General comment on financial incentives for lawyers under fee agreements

Generally everyone is motivated by incentives, and incentives often influence how people behave in commercial relationships. A mechanic who is paid a fixed fee to repair a vehicle has an incentive to get the repair done as quickly as possible and use the cheapest parts that will get the job done (perhaps even second hand parts). Conversely a mechanic who is paid by the hour and charges cost plus a markup on parts that are used for the repair has incentives to take things slowly, being “extra thorough”, and use expensive parts (resulting in bigger markups on parts being paid).

 

One hopes that despite financial incentives to modify their approach to the job depending on how they are being paid, mechanics will nevertheless perform all work to a fair and uncompromising high standard. Similarly, one hopes that lawyers will strive to provide high quality service at a fair price, but it is nevertheless worthwhile to understand the incentives that might exist under different types of lawyer-client fee agreements, and indeed these may be somewhat less obvious than in the case of mechanical work being done on a vehicle. 

 

Lawyers may sympathize with their client’s legal plight, but most lawyers are also in business to make money and it is important for clients to understand the incentives lawyers may have under different fee structures.

 

Although the law imposes fiduciary duties on lawyers to act in the best interests of their clients, that duty applies primarily after the retainer agreement is finalized and lawyers are permitted to bargain the terms of their retainer agreements. Indeed, clients may be advised to seek independent legal advice on the fairness of retainer agreements specifically because different people have different perceptions of fairness and there have been cases in which retainer agreements drafted by lawyers have been ruled by judges to be unfair. Further, even in the course of providing legal services there are “ethical grey areas” and are often conflicts of interest between the lawyer and the client. This has been acknowledged by the Supreme Court of Canada: 

 

There are many situations where counsel’s personal or professional interests may be in tension with an individual client’s interest, for example where counsel acquires an interesting new file that requires immediate attention, or has vacation plans that conflict with the timing of court proceedings affecting the client.  Counsel is obligated to be diligent, thorough and to act in the client’s best interest. 

(R. v. Cunningham, 2010 SCC 10 at para. 40).

 

The discussion below regarding the different fee arrangements identifies different incentives that may apply under various types of fee arrangements.

 

To be clear, it is not being suggested that lawyers, or mechanics for that matter, will consciously act on financial incentives that produce unfair results for their clients, but because human behaviour may be influenced by incentives it is considered worthwhile to understand the incentives that apply in different types of lawyer-client fee arrangements.