Best Practices for Drafting Effective Fee Agreements

In this Article, we’ll discuss why crafting effective fee agreements is essential to a successful attorney-client relationship and summarize best practices for effective fee agreements.

THE IMPORTANCE OF FEE AGREEMENTS

Having a written fee agreement can (and should) set forth more than just the attorneys fees by also setting expectations for both parties. Doing so establishes transparency and trust, which are essential to a successful attorney-client relationship. Additionally, written fee agreements are a significant part of managing one’s exposure to malpractice claims. The failure to have a fee agreement clearly identifying the client, the scope of the services to be provided, the fees and expenses to be charged and other matters incident to the representation, can negatively impact an attorney’s ability to defend against a legal malpractice or breach of fiduciary duty claim if later asserted.

Documentation of fees is critical evidence of work performed and for whom. Fee issues frequently serve as the catalyst for legal malpractice claims. Clients are often angered when they receive unexpected charges or bills, which may provoke them to sue for malpractice or breach of fiduciary. Additionally, a legal malpractice claim is a compulsory counterclaim when an attorney sues clients to recover fees. If a fee agreement is not in writing, the attorney may face an uphill battle in demonstrating that he or she is entitled to the fees claimed to be owed.

BEST PRACTICES

In Colorado Ethics Opinion 143, the Colorado Bar Association Ethics Committee set forth best practices for a fee agreement, which we’ve summarized and supplemented below. Note that this is a high-level summary only, and that additional provisions may be advisable depending upon an attorney’s area of practice.

THE BASICS

Have the client sign the agreement, and consider requiring the client initial certain provisions of particular importance.

Use plain language and ensure the provisions are free of ambiguity. In the event of a dispute, courts are likely to construe fee agreements in the client’s favor.

Be concise and focus on the essential elements. Lengthy agreements may deter a client from reading the entire agreement.

Use a new engagement agreement for each new unrelated matter you take on for the client.

Obtain written confirmation if the scope of the services being provided under the initial engagement agreement is later modified to narrow, limit or expand the representation.

IDENTIFY THE CLIENT

Specify in your engagement agreement to whom you owe your duties. Often, the identity is quite apparent, so identifying the client by name is typically sufficient. When a lawyer represents a client in a specific capacity, however, identify the client and the capacity in which the lawyer represents the client. If the fees are to be paid by someone other than the client, such as a parent, entity or other third party, it can provide additional clarity to identify who is not the client.

If a lawyer is representing multiple clients or an entity, consider including a provision regarding who has authority to authorize action by the lawyer and bind each client, and who the primary contact person is for the lawyer. When the client is an entity, it’s advisable that the fee agreement clarifies that constituents of the entity are not the client as failing to do so may expose the attorney to liability to third-parties.

SCOPE OF WORK

Even in the context of full scope representation, identify the extent of the representation, including the legal services that are not included.

Properly define what will be included in the lawyer’s services, but also outline what tasks or services the lawyer will not provide. And have client initial paragraphs specifically related to the scope and objectives of the limited presentation, thereby underscoring the importance of those sections for the client and any subsequent review of the agreement concerning consent.

FEES AND COSTS

All fee agreements should specify that any unearned funds in the lawyer’s possession will be deposited in a trust account, and that any unearned portion will be returned.

If charging an hourly fee, include the amount per hour being charged. If you anticipate a change in the hourly fee during the course of the representation, state in the agreement when the firm’s hourly fees are reviewed and how far in advance the client would be notified of any changes.

If requiring a retainer, address the amount of initial retainer, as well as the amount needed to replenish the retainer and when that amount is due. An attorney may want to include what will occur if the client does not make the payments to replenish the retainer and underscore that the retainer amount does not represent the entirety of the fees in the matter. If there is a maximum capped fee, specify whether costs are included in the capped amount.

For flat fees, include a description of services to be performed, the amounts to be paid, milestone events (if any), and an early termination provision.

Explain whether costs are in addition to the lawyer’s fees. This is of particular importance with flat fee arrangements, where the client may assume that the fee is inclusive of all expenses. In instances where the attorney will advance the costs, include a provision authorizing the lawyer to incur costs in the client’s matter up to a certain amount without prior approval from the client.

For billing matters, it’s best to complete reconciliation of the client ledgers to the trust account statements monthly and invoice the client accordingly. State the client’s obligation for timely payment to promptly raise any billing concerns. An attorney may consider explaining the consequences of failure to make payment within a specified time, including withdrawal or terminating the lawyer-client relationship.

When charging interest for unpaid fees and expenses, disclose the amount of interest charged, and period for which interest will be imposed. See also Texas Ethics Opinion 409.

Review Texas Disciplinary Rule 1.04 for guidance on the reasonableness of fees and allowed arrangements.

COMMUNICATION

Establish client’s understanding of the mode and frequency of communication. It’s important to emphasize that the client will be charged for these communications.

Address both the lawyer and client’s obligations regarding confidentiality of their communications (ensuring client understands the lawyer’s duty of confidentiality under Texas Disciplinary Rule 1.05), and the consequences of the client revealing attorney-client privileged communications to third persons.

Consider warning about the risks associated with certain forms of communication such as email. The prevalence of potential hacks or security issues that could arise may require an alternative more secure form of communication of sensitive information.

CONFLICTS AND WAIVERS

It is a good idea to address the possibility of conflicts and waivers at the onset of a representation and include language in the engagement agreement how conflicts that may arise will be addressed.

If you are representing multiple clients in a single matter, you may need to include a waiver as part of the agreement. Be conscious that there may be certain conflicts that are not waivable where the parties’ interests are in direct conflict with each other. This may include situations involving litigation, prenuptial agreements, criminal cases where testimonies may differ, some estate planning matters, among others.

Conflicts may also arise as your firm hires new staff. An addition of an attorney who worked on a matter that was adverse to an existing client could result in the need for waivers or withdrawal of the representation.

FILE RETENTION, RETURN AND DESTRUCTION

Explain the lawyer’s file retention process in the fee agreement, including whether the file is stored electronically and how the lawyer may wish to receive documents from the client (paper or electronically).

Address the process for returning the client file in the fee agreement, including what documents comprise the file and the format in which the file will be provided.

Detail how long the lawyer will maintain the file after the representation ends, and circumstances in which the lawyer intends to destroy the file.

TERMINATION

Inform client of client’s right to terminate the relationship at any time. Explain that the lawyer may terminate representation or move to withdraw, and consider specifying the reasons in which that may concur.

THIRD PARTY CONSIDERATIONS

When third parties are involved, specify the roles, effects, and limitations third parties may have upon the lawyer-client relationship. If the third-party is responsible for payment, be explicit regarding that no professional duties are owed to the third party. Additionally, include that all communication regarding billing will be made directly to the client.

If you will be associating with or referring the matter to another attorney, be sure to comply with Texas Disciplinary Rule 1.04(f) as to the division of fees and the requirement for written client consent in advance of the association or referral.

If you have a succession plan in place (and you should), prepare clients that they may be contacted by the successor attorney, including his or her name.

Newer attorneys may consider adding a provision explaining that the attorney may seek advice from other counsel to ensure the client is receiving the highest quality of representation.

CONCLUSION

If you are a TLIE insured, we’d be happy to talk through your fee agreements, and the potential malpractice issues associated with problem fee situations. Contact Us.

By Lauren Bianchini