Transactional Contingency Fee Agreements

April 2025

By Noah Rosenthal

As the legal economy grows more complicated and lawyers and clients look for new ways to finance legal work, lawyers in many fields have fashioned new forms of fee arrangements as an important part of their client relationships.  Whenever a lawyer enters into a fee agreement with a client, but especially when adopting a non-traditional approach, lawyers must consider whether their agreement complies with the State Bar Act and Rules of Professional Conduct.  One consideration for lawyers proposing alternative fee agreements for transactional work is whether their arrangements with their clients constitute contingency fee agreements – something traditionally thought of only in connection with litigation. 

Most California litigators, especially those who represent plaintiffs, are familiar with their obligations when they are retained on a contingency fee basis.  Among other things, section 6147 of the Business and Professions Code requires that contingency fee agreements be in writing.  The written agreement must include:

(1) A statement of the contingency fee rate that the client and attorney have agreed upon.

(2) A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.

(3) A statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract. This may include any amounts collected for the plaintiff by the attorney.

(4) … [Except in medical malpractice cases,] a statement that the fee is not set by law but is negotiable between attorney and client.” (Bus. & Prof. Code § 6147(a).)

But what about lawyers working on non-litigation matters using alternative fee structures?  Are their engagement agreements covered by section 6147? 

From section 6147’s adoption in 1982 until the Legislature amended the statute in 1994, the answer was “no.”  Section 6147 applied only to “plaintiffs,” not “clients.”  In 1992, in Franklin v. Appel, the Second District Court of Appeal addressed a client’s argument that section 6147 should be applied to a contingency fee outside the litigation context, in that case for a series of real estate transactions.  The client in Franklin owned several properties whose value and commercial use were affected by encumbrances and the poor financial situation of the client’s co-investors.  The client hired the lawyer to develop and implement a strategy to allow the client to effectively use the properties and maximize the client’s equity in the properties.  The agreement provided that the lawyer’s fee would be tied to the increase in their equity created by his strategy and negotiations.  (Franklin v. Appel (1992) 8 Cal.App.4th 875, 880-82.)  When he was successful, the client did not pay the full contingency fee.  The trial court concluded that the agreement was voidable by the client because the lawyer did not comply with section 6147.  (Id. at p. 883.)  The Court of Appeal reversed, concluding that the plain language of the statute foreclosed extending it to clients other than litigation plaintiffs.  (Id. at pp. 879-81.)  The court commented that, “[s]hould the Legislature intend section 6147 to apply to all contingency fee arrangements between attorneys and clients generally, irrespective of whether the representation contemplates litigation or transactional matters, a simple amendment to that effect will suffice; client or person may be substituted for plaintiff.”  (Id. at p. 891.) 

With the exception of one phrase in paragraph (a)(3) of section 6147 describing a situation that is limited to litigation matters, the Legislature took the court up on this invitation and replaced “plaintiff” with “client” throughout section 6147.  A comment to the Senate analysis of the bill amending section 6147 observed that it is intended to “clarify that [section 6147] pertains to all contingency fee contracts. Thus, AB 3219 overturns Franklin.”  (A.B. 3219, Senate Comm. on Judiciary, Sen. Aug 9, 1994, cmt. 2.)

Nevertheless, the application of this rule is not always straightforward with non-traditional fee agreements.  Neither the Business and Professions Code nor the Rules of Professional Conduct define a contingency fee, but, generally, a contingency fee is one where the fee is “contingent on the outcome of the matter for which the service is rendered.”  (See ABA Model Rule 1.5(c).)  While “we typically know a contingency fee when we see one,” nuances found in transactional fee agreements not typically seen in litigation contingency fees can complicate the analysis.

Some fee arrangements for transactional work are likely to be considered contingency fees under section 6147.  For example, a pre-determined “success fee” (sometimes referred to as a “holdback fee” or a “bonus fee”) to be paid if a transaction is completed for more than, or less than, a certain amount of money will typically trigger section 6147’s requirements.  Courts are likely to treat such fee agreements as parallels to typical litigation contingency fee agreements because the lawyer gets paid a share of the pot of money the client gets (or saves) as a result of the representation.  In Franklin, for example, the contingency fee was tied to the increase in the value of the client’s property resulting from the lawyer’s transactional work.

But a success fee tied merely to the closing of a deal (as opposed to its value) is much less likely to be considered a contingency fee.  Such a fee is tied to the work performed (representation of the client through closing versus representation of the client only until the deal died), not the value of the deal.  This type of success fee is effectively a partial flat fee paid upon completion of the work.  Like a flat fee, this success fee is earned based on the work performed.  A lawyer, of course, may charge a client a flat fee for work on a transaction, to be paid either prior to or upon the completion of the work, or when certain stages of work are completed.  (See California Rule of Professional Conduct 1.5(e).) 

A transactional engagement agreement that provides for the parties to negotiate a success fee or a bonus after the successful closing is even less likely to constitute a contingency fee under section 6147.  In that situation, the outcome does not trigger the bonus.  Rather, the outcome prompts the parties to negotiate for a potential bonus. Even if the engagement agreement requires good faith negotiation, that arrangement would likely fall short of being considered a contingency fee agreement. 

One final comment on the language of subdivision (a)(2) of 6147, which was not amended along with the other changes in 1994.  Section 6147(a)(2) requires a lawyer to state how “costs incurred in connection with the prosecution or settlement of the claim” will affect the client’s recovery.  While this subdivision does not appear to require lawyers to make disclosures of costs in a transactional matter, both the lawyer and the client are likely to be best served by setting out in detail when and under what conditions the client will be required to pay for costs incurred in the representation even if the contemplated contingency does not come about. 

Lawyers and clients consistently work to develop alternative fee arrangements tailored to the needs of the matter and the relationship.  The ones discussed here are among the more common arrangements, but any time an attorney enters into anything other than a standard hourly fee agreement, it is imperative for the lawyer to consider whether the agreement triggers the requirements of section 6147.  When in doubt, complying with its requirements will help ensure that the client cannot void the agreement for failure to comply with section 6147.

Noah Rosenthal is the Assistant General Counsel of Fenwick & West LLP.  Prior to joining Fenwick & West, he represented attorneys and law firms on legal ethics advice and counseling matters, legal malpractice defense, disqualification motions, and attorney disciplinary defense at an AmLaw 100 law firm and a litigation boutique. The views expressed in this article are his own.