Litigation Finance Primer: Part 6
Editor’s Note: This article is the sixth in a series forming a litigation finance primer for parties new to the space. For the first article in the series, click here.
Exceptions to the doctrine prohibiting champerty are not new. The first commonly allowed exception to champerty cam very early on in United States History with attorneys being allowed to represent people seeking monetary damages on what is called a contingency basis.
A contingency basis agreement means that the attorney has agreed to forego all payment for representation unless and until such time as the case has a favorable outcome or settlement. After the judgment or damages are awarded the attorney receives an agreed upon amount generally a third but sometimes as much as half. While legislation allowing such agreements is new and looked upon with suspicion in many jurisdiction the United States has allowed such arrangements for more than 100 years.
Contingency fee are one of three methods commonly used for purchasing the services of an attorney in the United States. The second is a fixed fee arrangement wherein the attorney agrees to perform a specific task such as preparing or filing simple business or legal documents. The third method is that an attorney may charge an hourly fee for more complex or open ended tasks such as legal representation in a case or suit or complex advice such as that regarding taxes or contract creation.
The contingency fee is a tool by which persons of more limited means are able to gain access to legal representation and has been allowed in all 50 states in the United States. It is by far the oldest and most common form of third-party financing in the United States. Contingency fee arrangements are most commonly used by personal injury attorneys, however they are available to all practitioners and the uses for this arrangement are limited only to the imagination of the client and practitioner.
Contingency fee arrangements have a long history within the United States stretching back to the days of settlers and the frontier. Generally these arrangements are used when the plaintiff had a just cause but lacked the resources to pursue the case. The contingency fee has met this need and provides access to the legal system for people who would otherwise be unable to access it. Famous historical practitioners who used contingency fee arrangements include senators and renowned orators such as Henry Clay and Daniel Webster.
The industrial revolution brought with it momentous changes including those allow more much more efficient transportation and communication systems than had ever existed before. This allowed for business of all types and involving all industries to expand to levels never seen before. It also created through working and living conditions an atmosphere in which defendants who possessed substantial resources were commonly incurring liabilities with people of very limited resources. These potential plaintiffs created a great need within the legal marketplace and this was the space which the contingency fee filled.
While the legality of contingency fees was challenged many times in court it was virtually always upheld as a legal arrangement. Finally in 1908 more than a century ago the American Bar Association endorsed contingency fees and by the late 1960 the practice had been allowed for throughout the union. While these arrangements were limited in nature and generally used under specific circumstances this exception to the doctrine against champrty became entrenched in law.
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