Methods for managing and avoiding legal action when it comes to unpaid bills
By ED POLL
Even when law firms take precautions, overdue accounts from clients can happen. When they do, there should be a consistent approach to connect with clients as a means of collecting past due bills.
When it comes to a client that hasn't paid, find out whether or not the client received the bill and, if so, ascertain whether the client is dissatisfied. Large and small firms alike often continue to work for the non-paying client in the misguided hope that continuing the relationship means getting paid and receiving referrals in the future.
But what should you do when checking in with a client and continuing to deliver services is not enough for your firm to get paid? While following up with a law suit may seem like the only solution, it shouldn't have to be. Continue reading to learn how your firm can manage a law suit, when necessary, but also, how to avoid one.
USING A COLLECTION AGENCY
If necessary, consider using a collection service. There are certainly ethical snares involved when using a collection service, but conflicts such as jeopardizing client confidentiality can be avoided by only disclosing details that are absolutely necessary for the service to do their job. Additionally, do not make a collection effort until after reviewing the client file and ensuring that it contains no basis for a malpractice allegation.
In 2012 the New Jersey State Bar's Advisory Committee on Professional Ethics Opinion 723 affirmed that it is ethically permissible to retain a collection agency to secure payment from former clients who have not paid their bills so long as only such information as "is reasonably necessary for the agency … to collect the debt" is revealed. However, the Committee also made the following statement: "Lawyers may not initiate collection action against current clients."
It is true that lawyers cannot abruptly leave a non-paying client without adequate notice. An attempt to withdraw, for example, right before a trial date may bring a state bar disciplinary action. Assuming a written engagement agreement is in place, there are no adverse consequences to the client from stopping work, and the client file has been reviewed to make sure that there has been no negligence in representation, using a collection agency or initiating fee arbitration on current clients who are not paying is perfectly justified.
SUING A CLIENT
To elaborate on the previous point, the American Bar Association's Code of Professional Conduct, Rule 1.16 ("Declining or Terminating Representation") allows lawyers to withdraw if "the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled." Again, an attempt to withdraw without adequate communication and careful records of the client's billing and payment performance may bring a state bar disciplinary action requiring future work without pay to fulfill ethical obligations toward the client.
If the firm chooses not to go this route, suing the client may be an unpalatable but necessary step. This should not be done lightly, and not without adequate communication on and careful records of the client's billing and payment performance. However, it can be effective: Some statistics show that the lawyer-creditor is successful in more than 95 percent of litigation against a client-debtor. There are, of course, drawbacks. First, there is an automatic loss of future business: The client who has been sued will not provide referrals or new matters. There is also the negative publicity that such litigation can bring to the firm, either in the local press or in the legal news media.
When lawyers sue for payment of fees, they are often met with malpractice claims either as an offset (counter-claim) or direct attack (cross-complaint). Of all the suits filed by lawyers to collect their fees, 10 percent arise as a result of a counterclaim; up to 40 percent of malpractice claims come from cross-complaints. About half of all lawyers' suits to collect unpaid billings will result in an offsetting claim of malpractice. There is no way to ensure that such a complaint will not be filed; the only thing lawyers can do is to prepare for it. Assess where the firm stands from a malpractice standpoint, evaluate the risk, know the insurance carrier's risk management policies and evaluate the likelihood of winning an unpaid billing claim before filing suit. Additionally, assess the likelihood of collecting a judgment (even if you win); some clients no longer have the funds to pay their bills. Assess their economic viability before expending more effort and funds to collect.
DEFUSING THE CONFLICT
To this point, the discussion involves the most drastic steps a law firm can take against a non-paying client. But the broader issue is that a firm should not have to take these steps. Collection problems first arise from not telling clients at the beginning what is expected of them, and from failure to communicate and follow through. This involves time and expense, but using a collection agency or suing a client involves far more of both.
