One of the biggest strains on a law firm is outstanding accounts receivable. Naturally, attorneys expect to be paid for the work they do and past due bills can cause tension within the firm and irreparable harm to the attorney-client relationship.
If a bill remains unpaid, the attorney may be tempted to “fire” the client and sue for fees immediately. However, experts opine that up to 40% of fee lawsuits result in legal malpractice counterclaims.
But attorneys who file fee suits must be cognizant of the substantial risks that may arise and should avoid situations such as the one below:
Attorney Hap Less represented Clint in a dispute with a neighbor over a boundary line. Litigation was protracted and expensive with Clint ultimately losing the case. Clint is dissatisfied with the result and refuses to pay Hap’s significant bills. Clint states it was Hap’s fault the case was lost and says he will sue if Hap pursues the bill. Despite Clint’s threats, Hap quickly files suit and receives the promised legal malpractice counterclaim in return. Hap reports the matter to his insurance carrier who defends him on the counterclaim.
Investigation reveals Hap overlooked a key defense; had such an argument been raised, Clint likely would have prevailed. The carrier and Hap agree to a settlement with Clint that includes payment of Hap’s significant insurance deductible as well as Hap’s agreement to drop the fee suit. Undoubtedly, Hap is worse off financially than he would have been had he written off the bill.
The above scenario, although fictitious, illustrates the issues that may arise when an attorney sues a client for fees.
No magic elixir exists to get bills timely paid, but there are ways to minimize these risks.
- Get a realistic retainer at the outset. Attorneys sometimes hesitate to ask for a retainer out of concern the client may be scared off. However, if the client is not able to come up with money at the outset of the relationship, this may foreshadow a future inability to pay. Getting a retainer, and having it replenished as warranted, is one of the simplest ways to avoid accounts receivable issues.
- Include fee payment provisions in your engagement letter. All billing components should be communicated, including the basis for the fee and the frequency of billing. Include when the payments will be due and what out-of-pocket charges will be billed. If your jurisdiction allows, consider including an arbitration clause requiring binding arbitration of fee dispute claims.
- Provide a budget. Give a realistic assessment of potential fees and costs. Do not low ball to get a client to retain you. A client will be much happier to pay less than what was estimated than to be billed more than what was budgeted.
- Practice monthly billing. The most preventable cause of fee disputes is sending large and late invoices. Clients don’t like surprises and getting a late invoice will only add to their dissatisfaction. Make sure your firm has a procedure to get bills out on time, and that the procedure is followed.
- Regularly communicate with the client. A client who knows what is going on with the case should not be surprised when the bill comes. Clients should never have to learn the case status by reviewing an invoice. Don’t let an invoice be your only point of contact.
- Never allow accounts receivable to accumulate. When a bill (or two or three) goes unpaid, don’t ignore it and hope for the best. The responsible partner (not associate, paralegal, or billing clerk) should meet with the client and find out why the account is outstanding. In a best-case scenario, an unintentional oversight occurred and the embarrassed client will provide payment immediately. However, if the client has insufficient funds or is dissatisfied, addressing the issues early will give you the opportunity to explore options. If you do decide to withdraw, make sure to comply with your jurisdiction’s ethical rules.
If you’ve talked to your client about the outstanding balance and are unable to come to an agreement, carefully weigh your options before filing a lawsuit. Up to 40% of fee lawsuits result in legal malpractice counterclaims and some bar associations have free or low-cost fee mediation and/or arbitration services that may provide a satisfactory resolution.
But, if you have exhausted all other avenues and want to proceed with a fee suit, consider the following steps:
- Research the statute of limitations for a potential legal malpractice claim. If feasible, wait until it has expired before filing suit to minimize the possibility of a counterclaim for malpractice.
- Ask a trusted colleague to review your file. Discuss if any errors were made that could make the firm susceptible to a legal malpractice counterclaim.
- Scrutinize your unpaid invoices. Does the firm’s file support the work outlined in the invoices? Were all billing entries appropriate? Does the billing comport to the written fee agreement?
- Analyze the net recovery if the fee suit is won. Consider any outside counsel or collection agency fees, taxes owed on a recovery, lost billable time to the firm, etc. Further, determine if a judgment against the client will be collectible.
- Review your legal malpractice policy. If a legal malpractice counterclaim is filed, what is your insurance deductible? Does your carrier consider fee suits when determining pricing and future eligibility for insurance?
Be objective in your cost benefit analysis. If you still elect to file a fee suit, proceed with caution and continue to explore resolution opportunities. A fee suit may be a distraction from your practice as well as other unintended consequences. Such litigation should be a last resort, not a first strike.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ellen McCarthy (CPCU, RPLU) is vice president and senior risk management & product underwriter for the lawyer’s professional liability program with Swiss Re Corporate Solutions. She previously served as a claims expert adjudicating complex legal malpractice and insurance agent E&O claims across the U.S., and as an underwriter for the LPL program. She is a licensed Maryland attorney and former associate at an insurance defense firm in suburban Washington, D.C.
This article contains the personal views, thoughts, and opinions of the author. It is not endorsed by Swiss Re nor does it constitute any official communication of Swiss Re.