Termination Clause in Contingent Fee Contract Is Invalid

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Joan C. Rogers

Jan. 7 — A fired contingent fee attorney can't enforce a provision in his fee agreement requiring a client to pay the lawyer 20 percent of his eventual recovery if the client changes counsel, a divided Pennsylvania Superior Court declared Jan. 5.

Enforcing the termination provision would penalize the client for exercising his absolute right to end the attorney-client relationship, Judge Kate Ford Elliott said in the majority opinion. In this situation, Elliott said, lawyers are limited to recapturing the reasonable value of their services, but that award can reflect the extent of the lawyer's contribution to obtaining the client's recovery.

A dissenting judge said such provisions are enforceable to the extent the actual fee isn't excessive or unconscionable.

Clause Penalizes Client

Pennsylvania cases have established that when a contingent fee client switches counsel before judgment or settlement, the discharged lawyer is entitled to just compensation and generally has a claim to recover his fees on the basis of quantum meruit, Elliott said.

A termination provision that requires payment of an additional amount is unenforceable, the court decided, even if the client doesn't claim the clause is unconscionable or against professional conduct rules. A clause that calls for more than quantum meruit recovery is “nothing more than a penalty on the client for severing the relationship” and “may well inhibit the client from engaging another lawyer to pursue his claim,” Elliott stated.

“Just as a lawyer may not charge an exorbitant fee or place a ‘no termination' clause in the contract or assert a vested interest in a client's claim, a lawyer may not penalize a client for discharging him or her,” Elliott wrote.

The termination provision in this case entitled Angino & Rovner P.C. to 20 percent of Monsour Zarreii's eventual recovery if Zarreii terminated Angino and he recovered money through successor counsel.

Angino said the contract was an arm's length agreement between two adults, and that the termination provision was included to protect his firm against Pennsylvania precedent holding that a discharged attorney's recovery is only through quantum meruit.

“This is precisely why the contract provision is unenforceable,” Elliott said in response.

Can Be More Than Lodestar

On the other hand, the court made clear that a quantum meruit recovery “need not be limited to an hours and expenses analysis.” Quantum meruit means “as much as deserved,” Elliott noted.

As an equitable remedy, Elliott said, quantum meruit should be based on the particular circumstances of the case and “principles of fairness should prevail.” Angino's contributions to Zarreii's case present a compelling reason to award him more than his hours and expenses, she said.

However, Angino only asserted a breach of contract claim without seeking quantum meruit recovery. “We make no determination as to whether such a recovery is still available to Angino in this case,” Elliott said.

Judge Jacqueline O. Shogan concurred in Elliott's opinion.

Dissent: No Per Se Ban

In a dissenting opinion, Judge Victor P. Stabile argued that “attorneys are not precluded per se from providing a termination fee provision in a contingent fee agreement.”

Stabile disputed the majority's view that terminated contingent fee lawyers only have resort to the remedy of quantum meruit even when the fee agreement contains a fee recovery provision that applies if the attorney-client relationship is terminated before the contingency occurs.

“ I find no support in our law for this limitation of remedies where a termination provision is included in a contingency fee agreement and that provision is not challenged and established to be either excessive or unconscionable,” Stabile wrote.

Stabile distinguished the decisions Elliott cited, saying the fee agreements in those cases did not involve a termination provision. He said the use of a termination provision in a fee agreement was tacitly approved in Capek v. Devito, 767 A.2d 1047, 17 Law. Man. Prof. Conduct 211 (Pa. 2001).Jeffrey R. Lessin & Assocs. P.C. represented itself and Monsour Zarreii. Richard C. Angino, Harrisburg, Pa., represented Angino & Rovner.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

For More Information 

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

 

Copyright 2016, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.