Perhaps the most common fee agreement for traditional collection work has been the contingent fee – the so-called “no recovery, no fee” arrangement. But today, more and more business people, particularly those in small to mid-size enterprises, are asking themselves if a contingent fee continues to make sense. The reasoned answer seems to be “no” - especially for a business with even a modest degree of knowledge of its accounts.
Contingent fees were not designed as a risk-shifting device, as they are generally considered today. Rather, this arrangement was originally designed to make the law accessible to victims that were truly without the financial ability to enforce their right. As a risk-shifting tool, the device generally fails.
Why is this so? Basically, because as compared to the hourly fee model, the creditor usually only benefits with respect to those accounts that are virtually uncollectible, and then only by eliminating further expense – not by maximizing the recovery.
Consider the case of a generally solvent debtor that has not paid for any one of a number of reasons – non-fatal cash flow slowness, an internal shift in payment priorities, or perhaps a minor dispute over the goods or services. In such a case, a recovery likely will be had, and often by way of an early settlement. Let’s say after the expenditure of $1,000 in attorney time, the case is settled for $30,000. An attorney that accepted the case on a contingent fee basis receives a windfall -- a fee of $10,000 for one tenth the work. Conversely, the client’s net recovery is only $20,000 – only two thirds of a number that itself is likely far less than the original debt.
On the other hand, the attorney that accepted the case on an hourly basis gets receives exactly that for which he bargained -- $1,000 for $1,000 of work. The client’s recovery is more realistic, as well. His net recovery is $29,000 – almost 50% more than under the contingent fee arrangement!
Under a careful analysis, it can be seen that the contingent fee arrangement’s great strength lies in uncollectible cases, which really does not benefit the creditor at all. Given that these cases can usually be identified with some degree of accuracy by the creditor before proceeding, they can be eliminated from the equation. With just that simple step, the true risk and uncertainty can be well managed, and the business can stop paying someone else to manage the risk. A savvy creditor can then retain quality counsel on an hourly basis, and begin to pay only for the legal services he uses, maximizing the economic recovery and eliminating unnecessary waste of resources. That is true economy.
