The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...
By Samson Habte
March 9 — Ethics rules don't flatly prohibit a retainer agreement that obligates the client to pay “a flat, nonrefundable monthly fee,” but the circumstances of each matter will dictate whether such an arrangement is permissible, the New York City bar's ethics committee advised in a February opinion.
Tackling one aspect of an issue that divides authorities across the nation, the committee said it was “not prepared to say that charging a nonrefundable fee is impermissible in all circumstances” because “there may be potential benefits to a client in having such an arrangement.”
Rather, the committee said the propriety of such an agreement will turn on whether the fee would be excessive, whether the arrangement would hinder the client's right to end the representation, and whether the lawyer clearly explains how the fee is calculated, the services covered by the fee and the circumstances under which the fee becomes fully earned.
The opinion responds to an inquiry from an attorney who is considering a retainer that “would require the client to pay, at the start of each month, a flat monthly fee in exchange for access to the lawyer for a specified list of legal services.”
The retainer would provide that any services outside the scope of the agreement would be available for additional fees to be specified in separate agreements.
“The client would be permitted to terminate the Retainer Agreement at any time,” the committee said, but “previously paid monthly fees are not refundable.”
The committee identified “four key questions” as relevant to determining the propriety of treating monthly fees as nonrefundable:
• Is the fee “excessive,” under Rule 1.5(a) of the New York Rules of Professional Conduct?
• Is the fee fully earned and, therefore, nonrefundable under Rule 1.16?
• Does the agreement impede the client's right to terminate the lawyer, in contravention of public policy?
• Is the fee adequately disclosed as required by Rules 1.5(b) and 1.5(d)(4)?
Given “the number of variables involved,” the panel said it “cannot opine on whether a particular monthly fee is excessive.” Instead, it advised lawyers to consult the factors in Rule 1.5(a) and “consider whether the fee will be appropriate in each of the following scenarios”:
(1) if the client does not request any specific services to be performed in a particular month (and is, thus, paying only for the lawyer’s availability); (2) if the client requests and receives specific services in a particular month (and is, thus, paying both for the lawyer to be available and to perform services); and (3) if the client requests specific services, but the lawyer fails to provide those services.
The next step is determining whether a purportedly nonrefundable fee has been “fully earned,” the committee said. The “most problematic” scenario, it said, is when “the client requests services in a particular month [that] the lawyer fails to provide.”
“In order for the entire fee to be nonrefundable under those circumstances, one would have to conclude that the lawyer was agreeing to charge only for availability,” the committee said. But that position would be difficult to sustain because the failure to provide requested services might indicate unavailability, it added.
The committee said one possible solution is to agree that a fee will be nonrefundable only if no services are requested during the month or if the lawyer performs any services requested during that time.
If services are requested but not provided, the committee said, the fee could be treated as fully or partially refundable.
Alternatively, the lawyer could “allocate a portion of the monthly fee to availability and a portion to services requested by the client, and agree that only the former portion is nonrefundable,” the committee said.
Another concern, it said, is that nonrefundable fees may impede the client’s right to terminate a lawyer. The committee noted that a client may be hesitant to fire a lawyer if doing so means forfeiting fees paid in advance but not yet earned.
“Thus, in setting the amount of the monthly fee, the lawyer must consider whether it will create a meaningful financial disincentive for the client to terminate his or her relationship with the lawyer,” the opinion states.
The committee said the extent to which a nonrefundable fee operates as a disincentive to terminate a lawyer “will depend, among other things, on the amount of the fee and the client’s financial circumstances and expectations.”
Finally, the committee said the terms of a nonrefundable retainer agreement must be adequately disclosed to the client.
It said the retainer should explain the services that are available for the fee and why and to what extent monthly payments are nonrefundable.
“The agreement must avoid any suggestion that the monthly fee is nonrefundable without being earned,” the committee added, because “broad statements about non-refundability can mislead clients about their right to receive a refund of fees that have not been earned or their right not to be charged excessive fees.”
Copyright 2015, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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