You are here:

Statutory ban on contingency fees for lawyers must permit exception

Press Release No. 27/2007 of 07 March 2007

Order of 12 December 2006
1 BvR 2576/04

The Federal Lawyers’ Act prohibits lawyers from making agreements under which a payment or the amount of a payment is made dependent on the result of the matter or on the success of the lawyer’s activity, or under which the lawyer receives as a fee part of the sum awarded. Similar regulations exist for tax advisers, tax agents and auditors. In the case in hand, a lawyer asserts that the prohibition of contingency fees for lawyers is unconstitutional. In 1990, she was instructed by two persons living in the USA to enforce claims for land located in Dresden which had belonged to their grandfather and which had been expropriated by the National Socialist dictatorship. The lawyer was offered as a fee one-third of the amount awarded. In the following period, the complainant obtained compensation in the total amount of DM 312,000 for her clients. Of this, she received, as agreed, DM 104,000. The lawyers’ disciplinary court held that the payment in the shape of a contingency fee was a violation of the fundamental duties of a lawyer. It therefore reprimanded the complainant and ordered her to pay a fine in the amount of EUR 25,000; the lawyers’ disciplinary appeal court reduced this to EUR 5,000.

The lawyer’s constitutional complaint in which she asserted the unconstitutionality of the statutory prohibition of contingency fees for lawyers was successful in part. The First Senate of the Federal Constitutional Court held that the statutory prohibition is not compatible with the fundamental right to the free practice of an occupation or a profession (Article 12.1 of the Basic Law (GrundgesetzGG) to the extent that the statute provides for no exceptions and therefore the prohibition is to be observed even if the lawyer, in agreeing a fee based on results, takes into account particular circumstances in the person of the client which would otherwise deter the client from pursuing his or her rights. The legislature must pass a new provision by 30 June 2008. Until then, however, the statutory prohibition of contingency fees for lawyers continues to apply. For this reason, the Federal Constitutional Court did not criticise the judgments of the lawyers’ disciplinary courts against the complainant from a constitutional point of view.

In essence, the decision is based on the following considerations:

In prohibiting contingency fees for lawyers, the legislature is pursuing public welfare goals that are based on rational considerations and therefore are capable of legitimising the restriction of lawyers’ practice of their profession. On the one hand, the prohibition serves to protect the independence of lawyers, which is the indispensable requirement for a functioning administration of justice. It is not constitutionally objectionable that the legislature regards the agreement of a contingency fee as a threat to the independence of lawyers. For example, to remain independent, a lawyer needs critical distance from a client’s concern, and this critical distance may be harmed if a lawyer has agreed to share in the risk of a legal matter. But above all, it is not completely misplaced to fear that the agreement of a fee based on results may create an additional incentive for dishonest members of the profession to aim at success “at any price”, including the use of dishonest means. Another legitimate purpose of the prohibition of contingency fees is to be seen in the protection of those seeking justice against being cheated on the basis of excessive fee rates. It is possible for a dishonest lawyer to induce the client, by incorrect representation of the chances of success or exaggerated description of the amount of work to be expected, to agree to an unreasonably high fee. Finally, it is unobjectionable under constitutional law if the legislature regards the admissibility of a contingency fee as endangering procedural equality of arms because the defendant – in contrast to the plaintiff – does not have the possibility of shifting his or her costs risk in a comparable way. In order to pursue these goals for the common welfare, the prohibition of contingency fees for lawyers may also be regarded as suitable and necessary.

The prohibition of contingency fees is, however, unreasonable to the extent that it permits no exceptions and therefore is to be observed even if the lawyer, in agreeing a fee based on results, takes into account particular circumstances in the person of the client which would otherwise deter the client from pursuing his or her rights. When persons seeking justice make a decision on using the services of lawyers, the questions of costs is of vital importance. Persons seeking justice who by reason of their income and financial circumstances have no claim to state assistance for litigation or legal advice may similarly be confronted with the decision whether their own financial situation reasonably permits them to take the financial risks that are entailed by calling on qualified legal assistance and support, in view of the uncertain outcome of the matter. A considerable number of persons affected will, on the basis of rational deliberations, not wish to take the risk as to costs, and will therefore refrain from pursuing their rights. For these persons seeking justice, recognition should be given to their need to shift the above risk at least in part onto the lawyer representing them, by agreeing on a fee based on results. In such cases, the prohibition of contingency fees for lawyers does not promote the granting of legal protection, but instead makes the path to it more difficult.

The legislature can remove this deficiency in the law by retaining the prohibition as a general rule, but creating an exception for the above group of cases. In addition, to protect the financial interests of the persons seeking justice and to protect confidence in the legal profession, the validity of the agreement of a contingency fee may be made dependent on the lawyer performing his or her duties of information towards the client with regard to fees. Finally, the legislature is not prevented from removing the basis from the unconstitutional deficiency in the law by completely abandoning the prohibition of contingency fees for lawyers or retaining it only subject to strict requirements, for example where the client has been inadequately informed.