How to Detail Fee Payment in the Engagement Agreement
Getting fees and payment terms in writing is the heart of an engagement agreement. When the client understands what to expect,
it minimizes the potential for fee disputes significantly. At minimum, both lawyer and client should agree on:
- Who the lawyer is representing
- Who should receive the lawyer's bill
- The scope of the representation what the lawyer will and will not do
- The fee to be charged and how it will be billed
- Definition of any alternative billing arrangements and the benchmarks to calculate them
- When bills are to be sent out by the firm
- Payment due dates
- The consequences of non-payment, including the lawyer's right to withdraw if the client should fail to honor his or her obligations under the terms of the agreement
- Budgeting and staffing
- Frequency and method of communications from lawyer to client
- The client's responsibilities, including payment in accord with the agreement
- Dispute resolution procedures if one party to the engagement has a fee or dispute with the other
There is certainly no need for a collection problem to reach this point. Maridee F. Edwards, who is a Missouri attorney, a mediator in the area of professional licensing and ethics, and former Bar counsel for the Missouri Bar, rightly observes that taking legal action against a client and responding to a likely disciplinary complaint from the client, "is not a cost that a law firm or lawyer can pass on. Dealing with the motions and sanctions involved directly and negatively affects the lawyer's bottom line." Edwards suggests that when such a lawyer-client controversy develops, the root cause is that the lawyer has not built trust with the client. "Distrust often is generated when clients review a lawyer's bill through the perception that they think the lawyer is being dishonest. If clients don't trust their lawyer and think he or she is into sharp practice, it leads to unpaid bills and disciplinary action." The antidote, of course, is to establish a budget and provide full communication about billings in relation to the budget.
As a second safeguard against allowing fee disputes to arise, Consultant Stewart Levine, author of books, Getting to Resolution and Collaboration 2.0, suggests preparing proactively to preclude fee disputes on the front end of any matter. "The key to conflict resolution is to get people to effectively collaborate," he notes, "and that involves doing work on the front end so you have clarity about what you're going to accomplish and how you're going to accomplish it. Otherwise, lawyer and client will never be on the same page." This is another way to stress the importance of budgeting and constant communication.
One more factor that lawyers must increasingly account for when a fee impasse develops is intergenerational communication differences. Gretchen Neels, the founder of strategic communication firm Neels & Company and a pioneer at resolving intergenerational conflicts in professional settings, suggests that younger lawyers, in particular, can prevent conflict over fees and other issues by doing more work to strengthen three conflict resolution core skills: emotional intelligence, verbal and non-verbal communication, and empathy. "These core skills are essential outside the law office to build a relationship of trust with clients, one that younger lawyers need to develop by honing their sense of generational awareness, "she says. Using these core skills in regular client interaction builds a positive relationship that precludes fee and disciplinary disputes.
COLLABORATING TO GET PAID
Such proactive suggestions to avoid a fee dispute all emphasize one thing: communication. Not enough law firms ask their clients, "How am I doing?" As a result, many lawyers, unfortunately, never figure out that their client is unhappy before a fee impasse develops. Firms must find out what clients think, and the best way to do that is to visit with the clients periodically and listen to what they are saying. Managing client expectations is crucial to avoiding fee disputes, and this is possible only when those expectations are clear.
Being a qualified lawyer is not the key to managing client expectations. The very first Rule of Professional Conduct (1.1) says, "A lawyer shall provide competent representation to a client." But competence is a pretty low benchmark. Clients see lawyers as competent, and on a skill level, typically can't tell the difference among lawyers. Each lawyer with a law degree and license from the state is assumed to be as competent as the next lawyer.
In order to fulfill client expectations, a lawyer should be fully committed to a collaborative relationship that builds trust over the long term. Communicate regularly with clients. Demonstrate a clear understanding of their value as individuals and (if appropriate) as organizations. Seek out their opinions, ask them what they want to accomplish and explain the reasons behind the advice they receive. Such collaboration doesn't just manage expectations it builds trust and loyalty. The obligation to promote quality communication between attorney and client and to ensure that the client has a good understanding of what to expect lies squarely with the attorney, as part of his or her professional responsibility. When that responsibility is met, fee disputes and related disciplinary complaints will not be an issue.
About the author
Ed Poll, J.D., M.B.A., CMC, Principal of LawBiz® Management, is a preeminent coach, law firm management consultant and author. He is a thought leader in strategic planning, profitability analysis, and practice development, coaching and consulting with lawyers. You can reach Ed at 800.837.5880 or firstname.lastname@example.org.