Opinion 2148

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.