Contingency fees: the debate
Unlawful - Constance McDonnell argues that contingency fee agreements are unlawful
In today’s modern age of transient living, portfolio careers and extended families, probate can be less than straightforward to complete. By law, all reasonable steps must be taken to locate all the beneficiaries to an estate before the estate can be distributed. Solicitors, executors, administrators and trustees of estates may find more frequently that they have to turn to probate genealogists to help distribute assets to their rightful heirs. Probate genealogists (sometimes referred to as heir-locators) specialise in finding missing heirs and beneficiaries to a deceased person’s estate.
There are two types of fees charged by probate genealogists to locate beneficiaries. The first type of fee is the so-called ‘contingency’ fee arrangement, where genealogists charge nothing up-front and do not charge anything unless they find the missing heirs. If, however, they do find the missing heirs, they charge a proportion of the inheritance due to that heir, typically between 10 and 30 per cent. The percentage fee is agreed with each beneficiary or with the executor/administrator of the estate. The second type of fee is simply charged by the genealogist based on a fair reflection of the amount of time/effort/skills needed to locate beneficiaries. Such fees are agreed in advance with the probate practitioner handling the estate. The fee agreed is often a fixed fee.
Legality of contingency fee agreements
There are good reasons for professionals involved in the administration of estates to have significant concerns about the legality of contingency fee agreements used in these circumstances, which have been set out in some detail in a recent Counsel’s opinion provided to Title Research. The arguments canvassed in that opinion and in this article should not be advanced by any person without having obtained independent legal advice based upon that person’s particular situation. The opinion addresses the following:
- the lawfulness of genealogists’/heir-locators’ contingency fee agreements;
- where contingency fees are sought to be charged for work carried out identifying and/or proving the claims of missing beneficiaries, the implications of such agreements for beneficiaries, for trustees, executors and administrators (collectively ‘PRs’), for the advisors to PRs, and for genealogists.
Preserving the estate
Where a PR or professional advisor agrees to a contingency fee agreement to find beneficiaries, it is agreed on the basis that the PR does not pay anything out of the residuary estate towards the cost of locating those beneficiaries – instead such costs would be paid out of those beneficiaries’ respective shares of the estate, thus depleting their inheritance (possibly to a far greater extent than would have been the case if such costs were paid out of the residuary estate). There is a well established principle that a PR has a duty to preserve the estate. A PR who instructs or allows an heir-locator to trace beneficiaries on the basis that it will then present any traced beneficiaries with a ‘contingency fee’ agreement may be found personally liable to a beneficiary for having breached his duty as a PR, and possibly his fiduciary duty, as a result of the beneficiary’s share of the estate having been depleted by the contingency fee.
It is therefore suggested that a prudent PR, or solicitors acting on behalf of an estate, should not instruct an heir-locator unless the heir-locator’s fee is proportionate and reasonable (which a ‘contingency’ fee is very unlikely to be) and unless the fee is to be paid as an administrative expense of the estate. It is the writer’s view that a PR who instructs or allows an heir-locator to trace beneficiaries on the basis that it will then present any traced beneficiaries with a contingency fee agreement, may be found personally liable to a beneficiary for having breached his duty as a PR of the estate, and possibly his fiduciary duty.
Further, it is the writer’s view that a PR should not enter into an agreement whereby an heir-locator may charge her fee to the estate as a percentage of the relevant beneficiary’s share of the estate, because it is improper for a PR to permit the value of a beneficiary’s share to be depleted in such a way; the only proper method of charging a beneficiary’s share with such an expense would be on the basis of payment of such fees according to an hourly rate or fixed fee, depending on the circumstances of the case.
Either a fixed fee or hourly rate might be objectively viewed as reasonable, and therefore properly payable by a PR, depending on the value of the estate, the predictability of the extent of work which needs to be carried out by the heir-locator, and the availability of funds in the estate. In many cases, it will be appropriate to commission a preliminary report, so that the PRs may consider in stages whether or not more detailed (and expensive) research is appropriate or proportionate, and can periodically assess whether there is sufficient material to form the basis of (for example) an application for directions from the court, or an application for a policy of missing beneficiary insurance.
