 1.2(a) (Scope of Representation) Rule 1.5 (Fees) Rule 1.8(e)(1) (Conflict of Interest: Current Clients: Specific Rules)

DISCUSSION

Revised Rule 1.8(e)(1) which became effective on September 1, 2006 dispensed with the prohibition of repayment of costs advanced towards litigation contingent upon the outcome of a matter. Advancement of costs associated with litigation such as court costs, medical examinations and investigation are “virtually indistinguishable” from contingency fees and helps improve access to the courts. See Rule 1.8, Comment 10.

Rule 1.2(a) states that, “A lawyer shall abide by a client’s decision whether to settle a matter.” A client has an unfettered right to be free from economic coercion in accepting or rejecting a settlement offer. See Washington State Bar Association, Committee on Rules of Professional Conduct, Formal Opinion 191 (1994) (Rule 1.2(a) violated by a contingency fee agreement where a lawyer’s contingent fee is based upon the larger of the recovery obtained at trial/arbitration or the amount offered in settlement). See also Philadelphia Bar Association, Professional Guidance Opinion No. 88-16 (July 25, 1988) (disapproving contingent fee agreement in which costs of litigation would be contingent on recovery, but requiring client to pay costs “where the client has rejected an offer of settlement which appears to counsel to be ‘fair and reasonable under the circumstances.’”).

A client’s net recovery under the contemplated provision may be reduced by some or all costs a lawyer advanced towards litigation if he or she disagrees with a lawyer’s advice with respect to a settlement offer. A lawyer could wield the repayment of costs as a sword to force settlement, that a client deems inadequate. Furthermore, it would undermine the purpose and intent of improving access to the courts.

A lawyer may have a provision in a contingency agreement wherein a client is responsible for reimbursement of reasonable costs advanced towards litigation. See e.g. Hagans, Brown & Gibbs v. First National Bank of Anchorage, 783 P.2d 1164, 1167 (Alaska 1989) (“Should the client fail to exercise control over the litigation in a manner consistent with the reasonable expectations of the parties, the client may become liable to his attorney”). However, that provision cannot be based upon any contingency.