Term and Definition of Contingency Fees
Ein Contingency Fee is a special form of remuneration in which payment for a rendered service is made wholly or partially dependent on the occurrence of a pre-determined success. Typically, the contingency fee is particularly used in connection with certain professions such as lawyers, management consultants, or debt collection agencies. In Germany, the contingency fee is mainly significant in the context of lawyer remuneration law but is subject to significant legal restrictions.
Legal Foundations and Regulations
Legal Foundations in Germany
The contingency fee is governed by Section 4a of the Lawyers’ Compensation Act (RVG) in German law. This is an exception to the general prohibition of agreeing to a contingency fee. The remuneration of services in the event of a specific, pre-defined success thus stands in a tension between client protection, professional ethical principles, and freedom of contract.
§ 49b BRAO – Professional Regulations
In addition to the provisions of the RVG, Section 49b of the Federal Lawyers’ Act (BRAO) provides a professional regulation that generally prohibits agreements on contingency fees. The aim is to protect those seeking legal advice from inadmissible fee claims and to preserve the independence of the legal service.
Exceptions According to § 4a RVG
According to Section 4a RVG, the agreement of a contingency fee is subject to special conditions. Such a fee agreement may only be made if, in the individual case, the client would be deterred from legal action by their financial situation without a contingency fee. The agreement must also be concluded in written form and be expressly related to the specific case.
Scope of Application and Practice
Contingency Fees in Legal Services
In the field of legal services, the contingency fee represents a particularity because the usual remuneration structure under the RVG is generally based on a fixed activity fee. However, the client’s economic hardship or particular circumstances may justify an exception. In practice, a contingency fee is usually agreed upon when the client cannot or does not want to bear the cost risk of litigation.
Contingency Fees with Other Service Providers
Contingency fees are also agreed outside legal advice, for example with management consulting firms or debt collection agencies. Here, the contingency fee is generally permitted within the framework of civil law, provided that no special professional regulations oppose it.
Advantages and Risks of Contingency Fees
Advantages
- Increased Motivation: The prospect of performance-based payment can further motivate the service provider to achieve the best possible result for the client.
- Minimisation of Cost Risk: For clients with limited financial resources, it provides an opportunity to engage a service provider without having to incur a high cost risk from the outset.
Risks
- Conflicts of Interest: There is a risk that the service provider’s focus will be too strongly on immediate success, which can impair the proper representation of interests.
- Improper Influence: Especially in the field of legal advice, improper influence on case management may occur if the fee depends on the outcome.
- Transparency Issues: Unclear agreements can lead to disputes over whether ‘success’ has been achieved and the exact payment modalities.
Limits and Unlawfulness of Contingency Fees
Legal Restrictions
The contingency fee is not permissible in all cases. Legal provisions set high requirements for the agreement and its validity. Key prerequisites include:
- Written Form: The agreement must be made in written form.
- Individual Case Analysis: Blanket application is not permitted; the client’s financial circumstances must be assessed individually.
- Prohibition of Circumventing Minimum and Maximum Fees: Contingency fees must not be used to circumvent statutory fee requirements.
Impermissible Arrangements
Agreements that apply generally to all matters of a client or provide for unlimited profit participation without an individual review are impermissible and may lead to disciplinary measures as well as to the invalidity of the fee agreement.
Tax Treatment of Contingency Fees
Contingency fees are subject to income taxation and value-added tax if earned through self-employment. The income accrues as soon as the success occurs and the fee is actually received.
International Comparison
In some countries, such as the USA, contingency fees, especially known as “contingency fees,” are common and legally permitted. In German law, however, the contingency fee remains the exception. In other Central European countries, similar restrictions or even prohibitions exist.
Literature and Further Information
- Lawyers’ Compensation Act (RVG)
- Federal Lawyers’ Act (BRAO)
- Bundestag Printed Papers on Amendments to the RVG
- Case Law on Contingency Fees
Conclusion
The contingency fee is a legally complex term that, particularly under German law, is subject to significant legal restrictions. A careful individual case assessment, a written agreement, and observance of statutory and professional fee requirements are essential. In practice, the contingency fee can under certain conditions represent a sensible and legally permissible alternative to conventional remuneration models.
