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Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #25 • August 2009
Attorney Fees in
California Construction Defect Cases
What Clients Should Know about Fee Contracts,
Referral Fees, And Professional Ethics
By Tyler P. Berding, Esq. and Allison L. Andersen, Esq.
The successful relationship between a client and attorney is built on trust and confidence. The guiding principal is that the client should be able to make informed decisions concerning all matters substantially impacting the client's case and recovery. The first big question facing the client in a construction defect case is the basis on which the attorney is compensated. While some firms will offer only one fee agreement option, others are more flexible. Before entering into any arrangement, the client should be apprised of all available alternatives so that the fee option best suited to the client's needs can be selected. This article explores various fee arrangements, the related legal requirements and considerations bearing on that decision.
The contents of an attorney fee agreement are governed by rules of professional conduct and state law, which require a full disclosure of key terms and restrict an attorney's ability to share fees with, or pay referral fees to, other attorneys or non-attorneys. California Business and Professions Code sections 6147 and 6148 require written agreements in cases involving contingency fees or those expected to result in fees in excess of $1,000. The contract must contain a general description of the services to be provided, state whether the fee is hourly or contingent, and state how litigation costs will be paid. Additionally, the fee contract must contain a reference to alternative dispute resolution and disclose whether the attorney will be sharing any portion of the fees.
What Are the Fee Agreement Options for Litigation?
Historically, both businesses and consumers paid attorneys' hourly rates for everything except accident and personal injury litigation, which were usually paid on a contingent basis, that is, the duty to pay the attorney was "contingent" on receipt of a recovery. More recently, the contingency fee arrangement has become a popular option in construction defect cases. Since there are important differences between hourly and contingency fee representation, it is essential that a board of directors be fully informed of the consequences of choosing one method of payment over another. The most important difference concerns how the risk of payment and recovery are divided between the client and its counsel.
Fee agreements allocate some of the financial risk of litigation as between the attorney and the client. There is always the chance the client will receive little or no recovery from the case; but that particular risk cannot be shifted to the attorney (in other words, the lawyer cannot guarantee and underwrite a cash recovery.) However, the financial risk of the expense of the litigation, i.e. the fees and litigation costs necessary to prosecute it, can be born by the client, the attorney or be shared. The typical hourly fee agreement requires that the client pay the fees and expenses of the case as they are incurred. On the other hand, with a contingent fee agreement the lawyer accepts the risk of some portion of the fee and expense until there is a recovery.
An attorney's agreement to accept some portion of the risk in the litigation is not without cost to the client. The contingent fee in a construction defect matter is a percentage of the recovery; the greater the risk of the particular claim, the higher the percentage. The percentage compensates the law firm for the possibility that its entire investment will go for naught if no recovery can be obtained. Thus, the contingency fee, when and if it is earned, often represents a premium over what a client might expect to pay for the same case with an hourly fee agreement, where the attorney takes no risk because the fee is paid regardless of whether the client obtains a recovery.
Based on a career of litigating construction defect cases, experience shows that the client will likely save money when its fee arrangement is hourly. This proposition is supported by the fact that the hourly fee remains the arrangement of choice for most for-profit businesses who hire attorneys to litigate on their behalf. Because cash flow is not as much of an issue for successful corporations, they are in a better position to pay litigation expenses and avoid any fee premium for "risk insurance".
For many community associations however, the risk of losing the case altogether, or obtaining an inadequate judgment is simply too great when added to the costs of litigation. They may lack the cash flow necessary to retain lawyers and expert witnesses on an hourly basis. For those associations, contingency fee arrangements are the only viable option. Each situation is different, but for the client the key is to be sure the various fee options are identified and explained. The basic arrangements are described below.
1. Hourly Fee Contract. Under the standard hourly fee agreement, attorneys are paid for their services for each hour billed. Different attorneys and legal assistants will have different hourly rates. While the rates for the most experienced attorneys will be higher than those for junior associates or legal assistants, it isn't the rate of any individual attorney that is important, but rather the average rate of the firm projected over an entire case. This is because more hours are (or should be) invested into a case by those with lower rates. The partners in the firm, those attorneys with the greatest experience (and the highest rates), will supervise the others and appear at important events like depositions, mediations, and court hearings, but generally will bill fewer hours than other staff members, resulting in an average hourly rate far below that of the partner in charge.
The other major cost component is the fees of experts--architects, engineers, and others--who provide the expert testimony necessary to successfully prosecute a claim. With an hourly fee arrangement, the experts are typically paid by the client on an hourly basis. In a construction case with a potential recovery in excess of a million dollars, attorney and expert fees can easily reach six figures, so the client must have sufficient cash flow or commit other financial resources (reserves, loans) to finance the case to conclusion. With this type of contract, the risk of success or failure resides with the client. The attorney and the experts are paid regardless of the outcome.
2. Contingent Fee Contract. A contingent fee contract provides that the attorney's fee will be a percentage of any recovery. If there is no recovery, there is no fee. Where cash flow is a big issue with the client, as it often is with community associations, the attorney's willingness to defer fees until and unless there is a recovery is a substantial benefit to the client. The client must keep in mind that with a contingent fee contract, the attorney is acting as the bank and that service is not without cost to the client. To the extent that the resulting fee is greater than what the client might have paid with an hourly fee agreement, the client is paying the attorney a premium to accept some or all of the client's risk. If that risk is minimal, the client may be paying for insurance that it doesn't need.
Under a contingent fee arrangement, the attorney and client must determine whether the attorney will also advance litigation costs. Litigation costs include all costs necessary prosecute the case such as expert fees, court filing fees, copy costs, service fees, etc. In a big case, litigation costs can be substantial. If the attorney is willing to advance costs in a particular case, it is again of great benefit to the client which has limited cash flow. The lawyer does have a right to recover those costs from any resulting settlement or verdict. If there is no recovery, however, the attorney will absorb those costs.

Tyler Berding on the Radio this Saturday
With On The Commons radio host Shu Bartholomew
They will discuss
The Contractual Community—Why Community Associations
Are Not Governments
and
Why It Is So Difficult to Get Owners to Serve
On Boards of Directors.
after 9am PST
Saturday, August 15, 2009
PREVIOUS ISSUES
QUESTION OF THE WEEK
Question:
"What are Articles of Incorporation?"
Answer:
Articles of Incorporation are filed with the state to create a corporation. Most Community Associations are non-profit, mutual benefit corporations, and were created by the filing of Articles of Incorporation.
Homeowners won't volunteer for boards of directors of community associations—another nail in the coffin?
Community associations are corporations.
Their bylaws require management of the association by an elected board of directors.
That board serves all of the owners by conducting the business of the association. …»
What You Don't Know...
When do Statutes of Limitation begin to run on Construction Claims?
Statutes of Limitation are intended to protect defendants from stale claims.
They are also traps for the unwary claimant.
If the time period expires before an appropriate claim is made, legal rights can be permanently lost…»
Are Apartments a Better Answer to the Housing Crisis?
Sometime in the early sixties, a large California developer opened its first development of condominiums for sale.
Even by the standards of the day, they were offered at rock bottom prices…»
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