The number of extended family members entitled to inherit from intestate estates is exceptionally generous under inheritance rules in the UK. Whereas some probate genealogists promote the contingency fee method of charging as being appropriate because of the risk of not finding beneficiaries despite work being done, it is suggested that there is an apparent contradiction here, in that there are relatively few cases where entitled relatives cannot be found and most probate genealogy firms claim a success rate of nearly 100 per cent for finding missing beneficiaries. Contingency fees expressed as a percentage are not based on the time spent locating beneficiaries. Consequently, contingency fees become progressively more disproportionate the larger the estate.
A beneficiary who has signed a ‘contingency fee’ agreement with an heir-locator is likely to have an argument that such an agreement is unlawful as ‘savouring of champerty’, so that the agreement is not enforceable by the heir-locator (see Fraser v Buckle  1 IR 1). This argument is based on the well established principle that a third party should not profit by assisting a claimant to prove a case. In other words, an heir-locator (who is likely to have to provide her expert assistance to prove the claim of that particular beneficiary to her inheritance) should not be permitted to profit by taking a slice of that inheritance as his fee for providing his expert assistance. A beneficiary who has signed such a contingency fee agreement may well be entitled to notify the heir-locator and the PRs of the estate that he considers that the agreement is unlawful and unenforceable (although if they are not enforced, the heir-locator may still be entitled to a reasonable fee based on time spent for the work she has done). If there has been misrepresentation by the heir-locator, the beneficiary should notify the heir-locator and the PRs of the estate that he has rescinded the agreement.
If an heir-locator has persuaded a beneficiary to enter into a ‘contingency fee’ agreement without the PRs’ knowledge, the PR should not pay any part of the beneficiary’s share of the estate to the heir-locator without the beneficiary’s informed consent. While it is not for the PRs to provide legal advice to the beneficiary, it would be prudent in such circumstances for the PRs to tell the beneficiary that he should obtain independent legal advice as to the enforceability of the agreement prior to deciding whether to consent to it.
In either circumstance, and in the absence of informed consent by the beneficiary, it might be appropriate for the PRs to seek directions from the court as to whether they should pay the whole of the beneficiary’s share directly to him, or whether they are obliged to pay the contractual percentage of it to the heir-locators (who will usually purport to have a charge on the estate for that amount). Otherwise, and failing settlement with the heir-locators, the beneficiary might be advised to issue a claim seeking a declaration that he is not bound by the contingency fee agreement.
In contrast to the contingency fee method of charging, time-based or fixed fees are proportionate to the work that needs to be undertaken, rather than to the value of the estate, as the research itself remains the same regardless of whether the estate is large or small. This charging method can also be offered on a ‘results guaranteed’ basis, whereby there is a guarantee to find beneficiaries for a fixed fee and if no beneficiaries are found then no fee is payable to the genealogist. Fees agreed in this way between the practitioner and the genealogist ensure costs are more closely controlled, avoid the risk of beneficiaries unfairly signing away a large percentage of their inheritance unnecessarily, and preserve the maximum amount of inheritance for all the beneficiaries involved. Unlike contingency fees, the reasonable cost of locating missing beneficiaries is shared equally amongst all beneficiaries (or, if directed by the court, upon a particular share). Put another way, once these fees have been paid by the estate as a whole (as with all other professional probate fees), all the beneficiaries receive 100 per cent of their entitlement.
An illustration of this would be as follows: on a GBP80,000 estate, a time-based fee for a case might typically be GBP1,000 to GBP5,000. However, using the percentage fee model, the charge for the same work might range from GBP8,000 to GBP24,000. The percentage fee rises proportionally with the value of the estate, so on an estate worth GBP1 million, a percentage fee might be between GBP100,000 and GBP300,000, whereas a time-based fee would stay the same (GBP1,000 to GBP5,000) for the same estate as the fee is based on time spent.