Frequently Asked Questions
When is the conclusion of a contingency fee agreement permitted under German law?
The conclusion of a contingency fee agreement is in principle allowed under German law only under strict statutory conditions as provided by § 49b paragraph 2 sentence 1 BRAO and § 4a RVG. A contingency fee may be agreed in particular if the client would otherwise be prevented from pursuing legal action due to their financial situation, or if the lawyer faces an exceptionally high risk of not receiving any fee. Usually, the law requires a written agreement that transparently sets out the performance-based remuneration and the exact success criteria. Furthermore, the statutory remuneration under the Lawyers’ Compensation Act (RVG) is usually the benchmark, with the contingency fee being paid in addition to or instead of the statutory fee. Violations of these regulations can result in professional disciplinary action and frequently render the fee agreement void.
What legal restrictions apply to contingency fees?
Contingency fees are generally impermissible in the legal field unless one of the statutorily determined exceptions applies. The German Lawyers’ Compensation Act (RVG) and the Federal Lawyers’ Act (BRAO) permit deviations from statutory remuneration only if expressly agreed in writing and if an exceptional case as defined in § 4a RVG exists. The primary aim of these restrictions is to protect those seeking justice and to ensure independent and objective legal advice. In particular, quota agreements without sufficient transparency or those that would block access to justice for economically weaker parties are prohibited. Furthermore, contingency fees may not be agreed for all types of activities—for example, they are excluded in the context of criminal defense and certain family law matters.
What formal requirements must be observed when concluding a contingency fee agreement?
Contingency fee agreements in the legal field must always be made in writing, otherwise they are void (§ 4a (1) sentence 1 RVG). The agreement must contain precise information about the fee, the basis of calculation, and the definition of the relevant success, so that both parties clearly know under what circumstances the fee is due. Unclear or ambiguously worded agreements are interpreted in favor of the client in case of doubt or may be entirely invalid. In addition, there is a comprehensive duty of the lawyer to inform the client about the risks and consequences of the contingency fee agreement, which itself must be documented. Failure to comply with these formal requirements can easily lead to the agreement being challenged or declared invalid by courts.
What are the legal consequences of an ineffective contingency fee agreement?
An agreement that does not comply with statutory requirements or violates the prohibition of contingency fees is void pursuant to § 134 BGB in conjunction with § 4a RVG. In practice, this means that the basis for a success-based fee is lacking, so the lawyer may only claim the statutory fee under the RVG. Additionally, the client may reclaim any excess amounts paid based on the invalid agreement by way of unjust enrichment (§ 812 BGB). Lawyers who repeatedly enter into invalid contingency fee agreements also risk disciplinary consequences, including sanctions from the bar and claims for damages if the client suffers disadvantages as a result.
Can contingency fees be claimed in court proceedings?
Contingency fees between client and lawyer are generally a civil law agreement and do not affect the cost reimbursement in court proceedings. Under German law, only the statutory fees under the RVG are reimbursed in civil proceedings, regardless of any performance-based remuneration agreement. Contingency fees are therefore not reimbursable and remain the responsibility of the client as far as they exceed the statutory fees. Only in exceptional cases, such as explicit arrangement or acknowledgment by the opposing party, could contingency fees be reimbursed, but this is very rare in practice.
Are there exemptions or special regulations for contingency fees, especially under international law or with cross-border mandates?
Under German law, the stated restrictions for contingency fees also apply to international mandates if the contract is governed by German law. Nonetheless, Section 4b RVG provides for the possibility, in cross-border cases, to agree on higher or different fees in individual cases. In international disputes, where for example a foreign client instructs a German lawyer, foreign law may apply in some circumstances, which allows for different regulations on contingency fees. In such cases, it must be determined individually which law applies and whether and to what extent the strict German regulations still prevail. A precise conflict of law assessment is recommended for a valid agreement.
