Fee collection is one of those areas where doing the fundamentals throughout the course of the year pays the biggest dividends. It is also one of the areas where the risk of a malpractice claim can be the greatest.
As a result, there is a high premium on having solid systems in place for billing and collections. Here are the five fundamentals of effective billing and collection.
1. Negotiate the fee before the attorney-client relationship begins
Attorneys have significant flexibility in negotiating a fee before the attorney-client relationship begins. Basically, the most significant boundary is the fee must be reasonable. In addition, fee agreements cannot penalize a client who decides to terminate an attorney at any time.
On the other hand, once the attorney-client relation begins, the rules change based on the fiduciary relationship created. Most notably, courts and bar officials are watchful for signs the attorney uses information learned in the course of the attorney-client relationship to the attorney’s advantage and to the client’s detriment.
Of course, circumstances can change during a representation. If they do, a different fee may be warranted. If this happens, the safest course is to suggest the client consult independent legal advice regarding whether to agree to the new fee arrangement. Attorneys should not give clients advice regarding new fee arrangements they propose.
2. Document the fee arrangement
While there has been considerable commentary regarding the implications of a “fee agreement”—specifically, whether written agreements extend the statute of limitations for legal malpractice claims—the risks of failing to document a fee arrangement far exceed the risks of an extended statute of limitations.
The majority of fee disputes literally involve a dispute regarding the amount of the fee. The simplest and most effective method for avoiding these disputes is to agree in writing to the terms of the fee arrangement. This means not only should the attorney reduce the fee arrangement to writing, but also the client should sign the document confirming the fee arrangement. Both the attorney and the client should get a copy of the signed/countersigned document.
3. Send bills regularly
Many fee disputes arise from sticker shock when a client sees for the first time all the things for which attorneys bill, or what the fee agreement means in the context of an actual representation. Indeed, sometimes clients do not receive their first bill until several months into the representation, along with a request for immediate payment.
Other times, clients don’t see the amount of the fee and incurred costs until a settlement has been reached, or, in a real estate or corporate transaction, until the closing. Regardless of the context, this is not a good thing.
The better option is for the client to see what the fees are, or will be, well in advance of the request for payment. For the hourly fee attorney, this means sending out bills regularly so the client gets a sense of the fees and costs. Obviously, “regularly” differs based on the circumstances of each representation. If there is little activity while a motion or appeal is pending, then bills might not be sent for a few months. On the other hand, if there is significant activity, then bills should be sent more frequently. Effective malpractice prevention does require bills actually be sent at some interval regardless of activity.
For transactions, a pre-closing preview of the closing statement with the fees is helpful. For contingency fees, pre-settlement fee previews are appropriate. If the representation involves significant out-of-pocket expenses for which the client is responsible, consider interim bills. The key is to make sure the client understands what the fees are before the fees get locked in by a closing or settlement.
4. Follow-up on unpaid bills
Unpaid bills are problems waiting to happen. The sooner those problems are identified and resolved, the better. Unfortunately, many attorneys do a good job at documenting the fee and sending the bills, but do a poor job on the follow-up. Rather than leave the follow-up to chance, the better approach is to actually enter a calendar control date for follow-up on outstanding bills.
If the bill has been paid, then a thank you would be appropriate. If the bill remains outstanding, then a reach out to the client is in order. This contact enables the attorney to determine if the client has any issues or whether the failure to pay is a simple oversight or intended delay.
The sooner the attorney knows the answer, the better. If there are concerns or issues about the bills, then the attorney should address them. If it is oversight, then the contact is good and the squeaky wheel rule fully applies. If it is intended delay, then the attorney and client can discuss the limitations and how they might be addressed.
Again, there is no magic time for follow-up. Instead, it will depend on the contours of the relationship with the client. Generally, most risk managers recommend 30-day follow-up on an unpaid bill. The most important step is to actually have a pre-set time for follow-up accompanied by a calendar entry with a reminder.
5. Set expectations
If the attorney or law practice expects to get paid at least every six months, or by year-end, tell the client. If the fees will be paid directly from the settlement proceeds or at the closing, tell the client. The most important prevention technique is to avoid surprises. Simply put, most fee disputes can be avoided by effective communication about the one thing most attorneys prefer not to talk about—getting paid.
In the context of a representation, effective communication means communicating and agreeing on the fee before the representation begins; written confirmation of the fee with the client; regular communication about earned fees through regular or interim billing; and timely follow-up when bills have not been paid. And, it means candid communication about what the attorney’s expectations and limitations are for payment.
For attorneys and law practices that have followed these steps, fee collections can be a little less daunting. For attorneys and law practices that have not, now is a good time to put the systems in place in advance of year-end collections.
Randy Evans and Shari Klevens are partners at McKenna Long & Aldridge, which has six offices throughout California. Suzanne Y. Badawi is special counsel at Sheppard Mullin Richter & Hampton. She is an appointed member of the California State Bar Committee on Professional Liability Insurance and represents insurance companies in courts throughout California. The authors defend attorneys and law firms and regularly speak and write on issues regarding the practice of law, including “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” (ALM 2013), “Georgia Legal Malpractice Law” (ALM 2014), and “California Legal Malpractice Law” (ALM 2014).
This article is an excerpt from “California Legal Malpractice Law” which is available at: http://lawcatalog.com/ProductDetail/18034/California-Legal-Malpractice-Law.
In Practice articles inform readers on developments in substantive law. Contact James Cronin with submissions or questions at email@example.com.