It is the writer’s view that agreements whereby the heir-locators’ fees are payable on a ‘contingency fee’ basis (whether payable by the beneficiaries or by PRs) are unlawful, and should therefore not be permitted to be enforced (although if they are not enforced, the heir-locator may still be entitled to a reasonable fee for the work she has done). PRs should therefore only contract to pay heir-locators’ fees calculated on an hourly rate or a fixed-fee basis.
A full copy of Constance McDonnell’s legal opinion is available on request from Title Research, email: firstname.lastname@example.org.
Lawful – Charles Fraser puts forward arguments to support contingency fee arrangements
Over the years there have been occasional questions and speculation in the press regarding ‘contingency fee agreements.’ Many firms operate solely in this way, some firms offer a variety of charging methods, and other firms offer just one alternative way of charging. While speculation about such agreements is generally not precise, it is taken that ‘contingency fee agreements’ refer to agreements whereby a genealogist or probate researcher enters into an agreement with a potential beneficiary whereby the genealogist’s fee is to be calculated as a percentage of the beneficiary’s entitlement to an estate. These are also the type of agreements used by asset locator companies that trace beneficiaries entitled to unclaimed dividends, shares and the like. There are some research firms that operate a fixed fee with guaranteed results or your money back, which are also effectively contingent agreements, but these are generally not those being referred to.
The first main distinction that needs to be made regarding contingency fees is whether an executor or administrator is already acting in the estate or whether the estate is an intestacy with no administrator acting under a Grant of Letters of Administration. There is no doubt that in the latter case, since no-one is entrusted with the administration of the estate, there is no one authorised to carry out any work or approve any work being carried out. In line with The Probate Practitioner’s Handbook, solicitors should refer such cases to the Treasury Solicitor (Bona Vacantia Department). It is, however, entirely open to them to refer such cases to genealogists to research on the basis that it is more likely than not that such research will result in one or more beneficiaries being identified who would therefore have an entitlement in priority to that of The Crown and one of those beneficiaries would then be in a position to apply for a grant of letters of administration. Given that there is no-one authorised to incur any expense, the only option for the genealogist who wishes to be paid for carrying out any research is for them to enter into a contingency-type agreement with the beneficiaries that they locate.
Several of the leading firms of probate researchers have, over the years, obtained counsel’s opinions regarding the topic of tracing beneficiaries and being paid for that research. One of the most recent opinions was produced by Christopher Nugee QC on 13 July 2005. ‘It is well established in English law that there is nothing unlawful about selling information, and a contract whereby a probate researcher agrees to reveal details of an estate to a beneficiary in return for a percentage of the sums received by the beneficiary from the estate is perfectly legitimate. The cases which establish this beyond doubt are as follows: Sprye v Porter (1856) 7 E&B 58 … reaffirmed in Rees v de Bernardy  2 Ch 437 and Wedgerfield v de Bernardy (1908) 24 TLR 497.'*
The only situation, therefore, in which contingency fees could be questionable are in those cases where (a) some of the beneficiaries are already known and an administrator is acting and (b) there is a will and an executor is acting in that regard. Again, a distinction must be made between a contingency type agreement which is made by a genealogist directly with the beneficiaries or an agreement made between a genealogist and the executor or administrator, whereby the executors agree to pay the probate researcher on a commission basis providing the commission is a reasonable one. In the latter cases, ‘since the executors will usually have a good idea of the size of the estate, the executors will be in a position to judge whether the rate is reasonable.'*
The advantages of this type of agreement are ‘that no costs will be incurred if the research proves fruitless; the probate researcher will have an incentive to make their research effective; and there is no risk of a large bill being run up with nothing to show for it. In essence, such an arrangement would be much the same as an executor agreeing to pay an estate agent for commission on the sale of the property and it has never been suggested that there is anything improper about that.’*
It also avoids ‘the very strong conflict of interests between an administrator’s duty and his personal interest.’* If the executor or administrator is to receive a portion of the residuary estate, then it is often in their interests for the costs of identifying or locating the known beneficiaries to be kept as small as possible. Not only would costs paid out of residue reduce their share, but any additional beneficiaries found may also mean that they ‘may have to share the estate with, or even hand the estate to, someone else.’*
