Like many attorneys, there may be times where you routinely include fee shifting provisions in your attorney-client retainer agreements. However, these agreements may not be appropriate in every case or for every law firm. Before you proceed, take time to understand the benefits and risks a fee shifting provision may entail.
To Fee Shift or Not?
Fee shifting provisions are generally intended to help protect you, the attorney, by raising the stakes for a client bringing a lawsuit against you and providing the possibility of recovering the cost of your defense if a dispute does occur and you prevail in court.
However, some fee shifting provisions may also expose you to excessive risk. If a dispute occurs and you do not prevail, you could end up paying the client’s costs as fee shifting agreements are generally reciprocal.
It’s important to understand that there are circumstances that raise your risks and thoughtfully consider each client and case before inserting a boilerplate fee shifting provision into the agreement.
4 Fee Shifting Provision Risks
There are a lot of questions to ask when writing retainer agreements, especially about fee shifting. Consider these four circumstances where fee shifting may offer you less protection than intended and place you at greater risk:
1. Breach of Agreement
If the retainer agreement covers only an actual breach of the agreement, claimants frequently assert a claim for recovery of the fees for breach of contract in malpractice or negligence suits. In these cases, the claimant typically alleges your malpractice/negligence was a breach of the contract because you failed to perform your 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. Because of this, it’s worth remembering that you cannot presume the enforcement of your fee shifting provision will be entirely predictable.
2. Any Dispute
If the fee shifting agreement covers any dispute that arises under the retainer agreement, the client who brings a legal malpractice action will certainly argue that his or her legal fees are recoverable. Many legal professionals are well aware of the common usage of these provisions in retainer agreements. These provisions may make claims against you more difficult to settle favorably and may also increase the likelihood that a claim will be filed against you.
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. However, fee collection may be the incentive these attorneys need to file suit against you. Even without a strong case, an attorney may hope for a leveraged settlement as they continue to bill the file. While a client alone may be unable to pay a legal bill, attorneys generally presume law firms will be able to pay.
3. Collectability Issues
If you insert a fee shifting provision into a retainer agreement with a client who is unable to pay, you may discover your provision is not worth the paper it’s written on. Collectability issues are an important consideration when deciding on use of a fee shifting provision. Some clients are simply unable to fund their defense, much less an award for legal fees.
Moreover, if you sue the client under the retainer agreement and seek 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).
4. Malpractice Claims
If a malpractice claim is filed against you, a fee shifting agreement could shift the balance of the defensive options available to you. A claimant could seek reimbursement for attorney fees according to the fee shifting provision of the retainer agreement. Counsel for the malpractice claimant will want to recoup his attorney fees on top of the amount of potential damages related to the malpractice, raising the stakes of fighting even a weak case. In some circumstances, it may be more appropriate to resolve the matter and limit the claimant’s attorney from racking up more fees.
For example, consider the California Code of Civil Procedure section 998 settlement offer (998 Offer), which can be utilized to place added weight to a settlement offer and facilitate settlement. Addressing attorney fees in a 998 Offer can be problematic. The claimant’s counsel usually will not provide you with their current attorney fees claim to include in the 998 Offer or will inflate fees beyond what may seem reasonable. To address the attorney fees in a 998 Offer, you may include language stating, “attorney fees to be determined by a judge or arbitrator.” Yet this risks a potential 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.
As an attorney in today’s world, it’s important to be thoughtful in creating your retainer agreements. This article is not intended to advise for or against the use of fee shifting provisions, but instead to offer attorneys additional considerations for drafting an agreement.
It’s wise to avoid inserting a fee shifting provision into a retainer agreement reflexively, even if it is what you have always done. Instead, think about why you are including the provision in light of the type of case matter involved and the impact on the particular client.