Contingency Fees in Germany

By Cornelia Emmert*

This overview focuses on contingency fees in the German legal fee system.
Globalization and the international movement of clients have forced attention on the German rule that the loser pays all costs and fees in litigation. Some commentators (e.g. Schütze, Rechtsverfolgung im Ausland, 44, 115, 1986) claim that contingency fees would be in the interest of clients because they only pay when they have won the case, and the attorney would examine the prospects of the action carefully in advance.

I. General Rules on Contingency Fees

After World War II, before the Federal Rules for attorneys (Bundesrechtsanwaltsordnung, BGBl. I, 565, 1959, abbreviated BRAO) were changed in 1994, contingency fees were legal in certain cases, in particular those concerning Nazi expropriations, to encourage former owners to reclaim their property.

As late as 1992, the highest German civil court (Bundesgerichtshof) decided that certain contingency fees do not seriously violate the German ordre public (BGH NJW 1992, 3101).

The 1994 amendment introduced § 49 b (2) BRAO. It states that contingency fees violate the law. German lawyers may either charge a flat fee, which conforms to the Federal Fee Rules for Attorneys (Bundesgebührenordnung für Rechtsanwälte, BGBl. I, 907, 1957, hereafter BRAGO), or contract in advance with their client for an hourly rate. In the first case, the fee depends on the amount of the claim. In any case, charging less than the statutory fee is illegal.

§ 49 b (2) BRAO has led to the interesting quirk that companies now do what lawyers may not: They assume the risk of litigation and its costs against a contingency fee of 20% to 30%. (See www.proxx.de; www.foris.de) Some lawyers alert clients to these services.

Some commentators suggest that different rules may apply to clients residing abroad. This exception will be discussed here, with a focus on German-American cases.

II. Exceptions for Cases Involving Foreign Clients

The German choice-of-law rules distinguish between cases where the parties decided on the applicable law in advance and the ones without an agreement.

1) If the parties have not decided on the law, Article 28 Einführungsgesetz zum Bürgerlichen Gesetzbuch (Introductory Statute to the Civil Code, BGBl. I, 2494, 1994, as amended, German conflict of laws code, abbreviated EGBGB) requires the contacts of the matter to be evaluated according to their relative importance with respect to the particular issue. Concerning the rules for attorneys, it is not the number of contacts but the attorney's place of business that has the most weight in this evaluation (Reithmann/Martiny, Internationales Vertragsrecht, 286, 1988; Dr. Bendref, Erfolgshonorar und internationale Mandate, www.bendref.de/artikel/artikel01.htm). As a result, there is no difference to the domestic cases.

2) The exception to the general rule is argued to follow from article 27 EGBGB (Dr. Bendref, supra). This article permits parties to select the law of a foreign jurisdiction even if the case has no relation to it (Palandt/Heldrich, Kommentar zum Bürgerlichen Gesetzbuch, 2296, 55th ed., § 27 EGBGB, n. 3) or to select a foreign law only for a portion of a contract (Palandt/Heldrich, § 27 EGBGB, n. 9). In the case of an engagement letter subject to German law the section addressing the fee could be subject to, therefore, the laws of another jurisdiction.

A provision by which the parties select U.S. law to govern the contract is valid and will be given effect only if it is not contrary to article 6 EGBGB. Article 6 controls the application of foreign law in private cases and its comparability with the German ordre public which is to be found in the constitution, statutes, decisions of its courts and moral attitudes of the community.

A contract is not necessarily contrary to the German ordre public merely because it could not validly have been made in Germany, but the parties need good reasons for the selection of another law.

Of course, there is no need and no reason for a German client and a German lawyer to settle on a fee under the rules of a foreign country, except for evading the German fee system. Doing so would most likely violate German law.

A German court may find no violation of the ordre public in the following circumstances:

The client's residence and place of business is the United States; a contract dispute involves the place of contracting and of performance in the USA. The potential defendant is German. The client needs an attorney who is able to communicate in German. He wants to engage his former fellow student from Harvard who is in Germany and familiar with both legal systems. Modern connection systems including the Internet make distances irrelevant to the case.

Facts such as these contain numerous contacts with the United States and their weight is very substantial. They appear to justify the application of U.S. law without violation of the German ordre public. But this would result in a very narrow exception to the rule that the attorney's place of business determines the applicable law.

Once a foreign or German attorney has agreed to a contingent fee, it can still be illegal. Although the contract itself may be valid, the amount of the fee could violate § 138 BGB (contra bonos mores) if German law is applicable or the German ordre public (Reithmann/Martiny, supra, 811, n. 836) and in that case could be curtailed by a German court. Especially when the rate is above 25%, the German ordre public would likely be violated if the fee is substantially higher than the otherwise applicable fee under BRAGO. Also, the German attorney paid according to foreign law still has to observe all other BRAO rules.

Further, the choice of law is also subject to the test of public international law under Article 34 EGBGB. This article is important mainly in anti-trust laws and embargoes cases and not in this setting.

This analysis finds support in a recently published decision of the Court of Appeals (Oberlandesgericht) in Frankfurt/Main from March 2000 (Recht der Internationalen Wirtschaft, Heidelberg, 374 (May 2001)). The court had to decide a case where a German lawyer with places of business in Frankfurt and in the State of New York had charged a quota litis fee. The client, a German heiress disputed the fee for probate work involving an estate in the United States. To evade the German fee system, the parties expressly applied American law to the engagement.

The court found a violation of article 34 EGBGB. The judges explained that § 49 b BRAO as a basic principle of the German fee system applies to German lawyers all over the world. The second place of business in New York is irrelevant in this case, because the client engaged the attorney at the German office. This decision underlines the strict interpretation of § 49 b BRAO.

III. Summary and Outlook

Summing up the main points, contingency fees can be legal in the engagement of German lawyers in a few international cases.

The future question will be whether a relaxation of the restrictions regarding contingency fees is necessary for the legal practice beside the existing, workable German attorney's fee system in light of the increasingly international nature of commercial transactions.

For a recent decision involving contingency fees involving tax advisors, see 47 Recht der Internationalen Wirtschaft 943 (December 2001).