Dispute Period in Law Firm Retainer Agreements in Doubt

Attorney-client retainer agreements often include a clause providing that if the client does not dispute a billing entry within a certain period after receipt of the bill, the entry shall be acknowledged as correct. In Cannon & Nelms APC v. St. Andrews Development Corp., an appellate court held such a provision unenforceable. The appellate court found a 15-day period does not comport with the fiduciary relationship between attorney and client.

Dispute Provision Is Unenforceable
In Cannon & Nelms, the underlying dispute stemmed from St. Andrews' insurance claim against Travelers Excess and Surplus Lines Company. Travelers was the underwriter of insurance covering St. Andrews' interest in an apartment building destroyed in a fire. St. Andrews sued Travelers after it failed to pay the claim. The Cannon firm represented St. Andrews in the case.

The relationship between Cannon and St. Andrews deteriorated as St. Andrews began questioning the legal bills. The case settled before proceeding to trial. Cannon subsequently sent St. Andrews three invoices totaling almost $400,000. St. Andrews did not pay the invoices.
Cannon sued St. Andrews over the unpaid bills and moved for summary judgment on breach of contract, account stated and services rendered causes of action. The trial court granted summary adjudication of the breach of contract cause of action. Relying on a provision in the retainer agreement stating that if St. Andrews did not dispute in writing any bill within 15 days of receipt, the court deemed all entries correct. The trial court noted that St. Andrews had not disputed any billing entries within the 15-day period.

St. Andrews appealed the trial court decision to the Court of Appeal of the State of California. The appellate court relied on Charnay v. Cobert, which held a 10-day notice provision unenforceable. The court in Charnay reasoned that the provision would allow a lawyer to fraudulently bill a client and then be immunized from liability. The appellate court held the 15-day dispute provision of the Cannon retainer agreement was unenforceable.

Dispute Period Violates Fiduciary Duty
The appellate court stated that a provision giving a client 15 days to dispute attorney billing does not comport with an attorney's fiduciary duty to the client. "The court held that because of the relationship of trust, confidence and loyalty, a lawyer cannot foreclose the client's ability to object to invoices or billing entries by requiring the client to object within 15 days of receipt of a lengthy detailed invoice," notes Cindy C. Albracht-Crogan, Phoenix, AZ, cochair of the ABA Section of Litigation's Solo & Small Firms Committee.

"In my view, the decision is not harsh. It is practical and consonant with Model Rule of Professional Conduct, ER 1.5, which requires that all fees charged by a lawyer must be reasonable. Enforcing a 15-day contest clause without determining whether the fee charged is reasonable violates ER 1.5 and should invalidate the provision," adds Albracht-Crogan.

Future of Fee Contest Clauses in Client Agreements Is Uncertain
"For years, legal practitioners have been recommending that engagement letters contain provisions that will assist a lawyer in collecting the fee for which the client contractually agreed to pay, including provisions related to the time for the client to object to payment," says Albracht-Crogan.

"I understand why an attorney would say 15 or 30 days. You want to get paid within 30 days," notes Scott E. Reiser, Roseland, NJ, cochair of the Section of Litigation's Ethics & Professionalism Committee. "If you put the dispute period out to 60 days, that is telling the client not to pay in 60 days. Payment of an invoice within 30 days is a standard term. A 15- or 10-day provision would shorten the time an invoice is paid."

The appellate court explicitly chose not to comment on whether a longer period of time would comport with fiduciary standards between attorney and client. "What is a reasonable amount of time? Fifteen days was deemed unreasonably short in this case. Some firms use 60-day provisions," notes Thomas G. Wilkinson Jr., Philadelphia, PA, the CPR/SOC Professional Responsibility Subcommittee liaison for the Section's Ethics & Professionalism Committee. It is unclear from the appellate court's decision whether a 60-day provision could be "effectively enforced, or whether used to encourage clients to look at the bill and make it easier for firms to collect unpaid fees from clients," adds Wilkinson.

Practice Tips from Section Leaders
Section leaders note that the outcome of this case may have been different if the terms of the client agreement had been negotiated. "What if this provision was a specifically negotiated provision? What if it is agreed upon by the client in exchange for an hourly rate, or in exchange for consideration for something that the client receives, like a pay reduction? If the client is more sophisticated, then the outcome of the dispute may have been different," says Wilkinson.

Fifteen-day fee dispute clauses may be enforceable, depending on your jurisdiction. While they are not enforceable in California after Cannon, in Florida "the Franklin & Marbin, P.A. v. Mascola court held that attorneys and their clients have the ability to contract for whatever fee payment terms they choose and that the power of contract governed the rights and liabilities of the parties," says Albracht-Crogan.

 

Christina Jordan is immediate past editor in chief of Litigation News.

 


Keywords: retainer agreement, fee dispute, fiduciary duty

 

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