3.

THE IDEA OF JUSTICE BONI MORES, BONA FIDES AND ABUS DES DROITSNO
SEPARATION OF LAW AND EQUITY

Opinion of the German Reichsgericht in the Matter of G. PLAINTIFF -Appellant v. F.,

Defendant-Respondent

Plaintiff, an attorney, sues the defendant, his former client, upon a contract providing
for contingent remuneration.

Defendant was the lessee of a large hotel property in Berlin. The lease, entered into in
1928, provided for an annual rental of RM 240,000. During the ensuing depression defendant
became unable to meet the stipulated rent payments, and around the beginning of 1931 he
retained the plaintiff for the purpose of seeking a reduction of rent.

From the beginning of 1931 the defendant paid to his lessor only one half of the
monthly rent installments, whereupon the lessor instituted four actions for the recovery of the
balance of four rent installments. On the other hand, defendant, represented by the plaintiff,
brought an action against the lessor for refund of alleged overpayments. All these actions
were settled in December, 1931. This settlement reduced the annual rental payable by
defendant to his lessor from RM 240,000 to RM 165,000.

Concerning plaintiffs fees, the parties entered into an agreement which under date'of
February 16, 1931 was confirmed by plaintiff as follows:

. .. Idition to my statutory fees you will pay to me ten percen (10%) of those amounts
which for the duration of the lease you will save as compared to the originally stipulated
rental. You will make these payments to me regardless of whether or not you obtain these
benefits directly or indirectly through my activities .. . You will not enter into any settlement
without my cooperation.

On the following day this agreement was supplemented by an additional letter

agreement which provided that the ten percent should be reduced to five percent (5%) if it
should become necessary for defendant to retain another attorney.

Under date of August 5, 1931, the parties entered into a new supplemental agreement
which plaintiff confirmed by letter as follows:

You have recognized that my claim for fees is justified on the basis of the agreement
existing between us.- You have contended, however, that prior to entering into the said
agreement you did not realize what amounts would become payable thereunder. For this
reason you have requested that the stipulated fee be reduced. We have agreed that my
percentage participation ... be reduced to five percent. You guarantee that I shall receive a
minimum of RM 30,000 out of this participation. In all other respects our former agreement
remains unchanged. We have expressly agreed that my participation extends over the whole
duration of your tenancy.

Defendant concedes that through the settlement which he made with his lessor in
December, 1931, he obtained considerable savings of rent, as compared with the previous
terms of the lease. Plaintiff claims that his 5% share of these savings, for the period prior to
the commencement of the action, amounts to RM 13,000. Plaintiff is suing for this amount
plus interest. Defendant denies the validity of the said agreements. He claims that such
participation of a lawyer in the benefits obtained by him for his client is not only
professionally unethical but contra bonos mores and hence void.

The court of first instance granted the relief prayed for by the plaint: The intermediate
Appellate Court reversed and dismissed the complaint. Plaintiffs further appeal to the
Reichsgericht was unsuccessful.

Reasons: ... The contract sued upon is characterized by the feature that defendant did
not promise a fixed sum payable in case of successful termination of the matter for which
plaintiff was retained, but that plaintiff was to participate in the benefits which his activities
were to procure for the defendant by way of legal action or settlement. Defendant promised to
plaintiff a specified percentage of these benefits. Plaintiff himself calls this a savings
percentage. The stipulation of such a savings percentage is, however contra bonos mores
and hence void, especially if one considers the collaterm-tefms of the agreement. The
intermediate Appellate Court was rightly guided by the principles which this Division, in
accordance with its prior decisions, had developed in the opinion reported in RGZ 115, 141.
As is there pointed out, an attorney, being an organ of the administration of justice, may in his
capacity as helper and adviser of his client not be guided by any considerations other than
those dictated by the nature of the matter entrusted to him. For this purpose he must retain the
necessary freedom as against his client. This position is jeopardized and deprecated if the
attorney amalgamates the interest which he has in an adequate remuneration, with the
interests of his client, by making his remuneration depend upon the success of the action. A
lawyer who enters into such an agreement violates the principles of professional ethics. Only
exceptionally may a different conclusion be warranted by the special circumstances of the
case.