‘An administrator may even dishonestly suppress knowledge of other relatives and positively refuse further research to keep the estate to himself; but even an administrator who is wholly honest may easily persuade himself that he already knows all of those entitled and it would be a waste of money to commission further research. One consequence of adopting research paid for on an hourly basis rather than an a commission based method may be to reduce the likelihood of all those in fact being entitled being found and receiving what is rightfully theirs.’*
In the first scenario, where the probate researcher enters into a contingency agreement with the beneficiary, the real ‘difficulty for executors is what they intend should happen if the beneficiary declines to sign. Engaging probate researchers to locate the beneficiaries for them only discharges their duty if the probate researchers duly report back to them on those whom they have found. I am uneasy with the idea that executors could properly agree with probate researchers that they need not reveal details of the beneficiaries they have found unless they have persuaded the beneficiaries to sign up to a commission agreement. This cannot be a discharge of their own duty to ascertain the beneficiaries. Once they have engaged probate researchers to locate beneficiaries, their duty would require them to stipulate for the results of the researcher’s to be disclosed to them. So I think executors are placed in a difficult position; if they do insist on being given the results of research regardless of whether a commission agreement has been reached, they are in effect authorising the probate researchers to approach their own beneficiaries on a misleading basis (namely that the only way they will receive their inheritance is by signing the agreement) whereas if they do not insist on this and agree that the probate researchers can keep to themselves the results of their research unless a commission agreement has been signed, then they run I think a risk of being in breach of their own duty to the beneficiaries.’*
Probate researchers ‘are not fiduciaries, and owe no duties, whether contractual or otherwise, to beneficiaries before they have reached an agreement with them (save the ordinary duty is not to obtain contracts by misrepresentation and not to take unconscionable advantage of the ignorant.)*. It is, however, entirely open for the beneficiary contacted by the probate researcher in such a way to negotiate with them over the level of fee that they are happy to pay.
‘I do not think it necessarily follows that a probate researcher who traced a beneficiary on the basis of information given by an executor would be in breach of any duty.’* The researcher ‘is not I think likely to be acting as the agent of the executors but independently and although I can see the argument that the information provided by the executors to the probate researcher is confidential, if the executors choose to provide that information to the probate researchers, I do not think the latter are in breach of any obligation if they use it for the precise purposes which the executors intended them to.’* Working in such a way does have a practical advantage for the executor of the probate researchers working on a commission basis. It ‘has the effect that if the probate researchers do not find the missing beneficiary no costs are incurred; and this gives the probate researcher a powerful incentive to make their research thorough and effective. Paying on a time basis, on the other hand, might mean that the executors would be faced with a bill for what could be hours of work that produce no definitive results.’*
There is no conclusive evidence as to the level of average fees charged on an hourly basis compared with average fees payable under contingency arrangements adopted by many probate researchers, but ‘it is self evident that there is nothing inherently less expensive about charging in this way: it all depends on the rates adopted. It is also obvious that a time-based method of charging is likely to eat up a larger proportion of a small estate, whereas with a commission based method of charging the larger estates will subsidise the smaller ones. It follows that I do not think that one can say that either method is automatically a “better” method of charging. I can see that there is one possible disadvantage of working solely on a time-spent basis, namely that once a beneficiary has been found and becomes administrator of the estate, there is little incentive for him to find other beneficiaries.‘*
There is also the question of fairness that needs to be considered. Why should those relatives that knew the deceased and were regularly in touch with the deceased pay for research to locate beneficiaries who were not, and who in some cases have no knowledge of the deceased whatsoever? Unless the estate has already been distributed to the known beneficiaries, assuming their shares can be ascertained, this is precisely what happens where research is paid for out of the residuary estate on a time-spent basis as opposed to the unknown heirs effectively paying for the research to be found themselves by entering into contingency agreements with the probate researcher.
* Opinion of Christopher Nugee QC 13 July 2005.
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