On Law

October 1, 2002

October 29, 2002

December 3, 2002

Suits for fees can lead to malpractice

When law firms provide professional services, they expect to be paid for such. However, disputes can arise about the cost of these services. If reasonable terms cannot be agreed, by both parties, the law firm is then forced to make a decision whether or not to initiate a suit for the collection of their fees.

Unfortunately, law firm suits for fees generate a large number of malpractice claims. The reasoning is that once the suit is filed, the answer often will include a defense and an affirmative counterclaim stating that the fee was not paid due to the fact that the attorney's performance was deficient. The counterclaim becomes for all practical purposes a malpractice claim against the law firm.

Sometimes the amount involved or the particular circumstances of representation may require a suit against a client for a fee. However, any decision to undertake any form of collection activity against a client is one which should only be taken after understanding the hazards.

Therefore, it is recommended that the advice of independent counsel and a comprehensive review of the services provided be made before any collection activity occurs.

It is estimated by many insurers and lawyers who frequently litigate malpractice claims that approximately 10 percent of all malpractice claims originate as counterclaims to suit for fees and that approximately 50 percent of all suits for fees will generate a malpractice counterclaim.

In an effort to better manage fee disputes with clients, a firm can implement the following prevention considerations and techniques:

A. Do not allow an owing fee to become so large that a suit to collect it would be necessary, warranted or justifiable. When the fee reaches a certain amount, institute an agenda of alternative choices and strategies as to how to proceed. If the fee cannot be collected at a certain point, consider withdrawing from the representation.

B. Do not file any suits for fees. Or alternatively, file suit only as an absolute last resort and only when the totality of the circumstances forces you to.

C. Senior partner or committee approval -- Institute a procedure in which a dual partner, committee or third party reviews the file prior to filing any suit for fees.

D. Carefully weigh all considerations especially including the possibility of a malpractice counterclaim and all of its ramifications before making a final decision to file a suit to collect fees. Keep in mind the following:

  • Are the financial benefits of recovery better than the negative implications of filing suit? In assessing how much can be gained financially by the legal enforcement of a fee agreement, it is necessary to deduct costs or expenses of collection efforts.

  • Attorney fees. It is not advisable that a firm represents itself in a suit for collections. Subtract the costs of hiring an attorney from the ? Taxes. What is the net gain after taxes have been paid?

  • Partner/associate time. Every case requires the commitment of time by partners and/or associates within the firm -- time that could otherwise be billed on other matters.

  • Expert witness fees. In order to establish what a reasonable fee might be the firm may need to hire another lawyer to act as an expert witness.

  • Possible increase in malpractice insurance premiums. If the firm receives a counterclaim, the suit will have to be reported to the insurance carrier. Any claims, which appear on the firm's history, can impact future insurance premiums -- particularly in a hard insurance market.

  • Adverse public image. The publicity, which may result from a suit for fees and a retaliatory counterclaim, could scare away other potential clients. Even with no publicity, the news may spread by word-of-mouth.

    Since a firm's business is dependent on its attorneys' reputations, making an enemy of a client could do far more harm than negotiating or forgiving a fee.

  • Division of net recovery. When the amount collected is pro-rated among the partners of the firm the amount in controversy appears less significant. A $5,000 possible gain seems much less appealing when it only works out to $1,000 for each of five partners.

    E. Be reasonable in the amount you will accept in fee dispute discussions. Doing this does not denigrate the value of the legal services that were actually provided. Rather this is almost always the most practical and realistic way to end a mater of this type. Don't get absorbed in a fee dispute! Move on so you can redirect your focus and energy onto activities that can produce benefits and profits for the firm.

    F. Keep open communication lines with the client. Try and determine whether the client is unable to pay due to a lack of funds or whether the client is genuinely unhappy with some aspect of the fee or representation. If this distinction can be accurately made, the likelihood of a malpractice counterclaim can be more precisely assessed.

    G. Prior to filing suit, make sure you have proper and complete documentation of the services performed, and precisely how fees were calculated. This evidence should include time sheets and/or other appropriate billing documentation.

    H. Consider hiring an attorney to review your file before you move forward with a suit for fees. The reviewing attorney should look for any questionable practices or omissions in the representation of the case.

    I. Do not sue a client out of anger, resentment, or vindictiveness. Do not personalize any aspect of the transaction. The decision of whether to file a suit for fees is purely a business decision and should be handled and analyzed accordingly.

    J. Accept the reality that on many occasions through your career you will not get paid money that is rightfully and deservedly owed to you. No business or professional practice collects 100 percent of its justified billings.

    Some lawyers wait for at least two years after representation has ended before filing a suit for fees. The reasoning is that the statute of limitations for legal malpractice will have expired by that time. Not always! Some courts have held that the malpractice was not discovered until the attorney filed suit against the client.

    A firm can safely assume that it will never collect all of the fees owed to it. However, by following diligent procedures of billing and collection, you can limit the amount of fees written off.

    Ahern, RPLU, is the president of Ahern Insurance Brokerage. He can be contacted at brian.ahern@sddt.com.

  • October 1, 2002

    October 29, 2002

    December 3, 2002