An interesting issue can be raised about one type of alternative billing arrangement, namely a fixed or flat fee with the billing rate determined and stipulated in the engagement letter, before the assignment even begins.
What happens if the client terminates the relationship before the legal services are concluded? How does the lawyer apportion work already done versus work yet to be done, especially when the fee agreement is silent on the subject?
Is a flat or fixed fee earned on signing the engagement agreement? Or, must there be an apportionment if there is a separation between client and attorney before the matter is concluded? And if the latter, on what basis must this be done?
One purpose of a fixed fee arrangement is to provide knowledge of the cost of the legal services to the client before work begins. Under such circumstances, a fee dispute is unlikely; under such circumstances, termination of legal services before conclusion is unlikely. But as we’ve learned in other circumstances, “…unlikely does not mean impossible.”
A lawyer must refund any advance payment of a fee that has not yet been earned because the work has not yet been done, irrespective of whether it’s a fixed fee, retainer or advance payment of hourly billing. The lawyer is a fiduciary who must keep accurate records of fees and trust account transfers under every state’s rules of professional conduct to prevent misappropriation or negligence. Often, a client will pay such a fee in advance.
If the flat or fixed fee is billed at the completion of the matter, there seems to be no issue. With a fixed or flat fee, however, does this mean that the lawyer must still keep track of time to be prepared for the unlikely event of a dispute?
One important reason for such a fee structure is to do away not only with the billable hour, but with keeping track of the hours spent on a matter. This pricing modality becomes irrelevant; as a management tool, it might be helpful but not everyone is interested in using time keeping as a management tool.
The concern here would center on what is stipulated in the engagement agreement, specifically if the lawyer requests and the client agrees that the flat fee paid is not refundable for work completed.
Consider the example of a lawyer who has an estate planning practice and uses flat fees that are non-refundable. In one instance, a client requests an estate plan. The lawyer completed the documents and sent them to the client for signature. The client then informed the lawyer that she had changed her mind and did not want the type of trust that had been created and, worse, now wanted the fee refunded. As a matter of professional courtesy, the lawyer made an adjustment that was accepted by the client.
In a technical sense, a refund likely was not necessary. If a lawyer charges a flat fee and the fee meets the Rule of Professional Conduct 1.5 standard of being “reasonable,” and the client knowingly accepts the fee in a written fee agreement, it is ethically acceptable to retain the fee on the submission to the client of the finished work product.
The practicality of doing so from a client relations standpoint is, of course, another matter. By contrast, if a lawyer takes a flat fee in advance as a retainer, and work is promised in exchange for that fee, then failure to perform the work requires a refund. But, how much was earned?
This issue illustrates the position that, even when using fee alternatives to the billable hour, lawyers may be safer, despite whatever billing methodology is employed, when keeping track of time expended. Where your billings may come into question or when, as in this instance, a refund is needed, the tried and true method of demonstrating what you’ve done usually comes back to hourly metrics.
One might ask, if a client agrees to a flat fee, why should it matter whether we keep track of time?
The most important reason is the ethical requirement, under the ABA Rules of Professional Conduct and all state bar regulations, that fees charged must be “reasonable.” If a client wants to dispute whether a value charge for a service was reasonable, a time record can provide useful backup documentation.
Of course, the real issue here is good client relations and effective, frequent communication between attorney and client to make sure such disputes don’t arise and/or are settled quickly.”