The Risk Manager, Spring 2012

Avoid Fee Disputes and Malpractice Claims by Carefully Following the Rules

The representation has now dragged on for over three years. It has proven much more time consuming and expensive to practice because of changed circumstances not contemplated at the time the matter was accepted and the fee agreed. Are you stuck with the original fee agreement or is there a way to increase fees without violating fiduciary duties and aggravating the client resulting in a fee dispute and malpractice claim?

Recently published ABA Formal Opinion 11-458, Changing Fee Arrangements During Representation (8/4/2011), answers this question with a comprehensive analysis of the issues and provides guidance on the requirements for properly increasing fees mid-stream. What follows is an extract of the opinion’s key points for your consideration. Google the opinion cite for the full text (last viewed 3/5/2012).

Basic Rule: After a representation is accepted and a fee agreement reached, subsequent change to the fee agreement is regarded with great suspicion. Any fee agreement not made close to acceptance of a matter carries an extra burden of justification. Some of the reasons for this burden are that changing lawyers during a representation can be difficult and expensive for a client; and the client may fear the lawyer will resent a refusal to change the fee agreement.

Mid-Representation Fee Changes Are Permissible: Fee changes during a representation are recognized in the Rules of Professional Conduct. Kentucky Rule 1.5(b) provides: “Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.” This does not mean, however, that lawyers are free to change fees by merely giving notice of an increase.

Factors to Consider When Increasing Fees During a Representation:

  • Reasonableness: Modification of an existing fee agreement must pass the same test of reasonableness required at the inception of a representation. Reasonableness is tested “in relation to the circumstances at the time of modification.” Modifications must be “…fairly negotiated and not the result of undue influence or coercion by the lawyer.”
  • Communication: “Rule 1.4(b) provides that a lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. An explanation of the lawyer’s proposed modification of a fee arrangement, including the advice that the client need not agree to pay the modified fee to have the lawyer continue the representation, is necessary to enable the client to make an informed decision about the client’s ability and willingness to pay the modified fee for continued representation.”
  • Client Acceptance: Mid-representation fee changes must be accepted by the client

Special Situations:

  • It is permissible to include in a letter of engagement periodic billing rate increases (often annually) provided the client is adequately informed of these fee terms.
  • Lawyers and clients may convert an hourly fee arrangement to a contingency fee arrangement or vice versa by carefully complying with the applicable fee rules.
  • If a fee modification involves a lawyer acquiring an interest in a client business, property, or other nonmonetary property, Rule 1.8(a) covering business transactions with clients must be followed.

No client is going to be happy with a fee increase during the representation. If you must increase fees, carefully follow the ethical requirements. Avoid a fee dispute if at all possible. There is no surer way to provoke a malpractice claim.