This court realizes that legal writers have vigorously attacked the foregoing view, and
that this view has not been followed by some of the intermediate Appellate Courts.
Nevertheless, this view cannot be abandoned .... The unethical nature of an agreement by
which a lawyer obtains a part of the product of his activities as his-remuneration can be
denied only by those who think (the individual lawyer should enjoy complete, freedom with
respect to the economic side of his professional life. But in view of the position which the
legislature has conferred upon the legal profession, this is impossible. True, the lawyer, as
distinguished from the public official, belongs to a free profession. Nevertheless he does not
enjoy the freedom of a private individual whose economic activities are limited only by the
general laws. The status of the lawyer is ordered by statute. Special privileges have been
bestowed upon him. The legal profession has special importance for the administration of
justice and for the public life of the nation. From all this it follows that every individual
lawyer is subject to special duties. Section 28 of the Lawyers Code summarizes these duties
by providing that every lawyer is bound to use due diligence in the exercise of his profession
and by his professional conduct to prove himself worthy of the respect which his profession
requires. This diligence in the exercise of the profession, however, is no longer absolutely
assured if the lawyer completely allies himself with the economic interests of his client by
making the client promise him a part of the benefits which the client hopes to obtain through
the work of the lawyer. In such event the lawyers`s own interest in the matter becomes so
great that his legally imposed status as protector of the legal order becomes jeopardized. The
lawyer who causes such jeopardy will as a rule violate the canons of professional ethics.

The very case at hand demonstrates that these are not imaginary dangers, but that a
lawyer who through a percentage agreement is strongly interested in the outcome of a matter
entrusted to him will more easily resort to improper methods than a lawyer not thus
personally interested. While the settlement negotiations with the lessor of the hotel were
pending, the defendant sought to obtain more favorable terms by painting his financial
condition in the drabbest colors. Therefore, on November 12, 1931, he wrote a letter which
was addressed to the plaintiff but which, as plaintiff knew, was meant to be forwarded to the
adversary. In this letter defendant pointed out that for financial reasons he was not in a
position to accept the offers of settlement previously made by the lessor. Plaintiff states in
one of his briefs in the present action that this letter as originally drafted by defendant did not
seem to him completely suitable for the purpose for which it was written. Therefore, plaintiff
improved the letter, had it re-typed and had defendant approve the new version. Then he sent
the letter to the attorney for the lessor, as if it were an original letter of the defendant. The
plaintiff himself says concerning this incident . . . that it was intended by the use of that letter
to bluff the adversary. . . . That plaintiffs participation in these deceptive machinations of
his client constitutes a grave violation of his professional duties is too plain for argument.
There is at least some ground for assuming that plaintiff acted that way only for the reason
that he was to derive immediate personal benefits from a more favorable settlement. Of
course, our conclusion that the fee arrangement between the parties was contra bonos mores
is not based upon the subsequent conduct of the plaintiff. Such conduct merely justifies the
suspicion that because of the amalgamation of his own interests with those of his client the
plaintiff was no longer able to live up to his professional duties....

The views of this Court concerning the participation of an attorney in the economic
products of his work are in complete agreement with the views of the National Honor Court
for Attorneys.2 ...

The view opposing the strictness of this Court in matters of this kind is in the last
analysis traceable to a different conception of the nature of the legal profession. This
conception, which emphasizes the economic factors, does not sufficiently consider the public
law character of the legal profession and the professional duties flowing therefrom. This
philosophy was favored by certain general tendencies of recent years. Nevertheless,
especially in view of the decisions of the National Honor Court for Attorneys, it cannot be
said that that philosophy has ever gained controlling influence. To let this philosophy become
victorious at this time, is entirely out of the question, since the national resurrection has
generally re-established a more moral conception of law.3 One of the characteristics of this
conception of law is the emphasis upon duties rather than rights, especially as regards those
who are incorporated into the public legal order. The legal sentiment of today more than of
any other period commands us not to loosen, but on the contrary to maintain, the rules
preventing the selfish exercise of the legal profession....

Even the presently prevailing philosophy does not make it impossible that
exceptionally, under special circumstances, an agreement of the said kind between an
attorney and his client may not be considered unethical. The present case, however, does not
belong to that exceptional category. On the contrary, the intermediate Appellate Court was
correct in holding that the details of the arrangement made by the parties reveal particularly
objectionable features.

In this connection the intermediate Appellate Court rightly emphasizes the length of the
period for which the defendant promised to make payments to the plaintiff.... It is absolutely
improper for an attorney to stipulate for such payments which his client is to make for an
indefinite period, and at least for a period of almost ten years.

It is true that by the supplemental agreement of August 5, 1931, the plaintiff reduced his
participation in the savings obtained by defendant from ten percent to five percent. For this
concession, however, plaintiff received ample consideration in the form of a guaranteed
minimum of RM 30,000....

