4 Questions to Ask Before Pursuing Business Litigation on Contingency

By David Olsky

Many entrepreneurs feel they can’t afford an attorney, a predicament made much worse when they find themselves faced with a potentially catastrophic business challenge. Case in point: Recently, a successful entrepreneur who had built a thriving business from the ground up and was nearing retirement was fraudulently induced into selling his company’s most valuable assets for a mere $10,000.

In exchange, he received a variety of appealing promises: that the purchaser’s company would assume and refinance his debt, appoint him president of the new company, give him a minimum 25% ownership interest, and provide him with a $20,000 per month salary as well as sales commissions.

Sadly, all of the purchaser’s promises turned out to be false, leaving the business owner devastated and destitute. To make matters worse, his litigation counsel withdrew shortly before trial because he could no longer afford the expenses associated with litigating the case.

Shortly before trial, my law firm agreed to take the case on contingency, and a jury awarded the entrepreneur nearly $1 million in actual and punitive damages. The key takeaway from this verdict and the significant monetary damages awarded is that there is hope. There are attorneys willing to represent people or companies facing challenging and unfair business situations on a contingency basis if they are without the financial means to cover the upfront costs.

What makes a good contingency case?

When people hear the word “contingency,” they typically think of personal injury cases. And for a good reason—those are the most common types of cases conducted on a contingency basis. In certain circumstances, however, it is feasible to pursue high-stakes commercial litigation on contingency. The attorney receives payment only if the client wins or settles their case, resulting in monetary recovery.

Yet, not all cases are the right fit for contingency, and each lawsuit involves different levels of risk. In some cases, the contingent percentage required by the attorney will be too high when weighed against the potential reward to the company in the event of success. In others, the defendant may not be able to pay a judgment, which would render the effort moot. Thus, potential plaintiffs must carefully review the terms of a contingency fee agreement and weigh it against the likelihood of success.

The most common types of commercial disputes that usually lend themselves to worthwhile and profitable business litigation on contingency include:

• Partnership disputes
• Breach of contract
• Fraud
• Denial of insurance coverage

If you are a business owner who is facing this kind of legal scenario, there are four important questions to ask when determining if a case is suitable for business litigation on contingency.

More articles from AllBusiness.com:

• 10 Reasons Why You Need a Strong Business Plan
• Should You Hire a Lawyer for Your Small Business?
• Questions to Ask When Interviewing a Lawyer
• 5 Legal Issues That Could Sink Your Business

Ask yourself these questions before pursuing business litigation on contingency

1. What are your damages?

This should be the first question asked before undertaking any litigation, and it will be especially important for an attorney to assess this before agreeing to take on a contingency.

2. What are the key facts of the case?

One of the first things I request from clients is a chronology of the events related to the dispute. This typically involves reviewing relevant emails and texts and almost always helps the client refresh their recollection of prior events.

For example, people frequently enter into business relationships without putting a formal contract in place. Then, when the relationship sours, the wronged party is discouraged and worried about their legal rights to pursue a case. However, oral agreements can be legally binding, and a close review of the circumstances may lead an attorney to take the case on contingency. Only once we have the facts can we ascertain whether a claim is viable.

3. What proof exists in favor of your claim?

For example, do witnesses back your claims? Are there emails? For example, a jury or judge is much more likely to find a claim in the case of an oral agreement viable if there’s contemporaneous evidence of said agreement, such as an email with the opposing party.

4. Are you willing to spend the time required to help your attorney put together the case?

Litigation cases are typically time intensive and exhaustive in their scope. If a lawyer agrees to work on a contingency basis, they will be investing a significant amount of time and resources out of pocket. However, the client must also be willing to commit the time and effort it will take—potentially months or years—to help their attorney put together a strong case and bring it to a conclusion.

Contingency fees: What’s normal and what’s fair?

Each case will be different based upon the individual circumstances and level of risk involved for the attorney or firm. Contingency fee percentages may range from 20% to 40%, depending upon the size of the damages, the likelihood of success, and the potential cost of discovery. The percentage may also increase as the case proceeds, such as a step-up at the beginning of the trial.

Your attorney will not only need to recover the cost of their time but also all out-of-pocket expenses, which are varied and can include filing and transcript fees, court reporter fees, expert witness fees, mediation fees, and more.

When considering business litigation on contingency, find the right attorney

Just because an attorney says they will take your case on a contingency basis does not mean you should proceed. Would you hire an orthopedic surgeon to remove an appendix? Likewise—and especially in contingency cases—it is critical to retain an attorney with experience handling the specific type of claim being pursued. You should understand that if you follow a case to the end and lose, you may be subject to significant additional expenses, such as levy of the other side’s costs and (in some cases) their attorney fees as well.

Entrepreneurs or business owners who find themselves in what seems like an untenable situation with no funds to seek legal recourse should not despair. Although experienced litigation attorneys may be selective about the types of contingency cases they will take, some are willing, and cases can be won—if key criteria are capable of being met.

RELATED: 15 Major Legal Mistakes Made by Startups