May 21, 2019 Practice Points

When a Third Party Pays the Legal Fees

Attention to these issues at the outset will help you avoid ethical issues and get paid.

By Paula M. Bagger

Litigators occasionally agree to represent a client whose legal fees will be paid by a third party, whether an employer is paying to defend an employee or a friend, family member, or business partner is paying the fees of another. Whether or not this third party (referred to hereafter as “the payor”) is itself your client, attention to the following issues will help avoid ethical issues and decrease the chances of an unpaid bill.

ABA Model Rule of Professional Responsibility (MPR) 1.8(f) provides:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent;

(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6 [confidentiality].

Conflicts of Interest

Actual or potential conflicts of interest raised by a dual representation must be addressed in the usual manner if the payor is also a client, see MPR 1.7, but even if the payor is not a client, you must consider whether the financial arrangement—i.e., the fact that the payor is paying the client’s legal fees—itself creates a dynamic that prevents your providing zealous representation or interferes with the exercise of your independent professional judgment. This could occur, for instance, with the payor expressing a financial interest in minimizing expense. Consider stating in your agreement with the payor that the fact that the payor agrees to pay legal fees incurred by the client does not itself make the payor a client and that the payor will have no right to instruct the lawyer in the matters in which the lawyer is representing the client.

Confidentiality

Confidentiality is another aspect of the attorney-client relationship that may be impacted in a third-party payor situation.  The payor may want to monitor the matter to keep track of what she is paying for, but your duty of confidentiality runs to the client alone. As with the conflicts issue, you may wish to state in your agreement with the payor that you will not, without the client’s prior permission, disclose confidential information to the payor.

Sharing the client’s confidences with the payor after the client has given informed consent satisfies your confidentiality obligation, see MPR 1.6, but you will also need to consider the attorney-client privilege when deciding what ought to be disclosed to the payor. It will almost always be prudent to have two initial agreements, two sets of billing statements, with differing detail, and, generally, two avenues of communication, with the payor and the client separately.

Scope of Representation

The scope of your representation of the client and the scope of what the payor has agreed to pay for may or may not be the same, and it is important to have a clear understanding of both at the outset. MPR 1.2 allows you to limit your representation of the client, provided that the limitation is reasonable under the circumstances and the client has provided informed consent. If your agreement with the client is silent or unclear as to any limitation on the scope of your representation, that scope is determined by considering what the client might reasonably have expected under the circumstances. Discussions you had with the payor about the scope of the payor’s payment obligations, to which the client was not privy, would not be considered. Carefully drafted agreements with the client and the payor will decrease the chances that you are obligated to provide the client with a broader set of legal services than the payor has agreed to pay for.

Getting Paid

If you want to enforce the payor’s undertaking to pay for your services to the client, you should have a written agreement with the payor too. As discussed, to reinforce the differing statuses of the payor and the client, it is best for this to be a separate agreement in which the payor agrees to pay for the services to be rendered to the client.

The retention agreement with the client should also address the issue of payment.  Where appropriate, the client should be asked to agree that, while the payor has agreed to pay his fees and expenses, this does not affect the client’s own obligation to pay outstanding fees and expenses. You may also want to consider providing that, if the payor stops paying, you may look to the client for payment with no obligation to enforce the payor’s agreement to make payment.

Finally, unless a different result has been negotiated, both agreements should provide that if the payor pays a retainer, any funds left over at the end of the case are returned to the payor, not the client.

Paula M. Bagger is an attorney in Boston, Massachusetts.


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