Attorney’s Fees Arrangements In Construction Defect Litigation

3 Jan

Aside from taxes and death, paying the attorney may be the most disliked activity an Association Board undertakes.  But, like seeing a doctor to treat an ailment, attorneys are necessary in many cases for an Association to meet its goals of recovering money in construction defect cases.  How the Association pays the attorney in construction defect cases (this would also include cases against remodeling contractors) can be broken down into three general types of fee arrangements. 

The first and the most longstanding arrangement is the hourly fee arrangement.  In this arrangement, the Association is billed typically on a monthly basis for the actual hours spent by the attorney (including costs advanced by the attorney) in pursuit of the matter.  The Association pays as it goes, and when a recovery is made, the Association receives 100 percent of the recovery (assuming they paid their bills).

The second arrangement, which is suddenly popular, is the contingency fee arrangement.  The attorney is paid a percentage of any recovery that is made in the litigation.  Therefore, a 33 percent contingency fee arrangement means that the attorney is paid one-third (1/3) of any money that is recovered in the litigation and the Association receives two-thirds (2/3) of the money (minus any costs advanced by the law firm in the case).

The last arrangement is the flat fee arrangement.  This is not as popular as the previous two and sometimes is mixed with an hourly fee arrangement.  For example, the attorney may charge a flat fee to take the matter up to mediation and charge an hourly rate going through to trial.

The question most Associations have is which fee arrangement is the best?  As is expected when a lawyer is writing an article, the answer is “it depends.”  There are two primary goals the Association Board should seek to achieve in any fee arrangement.  First, to recover as much money as the Association needs to repair the conditions that exist at the Association after considering all the risks.  Second, that the Board be cognizant of its fiduciary obligations to the members to protect the Association’s finances and to keep as much money for the Association while advancing the first goal.

The contingency fee arrangement sounds attractive to some Boards because there is no monetary payment made as the litigation proceeds.  However, with contingency fee arrangements, the percentage amount paid to the attorney at the conclusion of the case may be much greater than the Association would have spent if it would have paid the attorney on an hourly basis.  For example, let’s assume that the Association has a $600,000 roof defect claim (cost of repair based on expert’s estimate) and has entered into a 33 percent contingency fee arrangement with a law firm.  Let’s assume further that the Association engages in mediation and based upon an evaluation of the risks and benefits and proceeding forward decides to resolve the matter for a $450,000 settlement at the mediation.  In this example, the law firm receives $150,000 in fees plus reimbursement for any costs that they advanced in the litigation (expert fees, filing fees, depositions, etc.).  For this example, let’s say that amount is $10,000.  This leaves the Association with $290,000 ($450,000 – $150,000 – $10,000 = $290,000) to fund a $600,000 repair.

The chief complaint with contingency fee arrangements is that the percentage taken by the law firm (one-third in my example) may not be based or related to actual time spent by the law firm for the work on the matter.  The law firm gets a windfall (they recover more money than they would have had the Association paid on an hourly basis).  This money is, therefore, not available for the Association to fully fund the repair.

The chief benefits of the contingency fee arrangement are the Association does not need to pay money on a monthly basis and if the Association’s claims get dismissed, the Association is not out any money in attorney’s fees (except the Association would still be liable for those costs advanced by the law firm).  In theory these benefits appear sound and advantageous to the Association. However, the Association needs to consider that most attorneys that are proceeding on a contingency fee basis have evaluated the case and generally do not take cases where the risk of getting nothing is present 

The concerns with the hourly fee arrangement are fairly obvious.  The Association may put money into a litigation and not recover enough to merit proceeding with the litigation (the money spent on the litigation surpasses the amount being recovered), or if the Association’s case is dismissed by the Court, the Association will have spent money on attorney’s fees which are not recoverable and a significant loss to the Association.  However, if the case is evaluated correctly and the risk of a zero recovery is not present the hourly fee arrangement is far more likely to net the Association more money as there is no windfall to the law firm. The law firm is compensated for the work they actually did.  This typically leaves the Association with more money to use towards the repairs.

This same concern with contingency fee arrangements can be seen in the flat fee arrangement.  There is one thing that can be said of lawyers, they do not suffer from a lack of concern for money.  The flat fee arrangement usually has a built in cushion for the attorney so they are not left working for free.  The flat fee arrangement, however, does help the Board in its budgeting so the Association knows exactly how much it is going to spend on the litigation. But like the contingency fee, the Association potentially pays the law firm more money then they actually earned.

As can be seen, there are benefits and risks to any fee arrangement.  It is critical that the Board consider all options and work with the lawyers to arrive at a fee arrangement which satisfies the two primary goals of recovering and keeping the most money to repair the conditions.

This post was authored by David J. McGee. David McGee’s practice is based in the litigation section at Thomsen & Nybeck, P.A.  Dave brings his 20 plus years of experience representing Community Associations in construction defects and insurance disputes.  Dave has recovered millions for Associations in disputes with developers, contractors and insurance companies, and heads up the firm’s “Property Insurance Claims” Group.  Dave has been named a “Top Lawyer” by Minnesota Law & Politics and Minneapolis/St. Paul Magazine for a number of years.  Dave has represented clients in numerous appellate cases including Chapman Place Ass’n, Inc. v. Prokasky, 507 N.W.2d 858 (Minn. Ct. App. 1993); Ly v. Nystrom, 615 N.W.2d 302 (Minn. 2000); and Peggy Rose Revocable Trust v. Eppich, 640 N.W.2d 601 (Minn. 2002).  Dave represents clients in arbitrations, mediations, court actions, trials, and appellate work.  Dave is a frequent lecturer and has written numerous articles in the area of Insurance, Construction, and Real Estate Law.  He is also a qualified neutral under Rule 114 of the Minnesota General Rules of Practice (mediation and arbitration).

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