The agreements of the parties also contain other stipulations which the intermediate
Appellate Court rightly considered as factors militating against the contentions of the
plaintiff. Plaintiff was to be entitled to the stipulated remuneration regardless of whether and
to what extent defendants benefits were directly or indirectly caused by plaintiffs work....
Furthermore, in case it should become necessary for the defendant to retain another lawyer in
lieu of the plaintiff, plaintiff was to remain entitled to five percent of the savings. Settlements
were not to be entered into without plaintiffs consent and cooperation. Plaintiff believes that
all these stipulations can be justified on the ground that their purpose was merely to secure
the rightful claim for the so-called savings percentage; plaintiff says it was his purpose to
prevent defendant from evading his obligations. It might be that plaintiff had this aim in
mind. His argument overlooks, however, that the contingent fee arrangement as such was
highly objectionable and that it became only more objectionable by security measures
intended to tie up the client even more firmly. A creditor may be permitted to secure an
unobjectionable claim in this manner. Where according to the standards of professional ethics
and general morals the claim itself is objectionable, such security measures can only lead to
even stronger condemnation.

In the above-mentioned decision of this Division, RGZ 115, at 143 certain conditions
are statet under which the stipulation of a perecentage fee would not violate the standards of
professional ethics. It is there said:
 If the facts were such that defendant could not have undertaken the payment of
compensation in any other form, ... then the contingent nature of the promise would not in
itself constitute a violation of the , lawyers professional duties. __

Appellant relies upon this statement and argues that the present case ... is covered by
the principles there stated. This is incorrect.

In the first place, the intermediate Appellate Court was right in holding that it was
irrelevant whether the plaintiff, as he claims, originally demanded a contingent fee in a fixed
amount, and that only upon request of the defendant he agreed to a percentage participation.
An attorney is himself responsible for his professional honor, and he has to protect his honor
particularly as against improper requests of his client. Plaintiff further argues that defendant
refused to promise a straight extra-fee; that defendant sought to justify this refusal by
pointing out that the current lease would ruin him unless the rentals were reduced, so that he
would be unable to pay more than the statutory fee unless he were to obtain considerable
relief through the activity of the plaintiff. In such a situation it may perhaps be possible to
justify a fee in a fixed amount, contingent upon success; but it does not follow that a
percentage participation is permissible.. . .

It is thus clear that in entering into said arrangement the plaintiff has disregarded his
professional duties. But to be invalid pursuant to Section 138, Subdivision 1, of the Civil
Code, the agreement must be not only professionally unethical but also generally immoral.
The intermediate Appellate Court has been correct in so holding, and has correctly analyzed
the logical relation between a violation of professional honor and a violation of the precepts
of morality. Not every violation of the former is at the same time a violation of the latter....

. . . On the other hand, we decidedly reject the argument that fee arrangements between
attorney and client should be subject only to the principles of professional ethics and should
be taken out of the reach of Section 138 of the Civil Code....

As in other cases, it is thus necessary in the instant case to examine whether the
violation of professional honor, of which the plaintiff has been guilty, is so grave that persons
whose views are just and equitable would consider it morally objectionable. This question has
been answered in the affirmative by the intermediate Appellate Court, and rightly so. The
applicable standard cannot be based upon the philosophy of those persons who think only in
economic terms and who have no understanding of the special legal status which the statute
provides for attorneys. If this special status is taken into consideration the conclusion is clear:
in making the arrangement with the defendant the plaintiff did not live up to the moral
standard which an attorney should never relinquish. He pursued his personal advantage so
unscrupulously that his conduct, far from being in accord with justice and equity, must be
characterized as morally objectionable.

NOTES
(1) In 1944, subsequent to the principal case, an express provision outlawing all contingent
fees was incorporated into a statute. Decree of April 21, 1944, amending Sec. 93 of the Law
Concerning Attorneys Fees. But when the statute was re-enacted as Sec. 3 of the Federal
Law Concerning Attorneys. Fees of July 26, 1957 (BGB1 1957 I 907), the provision
expressly prohibiting contingent fees was omitted. The legislative intention behind this
omission was to restore the law as it stood at the time of the principal case, i.e., to leave it
again to the courts to derive a solution of the contingent fee problem from the broad principle
of Sec. 138 of the Civil Code. In several more recent decisions the Bundesgerichtshof
accordingly re-established the ruleand the very limited exceptionsstated in the principal
case.1 In 1994 the legislator tackled the issue, stating that contingency fees violate the law
(see 49 b (2) of the Federal Law Concerning Attorneys Fees). 2 In 2006, the Constitutional
Court held that a law barring contingency fees in all cases may be, under certain narrow
circumstances, unconstitutional, and requested the legislator to change it as soon as possible. 3
The Parliament therefore enacted in 2008 the Gesetz zur Neuregelung des Verbotes der
Vereinbarung von Erfolgshonoraren, according to which contingency fees agreements are
valid only if but for them the client financial state would have prevented him to pursue
her/his rights.4