Financing Litigation, Part II.

What happens when an injured or damaged person has an important legal claim, but no or little resources to advance it?

One way is to borrow the money. The City of Lodi borrowed funds for its legal fees at 25% interest, as discussed yesterday.

Another way is to retain an attorney on a contingency fee basis. Under this arrangement, if there is no recovery, then there is no fee owing to the lawyer. Thus, the attorney shares in the risk of nonrecovery. If there is a recovery, then the fee is deducted at a previously agreed upon percentage, usually 33%. The percentage is negotiable between the attorney/law firm and the client. California law requires that clients be informed that the percentage is not set by law and can be negotiated.

The contingency fee arrangement can be advantageous for clients who do not have the money to pay hourly fees because they can obtain legal counsel to represent them. In exchange, they agree to take less of the recovery, if any.

In the City of Lodi case, the City might have been better served by taking the case on a contingency, rather than borrowing the money at 25%. Viewed at the outset (rather than with hindsight), the difference between paying 33% (from the recovery) and 25% interest (whether or not there is a recovery) is smaller than the risk of loss. In other words, most litigants have more than a 7% chance of losing. Accordingly, the better economic decision would be to pursue the case on a contingency fee basis, assuming other all things are equal.