Sue and be sued

July 2014 Eye on Ethics

by Susan Michmerhuizen, ETHICSearch counsel

It appears that a client’s retaliation for what he perceives as a substandard result is simple nonpayment of legal fees. And a standard warning to lawyers who have been stiffed by clients is not to sue for fees. It is estimated that two-thirds of legal malpractice claims come about as counterclaims to suits for fees.

As reported in the ABA/BNA Lawyers’ Manual on Professional Conduct, risk management experts and malpractice specialists gathered for a panel on “Suits for Fees/Mandatory Fee Arbitration” at the 2010 Ninth Annual Legal Malpractice & Risk Management Conference.   Brant Weidner, a lawyer serving as a claims manager with the Beazley Group in Chicago, said that insurers still don't like their insureds to sue clients for nonpayment of fees. “As night follows day, a counterclaim for malpractice will follow a lawsuit for fees,” he stated. 

Consult your insurance policy before bringing suit for fees because many malpractice policies may forbid the legal fee lawsuit or exclude coverage for counterclaims in fee suits. 

ABA Model Rule 1.5 FEES follows this cautionary approach in the Comment to the Rule where it strongly urges participation in state bar arbitration programs. Paragraph [5] of the comment to Rule 1.5 states:

…Disputes over Fees

[9] If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should conscientiously consider submitting to it. Law may prescribe a procedure for determining a lawyer's fee, for example, in representation of an executor or administrator, a class or a person entitled to a reasonable fee as part of the measure of damages. The lawyer entitled to such a fee and a lawyer representing another party concerned with the fee should comply with the prescribed procedure.

The aversion to suing clients is for fees is succinctly stated in ABA Formal Opinion 250 (1943) which stated:

…Ours is a learned profession, not a mere money-getting trade…Suits to collect fees should be avoided.  Only where the circumstances imperatively require, should resort be had to a suit to collect payment…

In some jurisdictions a client can initiate the process which is then mandatory for the lawyer.  

The ABA Center for Professional Responsibility’s Client Protection Committee publishes several resources regarding arbitration of fee disputes at which includes the ABA Model Rules for fee arbitration, a directory of fee arbitration programs state by state and a jurisdiction-by-jurisdiction chart comparing the attributes of bar-sponsored fee arbitration programs.

Mandatory arbitration provisions in fee agreements

In an effort to avoid these types of disputes a practice has developed whereby lawyers will insert mandatory fee and malpractice arbitration clauses in their fee agreements with clients. The ABA Standing Committee on Ethics and Professional Responsibility and several state bar ethics committees have considered whether a lawyer may include such clauses. ABA Formal Opinion 02-425 Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims (2002) addressed this issue. Citing to the above referenced paragraph of the Comment to Rule 1.5, the Opinion states that such provisions are permissible so long as the client gives his fully informed consent and the agreement does not insulate the lawyer from liability that he would otherwise be exposed to under law.

Several state bar ethics opinions that have approved the inclusion of provisions in fee agreements that make arbitration mandatory in the event that there is a dispute. See, e.g.  Texas State Bar Opinion 586 (2008), State Bar of California  Opinion 1989-116 , Connecticut Opinion 97-5 (1997), District of Columbia Bar Opinions 218 (1991) and 211 (1990) (A lawyer may not require clients to enter into a fee agreement that provides for mandatory arbitration of all claims against the firm for malpractice and all fee disputes unless the client is represented by independent counsel in entering the agreement.), and Vermont Opinion 2003-07  (2003), a digest of which as it appears in the ABA/BNA Lawyers’ Manual on Professional Conduct states as follows:

A lawyer may include a binding arbitration clause in a retainer agreement, but should advise the prospective client in writing to seek independent counsel before agreeing to the arbitration terms. If the prospective client declines to seek independent counsel, the lawyer must fully apprise him of the advantages and disadvantages of binding arbitration, and must obtain his informed consent to the clause. The lawyer should be aware that Vt. Stat. Ann. tit. 12, §5652 contains wording that should be included in order for an arbitration clause to be enforceable. In addition, the lawyer should bear in mind that a court may interpret Rule 1.8(h) broadly and consider an arbitration clause inapplicable to malpractice claims. 9 U.S.C. §§1 et seq.; Vt. Stat. Ann. tit. 12, §§5651 et seq.; Rule 1.8(h); ABA 02-425.

The key to avoiding this type of problem may be to ask for and obtain an adequate retainer at the outset of the representation. A replenishing retainer or other structured fee arrangement that keeps funds available for legal fees should be considered when fees are estimated. A regular replenishment schedule and specifications about costs and expenses, if spelled out, can make the collection aspect much easier. 

Another tool to avoid fee collection litigation is the engagement letter. A well-drafted engagement letter can head off a myriad of problems down the road, including nonpayment of fees. ABA Model Rule 1.5 (c) requires that a written employment contract be entered when a contingent fee is the manner of payment. Engagement letters should cover how the client will pay for the lawyer’s services, how disputes will be addressed and the particulars of what the lawyer is undertaking for the client. Interest charged on unpaid balances and other penalties in case of ignored or unpaid fees should also be set forth clearly. The better practice is to spell as much out as possible before a problem is on the horizon.