The end of the calendar year for law firms usually means one things above all else: collections. Attorneys and law practices feel the pressure to collect receivables and to reach out to clients in an effort to obtain any delayed payment for legal work performed. It used to be that law firms would rather leave money on the table than sue their own clients. However, in light of the business pressures of the modern practice, law firms are showing more willingness to file a lawsuit when they cannot get a client to pay.
Suing a client is never an easy decision. Suing a firm's own client for unpaid fees brings certain risks, including unfavorable media coverage, exposure of the firm's business practices (such as rates or legal representation arrangements), and expense. Further, data indicate that the majority of claims for fees result in a counterclaim by a client for legal malpractice. It also creates the risk that whatever the client's reasons for not paying—financial straits, the outcome of the representation, or even complaints about the quality of legal services—will become a larger focus of the lawsuit than simply the amount at issue.
In light of those risks, although firms are more willing to sue a client, many also view the option as a last resort. A few simple but important steps can help a firm avoid reaching the point where it has no option but to sue the client to recover unpaid fees.
Regular and timely billing
Attorneys often cite billing as one of their least favorite aspects of practicing law. It can be time-consuming and many view it as a detraction from their practice. However, effective billing practices are extremely important and, because clients prefer to have clarity on how much they owe, are necessary to maintain good client relations. Effective billing not only helps keep clients happy, but it makes it more likely that they will pay the bills.
A common but preventable source of fee disputes is untimely billing. Clients have a tough time digesting a sizable bill sent late, perhaps even after the matter is over, and may suffer "sticker shock." Bills are often more palatable to clients at the beginning than when sent after a matter has been resolved, especially when the matter is resolved unfavorably. An effective collection process is therefore one that creates receivables early and on a regular basis.
Communicate with clients regarding bills
When clients do not pay bills, attorneys may be reluctant to confront the client. But, the nonpayment of bills does not get better as time passes. Most attorneys recognize that, however uncomfortable, sometimes it is important to determine why a client is not paying.
There are four common reasons for why a client may not pay a bill. The first is an unintentional oversight by the client, which could be the result of something as innocuous as the client losing the bill or computer processing errors. In these situations, following up with the client can quickly determine whether nonpayment was unintentional or if there is a substantive concern.
Second, nonpayment may be the result of administrative issues, such as where the rate charged or number of hours worked on a project are higher than the client and the firm agreed, or where the statements do not comply with billing procedures. These issues are best identified early so that they can be resolved for future invoices.
Third, a client may simply not have the money to pay a bill. This issue is more difficult to address but, once a law firm realizes that the client may not have the means to pay, the firm can consider the impact of never getting paid, as well as the significance of the firm's relationship with the client. If the law firm determines that it would like to withdraw from the representation of the client, it is generally easier to do so earlier in a representation under the applicable bar rules. It may also be the case that, in light of the client's financial situation, the scope of the representation needs to be adjusted. But none of these things can happen if the attorney does not know about it.
Finally, a client may choose not to pay a bill because it is dissatisfied with the work performed or the value of the services billed. When this occurs, firms should consider the options discussed below.
Resolving a fee dispute
Three strategies can be utilized to resolve a fee dispute prior to litigation.
First, an informal meeting between the client and the firm can help diffuse any issues. In such meetings, it can be helpful to include an attorney other than the one whose services are at issue to reduce the emotions associated with a fee dispute. Many firms then weigh the costs and risks of pursuing the fees against the likelihood and amount of recovery.
Even if a dispute ultimately leads to litigation, which may include a counterclaim for legal malpractice, an informal meeting can help the firm learn more about the client's complaints pre-suit, rather than during discovery.
Second, there are situations where the fee dispute is too difficult for the law firm and the client to discuss in a productive way on their own. In such situations, a mediation can help bridge the communication gap and save both parties fees, costs, expenses, and time. Although a client may sometimes be intent on bringing a legal malpractice action, law firms should generally attempt a mediation before filing a lawsuit against their client for unpaid fees.
Finally, arbitration may be helpful in resolving a fee dispute and indeed is offered by certain bar associations as a service. The biggest advantage of an arbitration is that it may not involve a counterclaim for legal malpractice. However, a disadvantage is that arbitrations typically result in the firm providing some discount off of the amount of fees actually owed by the client.
Decide whether to file a lawsuit
If none of these options are successful in resolving a dispute, the firm may need to balance the positives and negatives of filing suit against a client, particularly in light of the statistically significant chance that a suit for fees could evolve into a malpractice case. However, by following the above steps, the hope is that a firm is never put in that position.
As published by the Daily Report.