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Dec 1994

Alternative fee agreements with counsel. (Accountants' Liability)

by Berman, Peter J.

    Abstract- Accountants embroiled in litigation and their attorneys should discuss possible fee agreements that can act as incentives for expediting the resolution of the dispute. For accountants who are plaintiffs, the simplest structure can be a contingency agreement that ensures a percentage of the recovery to the attorney. If a settlement is reached during mediation, an amount lower than 33% of the recovery should be enough payment to an attorney. Payment of a multiple of the standard hourly rate of the attorney is also recommendable. If a settlement is reached during arbitration, however, payment can be a middle ground between what would be paid if settlement is achieved via mediation and what would be paid if recovery is achieved in litigation. As for accountants who are the defendants in a case, attorneys who are able to settle during mediation should be awarded with a given percentage of the savings. If mediation fails, hourly rates may apply.

A client and his attorney should begin each assignment with the question of how an alternative form of dispute resolution may be used to settle a dispute. Since many of the underlying tasks will fall upon counsel, the client and his attorney should then discuss possible fcc agreements that would provide incentives for resolving the dispute promptly.

There is no limit to the type of fee agreements that can be used to provide incentives to counsel to settle a case promptly. Nonetheless, various principles underlie these agreements. The application of these principles will vary depending upon whether the attorney is representing a plaintiff or a defendant. It will also vary with the type of dispute mechanism that may be adopted.

Plaintiff's Counsel

The simplest motivation to plaintiff's counsel to achieve an early settlement is a contingency agreement. The client promises to pay his or her attorney a percentage of the recovery. Most contingency agreements involving the litigation of a dispute provide for the payment of approximately one-third of the recovery. However, the amount of work that would be done in connection with the mediation of a dispute is substantially less than the amount of work that would be done to litigate a case through trial and potential appeals. Therefore, the payment of less than one-third of the recovery should be sufficient payment to an attorney if a settlement is reached during mediation. In essence, an attorney will be motivated to settle a case promptly if the potential return on the investment of his time is sufficiently more than what he would earn from his standard hourly rate to warrant the risk that he will be paid nothing if the mediation produces no settlement at all.

A variation on this theme might involve payment of a multiple of the attorney's standard hourly rate if a settlement is reached during mediation. The attorney would not be paid anything or would be paid fees that would be based upon a reduced rate if no settlement were reached during the mediation. While such an agreement would provide an incentive to counsel to reach an early settlement of the case, it avoids the payment of a windfall to the attorney based upon a percentage of the recovery when relatively little work is done. While a plaintiff wants to expedite the proceedings, he also wants to maximize his recovery. Therefore, a bonus may be paid to the attorney depending upon the size of the settlement that is reached during the mediation. A reasonable combination of these components can produce a fair agreement for both counsel and his client. Most importantly, arrangements of this sort should result in significant net savings for the client.

If the mediation fails to produce a settlement, the client and his attorney may revert to payment of fees based upon a standard hourly rate or a fee that is based upon a larger percentage of the recovery due to the additional work that would be required throughout the litigation. In all instances, the fees should be negotiated with a view to providing an incentive to counsel to reach a prompt resolution of the dispute, where the amount of fees would be proportionate to the amount of work to be done and the risks to be assumed by counsel.

The arbitration of a dispute in most instances will involve more work than mediation. Yet, the amount of work associated with arbitration is generally less than what is needed to try a case in court. Therefore, if an attorney would be willing to represent the plaintiff in mediation for 15% of the recovery and one-third of the recovery in litigation, a middle ground of perhaps of 25% may be appropriate for the arbitration of a dispute.

Counsel and his client may prefer an agreement that combines a reduced contingency fee with a reduced hourly rate. For instance, a client and his attorney may agree that instead of paying an attorney 15% or 25% of the recovery to mediate or arbitrate a dispute, the may agree to a payment of 10% or 15% of the recovery with a guaranteed fee based upon one-half of the attorney's standard hourly rate. The factors that should be considered in devising such an agreement include the amount of work to be done, the amount of risk to be assumed and the size of the potential settlement. An arrangement of this sort provides some compensation to the attorney in the event the amount of work that is done is substantially more than what was expected or if the final results prove to be unsatisfactory. Such an arrangement also protects the client in not having to pay as large a contingency fee in the event a favorable settlement is reached quickly.

Defense Counsel

As with plaintiffs counsel, a client should discuss with his defense counsel how they may resolve the dispute in question promptly and inexpensively through alternative means. At the same time, the client and his counsel should discuss alternative fee arrangements as an incentive to reach a prompt resolution of the dispute less expensively.

One fee agreement requires a thorough evaluation of the potential damages that might be awarded if the plaintiff should prevail and collect a judgment from the defendant. If counsel is able to negotiate a settlement during the mediation phase of the case for an amount that is substantially less than the full amount that is at stake, the client would be required to pay the attorney a given percentage of the savings. This percentage might increase if the savings should reach different levels. These percentages might vary further if the matter were arbitrated instead of mediated. In any event, defense counsel should be motivated to settle the matter as quickly as possible.

As with fee arrangements with plaintiff's counsel, it may be necessary to revert to the attorney's standard hourly rates if a mediation is unsuccessful and litigation follows. The client and his or her attorney should consider the amount of work that is anticipated and the amount of risk to be shared with a view to providing incentives for reaching a prompt result in a cost-efficient manner.

Peter J. Berman, Esq., practices law in Chicago, Illinois, where he represents clients in the mediation, arbitration, and litigation of business disputes.

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