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Texas Supreme Court strikes down contingency fee agreement provision

February 10th, 2007 · No Comments

In Hoover Slovacek LLP v. Walton, Supreme Court of Texas, 3 November 2006, the Court severed a provision in a contingency fee agreement which entitled the lawyer to three-tenths of the “present value of the claim” forthwith upon termination by the client, whether for just cause or not. Instead, the lawyer recovered three-tenths of the actual recovery, and only once there had been a recovery.The retainer was by a ranch owner in a suit against oil and gas companies operating on his land, for millions of dollars of unapid royalties. The client authorised settlement in advance for $8.5 million. Armed with those instructions, the lawyer went off and offered to accept $58.8 million, regarded by everyone concernced as a fanciful and credibility damaging move.

In response, the defendant offered to settle the claim and buy some of the ranch for $6 million. The client then instructed the lawyer he would take $6 million in settlement of the claim alone, but the lawyer pressured him to accept the defendant’s offer. Annoyed, the client retained new lawyers, and settled the claim for $900,000. The sacked lawyer sent a bill for $1.7 million, three-tenths of what he said was the present value of the claim at the time he was sacked, namely $6 million. Obviously, the bill was also for about twice the amount the client ended up recovering.

Bizzarely, an ex-judge gave expert evidence that the only unconscionability would be not honoring the parties’ deal, but the Supreme Court disagreed, voiding the provision for unconscionability:

‘Public policy strongly favors a client’s freedom to employ a lawyer of his choosing and, … to discharge the lawyer during the representation for any reason or no reason at all. … Nonetheless, we recognize the valid competing interests of an attorney who, like any other professional, expects timely compensation for work performed and results obtained. Thus, attorneys are entitled to protection from clients who would abuse the contingent fee arrangement and avoid duties owed under contract. Striving to respect both interests, Mandell provides remedies to the contingent-fee lawyer who is fired without cause. [Mandell is a case which says “if an attorney hired on a contingent-fee basis is discharged without cause before the representation is completed, the attorney may seek compensation in quantum meruit or in a suit to enforce the contract by collecting the fee from any damages the client subsequently recovers.”]

[The lawyer’s] termination fee provision, however, in requiring immediate payment of the firm’s contingent interest, exceeded Mandell and forced the client to liquidate 28.66% of his claim as a penalty for discharging the lawyer. Because this feature imposes an undue burden on the client’s ability to change counsel, Hoover’s termination fee provision violates public policy and is unconscionable as a matter of law.

We believe [the] termination fee provision is unreasonably susceptible to overreaching, exploiting the attorney’s superior information, and damaging the trust that is vital to the attorney-client relationship.’

Additionally, the Court found the fee agreement in breach of a local conduct rule which provided ‘[a] lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for the client, except that the lawyer may . . . contract in a civil case with a client for a [permissible] contingent fee’.

The Court observed:

‘the only scenario in which [the] termination fee provision would benefit [the client] is if he expected the value of his claim to significantly increase after discharging [the lawyer]. In that case, [the client] could limit [the lawyer’s] fee to [30]% of a relatively low value, and avoid paying [30]% of a much larger recovery eventually obtained with new counsel. Thus, it is conceivable that a client viewing the events in hindsight could find that the arrangement worked out to his benefit. At the time of contracting, however, the client has no reason to desire such a provision because the winning scenario is not only unlikely, but also entirely arbitrary in relation to its timing and occurrence. Moreover, to the extent the client believes the value of his claim will increase as a result of employing new counsel, a rational client would forego the representation altogether rather than agree to the provision. In sum, the benefits of [the] termination fee provision are enjoyed almost exclusively by the attorney.

[The] termination fee provision is also antagonistic to many policies supporting the use of contingent fees in civil cases. Most troubling is its creation of an incentive for the lawyer to be discharged soon after he or she can establish the present value of the client’s claim with sufficient certainty. Whereas the contingent fee encourages efficiency and diligent efforts to obtain the best results possible, [the] termination fee provision encourages the lawyer to escape the contingency as soon as practicable, and take on other cases, thereby avoiding the demands and consequences of trials and appeals. Moreover, the provision encourages litigation of a subset of claims that would not be pursued under traditional contingent fee agreements.

Unless, in a further hearing resulting from the appeal, the client can overturn the jury’s decision that he sacked his lawyer without just cause, he will be liable in accordance with the Mandell principle to pay three-tenths of $900,000 to the sacked lawyer, as well as the fees he paid to the second lawyers ($283,00), but only so liable because the client had actually received the $900,000, a crucial timing and risk-sharing difference in comparison with the struck-down termination fee provision.

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Tags: No win no fee · Professional fees and disbursements · setting aside costs agreements