Many attorneys now routinely place fee shifting provisions in their attorney-client retainer agreements. These provisions generally provide that in the event of a dispute between the client and the attorney, the prevailing party may recover their attorney fees. These agreements, however, may not be appropriate in every case or for every law firm. The following article discusses certain disadvantages to such fee shifting agreements.

Before inserting a boilerplate fee shifting agreement into an attorney-client retainer agreement, thoughtful consideration should be given to the precise situation where it is desired to be applicable as fee shifting agreements are generally reciprocal.

Fee Shifting Provision Considerations

Breach of Agreement

There are a lot of questions to ask when writing retainer agreements, especially about fee shifting. Should the provision cover any dispute between the attorney and the client? Should it cover an actual breach of the retainer agreement? Or should it be limited to recovery of legal fees?

Note that even if the retainer agreement covers only an actual breach of the agreement, claimants frequently assert a claim for recovery of the fees in a malpractice or negligence suit.

For instance, a claimant will include an action for breach of contract along with the malpractice and negligence claims.  The claimant will then allege the malpractice/negligence by the attorney was a breach of the contract because the attorney failed to perform his or her duties as contracted.  Unfortunately, some courts and arbitrators can be persuaded by this argument and misinterpret this provision to be overly broad so as to include recovery of legal fees even in the context of a negligence or legal malpractice action.  Consequently, do not presume that the enforcement of the provision will be entirely predictable.

Any Dispute

If the fee shifting agreement covers any dispute under the retainer agreement, the client who brings a legal malpractice action will certainly argue that his or her legal fees are recoverable. The plaintiff’s legal malpractice bar is well aware of the common usage of these provisions in retainer agreements. These provisions may make claims against attorneys more difficult to settle reasonably and may also be increasing the likelihood that a claim will be filed against an attorney.

Many clients lack sufficient funds to bring a cause of action against their attorney, and counsel typically avoid taking these cases on a contingency basis. Now, however, fee collection may be the incentive an attorney needs to file suit against another attorney. This occurs even without a strong case, as they hope for a leveraged settlement as they continue to bill the file.  While some attorneys wonder whether individual clients will be able to pay a legal bill, attorneys generally presume that a law firm is financially sound enough to pay their bills.

Collectability Issues

Collectability issues are also an important consideration before deciding to use a fee shifting provision. Some clients are simply unable to fund an award for legal fees. An attorney may insert a fee shifting provision in the retainer agreement only to discover that it is not worth the paper it is written on. Moreover, if the attorney sues the client under the retainer agreement and seeks reimbursement of legal fees for enforcing the terms of the retainer agreement, the client may simply countersue for malpractice and contend that he or she is now entitled to legal fees.

Historically, counterclaims for malpractice were filed in response to an action by an attorney to recovery under the retainer agreement. However, fee shifting provisions now add a greater danger in terms of both frequency (the probability that a countersuit will be filed) and severity (the amount claimed in the countersuit).

Malpractice Claims

Don’t forget to consider the difficulties in settling a malpractice claim when the claimant is also seeking reimbursement for attorney fees pursuant to the fee shifting provision contained in the retainer agreement. In some instances, it may be appropriate to resolve the matter and limit the claimant’s attorney from racking up more fees.  Counsel for the malpractice claimant will want to recoup his attorney fees on top of the amount of potential damages related to the malpractice.

In California, for example, Code of Civil Procedure section 998 settlement offers (998 Offer) can be utilized to place added weight to a settlement offer and facilitate settlement. However, addressing attorney fees in a 998 Offer is problematic.  First, claimant’s counsel usually will not provide you with their current attorney fees claim to include in the 998 Offer, or they will inflate their attorney fees beyond what may seem reasonable.  Therefore, the only way to truly address the attorney fees in a 998 Offer is to include language stating, “attorney fees to be determined by a judge or arbitrator.”  The obvious risk of including this language in the 998 Offer is the potential for a judge or arbitrator awarding attorney fees to the claimant’s counsel in excess of what you may have been expecting.  Leaving this language out of a 998 Offer may ultimately invalidate it if the claimant eventually obtains an award for attorney fees.

In conclusion, be thoughtful in creating your retainer agreements.  This article is not meant to advise against fee shifting provisions, but instead to provide you with additional considerations when drafting your retainer agreement.  Do not just default to inserting a fee shifting provision in the agreement because it is what you have always done.  Think about why you are including the provision in light of the type of case and the impact on the particular client.

Alexander T. Bauer, Esq.
Tyson & Mendes

Deborah Bjes, Risk Manager
Swiss Re Corporate Solution