New York attorneys working on a contingency fee basis can charge a reasonable interest rate on unpaid funds advanced to a client, a recent New York State Bar Association ethics opinion advised.
The bar’s ethics committee noted that it addressed this issue in 2000 but “recent changes in the law concerning contingency fee cases have sowed some confusion about our prior opinions on a lawyer’s ability to charge interest on disbursements.”
The confusion “stems from the laws allowing a lawyer to fund disbursements rather than seeking immediate reimbursement from the client,” the Jan. 17 opinion said.
Clients have become increasingly interested in negotiating alternative fee arrangements, including work on contingency, with their law firms. This is even true in Big Law, where Kirkland & Ellis, for instance, said last year it would form a plaintiff-side trial group focused on AFAs, including contingency fee work.
But the bar clarified that lawyers working on contingency and charging interest for disbursements must have a clear agreement with the client and use “reasonable” interest rates. The definition of reasonable would vary “with the facts and circumstances of a particular lawyer-client relationship.”
The opinion noted other conditions the lawyer must meet in this scenario:
- the agreement must describe the alternative methods of payment of such disbursements, explain the financial consequences of each, and clearly indicate the client’s selection;
- the client is clearly advised, indicating that an interest charge will be imposed on disbursements that are not paid within a stated period of time, and the client consents to that arrangement before it goes into effect;
- the client is billed for the disbursements promptly after they have been incurred so the client may decide whether to pay the disbursements or incur the interest charge;
- the period of time between the bill and the imposition of the interest charge is reasonable; and
- the disbursement itself is appropriate.
The opinion is N.Y.S. Bar Ass’n Comm. on Prof’l Ethics, Op. 1181, 1/17/20.