Perhaps the most common source of problems over fees involves misunderstandings with clients over the amount of the fee and expectations regarding payment of the fee. Both types of misunderstandings can be minimized if there is a complete and frank discussion of fees with the client at the outset of the representation. This is particularly true with the small business client who may not have much experience dealing with attorneys and who may have a limited budget for legal services.
To minimize misunderstandings, and to improve collections as a result, it is desirable to fully explain to the client, before any work is done, the basis on which fees will be computed; the mechanics and frequency of billings; and the expectations of the attorney regarding payment of billings. These types of communications are particularly important when consideration is being given to some for alternative fee arrangement (“AFA”). Even though anecdotal evidence indicates that AFAs are used for a relatively small percentage of the work of a typical law firm, a number of firms have committed to trying to discuss AFAs for a majority of their potential engagements and this means that firms should have a set of guidelines, such as the following, in place to assist their attorneys in understanding, explaining and implementing AFAs in appropriate cases:
- Does the law firm have a formal strategy and related programs and policies for using alternative fee arrangements (AFAs)? Some law firms have created policies that attorneys can use to discuss AFAs with clients and have supplemented these policies with training that provides attorneys with additional information and experience on how to walk through the process with clients.
- Does the law firm follow a consistent practice of engaging in a realistic and comprehensive assessment of the work involved in a prospective engagement with the client? It is essential for both sides to identify and acknowledge all of the tasks involved in order to establish realistic goals and budgets and schedules for the engagement. Law firms should pencil out a budget for all of the work before discussing an AFA with the client in order to make sensible decisions regarding the potential benefits and risks of a particular AFA.
- Does each of the parties understand what an AFA is? In general, an AFA is typically defined as anything that is not based on a billable hour or a discounted hour, such as contingency, break-up fee, premium fee, flat fee or budgeted fee arrangements.
- Has the law firm gone through a menu of AFA structures with the client to provide the client with ideas about how they might want to structure the arrangement? Ideas include: a fixed or flat fee for a particular project or series of projects which may be payable in regular installments at the beginning of each month or quarter of the engagement; a fixed or flat fee for a particular stage or stages of a project that is combined with traditional hourly rates for the remainder of the project; a fee cap for all or part of a project; a non-refundable retainer paid at the beginning of the project that is combined with a percentage hold-back from standard rates during the project and an agreement for payment of a multiple of the hold-back at the end of the project if the outcome is a “success” or loss of the hold back if the matter falls short of a “success” (with “success” being carefully defined in advance); a “value” based fee, which is determined by a mutual agreement between the parties regarding the anticipated value of the work in the context of the overall goals and objectives of the client; and/or a blended hourly rate for any one category of timekeeper (i.e., partner or associate) or a single blended rate for all timekeepers regardless of category.
- Do the parties recognize and appreciate the advantages of considering and using an AFA? Conversations regarding a potential AFA should specifically focus on its ability to achieve benefits such as predictability in legal costs for the client; limitation of the client’s total cost exposure; greater risk sharing by the law firm in the total costs associated with the engagement; more creativity from both the client and the law firm with respect to managing costs and setting goals for the engagement; improving attorney-client communications; and reducing misunderstandings and disputes over legal fees and costs.
- Is an AFA suitable for the particular engagement? In general, an AFA make senses for any transaction that includes a series of activities that can be broken out into identifiable segments and pricing arrangements can be established for each segment. An AFA will be more effective when both sides have substantial experience with regard to the particular transaction and understand the time and effort involved and the unforeseen circumstances that might arise. AFAs may also be used for “cookie cutter” transactions or projects; however, even then it makes sense to agree on a range for the fees rather than a fixed amount in order to provide clients with predictability and the law firm with a modest amount of flexibility. A fixed fee for multiple matters of the same general nature is also a common strategy for AFAs.
- Have the parties candidly discussed the objectives of the client in seeking an AFA? Some clients are only interested in reducing costs and shifting all the risk to the law firm, a situation which inevitably leads to problems. The more constructive objectives include budgeting and risk sharing. Risk sharing means that one side may come out better than the other, at least in comparison to a traditional hourly fee arrangement, and both parties need to acknowledge and accept that possible result from the very beginning.
- Does the law firm have a formal mechanism for tracking the success of AFAs? A variety of methods can be used included “ghost billing” that is based on tracking actual time with normal rates and comparing the result to what the client pays under the AFA. Law firms should quantitatively analyze projects after they are done to determine profitability and identify areas for possible improvement.
Discussions with the client should be followed with a letter to the client confirming the discussion. In the alternative, a contract regarding fees, and perhaps the nature of the engagement as well, can be entered into. This process also minimizes the possibility that the fee arrangements will violate applicable ethical and statutory guidelines. See Legal Considerations in the chapter on Collecting Information on Prospective Clients (§§ 1:88 et seq.) in Business Transactions Solutions on Westlaw Next.
Misunderstandings are also minimized if the client is billed for the work on a regular basis. A regular monthly or quarterly itemized bill will inform the client about what is being done on his or her matter and will also provide the client some idea of how much the fee is building up. In addition, regular billings indicate to the client the charges being made while the services are still fresh in his or her mind. It can be much more difficult to justify a bill once the details of the work have been forgotten by the client and attorney.
Often clients fail to understand what the attorney is required to do in relation to their legal matters or how much of the attorney's time will be consumed. The lawyer should take the time to explain to the client, both at the outset and as the work progresses, precisely what the lawyer is doing. In this regard, it may be helpful to send the client copies of all correspondence, pleadings, briefs, and other documents.
Another strategy that might pay dividends is to deliver large bills personally. By sitting down with the client, the attorney can explain each element of the bill and immediately address any questions that the client might have regarding the size of the fee. This conversation will go much easier if counsel has laid the foundation for a large bill by regularly sending progress reports to the client that explain how the project is progressing and the relationship of the various tasks to the overall size of the bill.
For further discussion of AFAs, see the chapter on Collecting Information on Prospective Clients (§§ 1:1 et seq.) in Business Transactions Solutions on Westlaw Next.