attorneys

Can A Lawyer Be Held to His Estimate of Costs?

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[The following isn an excerpt from my book, The Definitive Guide To Resolving A Legal Bill Dispute. Information on obtaining a copy of this book can be found at https://legalbillaudit.com/available-books/]

Many times, what triggers a fee bill dispute in the first place is that the total amount of the fee bills has exceeded the lawyer’s estimate of what the legal costs would be in the matter.  Although not technically a billing issue, it is nevertheless a common issue I have come across in many fee bill disputes.

It has always been a mystery to me why lawyers provide estimates of costs. For providing an estimate of costs is not at all something that a lawyer is required to do. Also, it may be that the lawyer really does not have that much experience in handling a particular type of matter to be able to provide a meaningful estimate. Moreover, my experience and observation over the years has been that most lawyers, even if they are experienced in handling certain types of matters, really do not have a good handle on their costs. (This is one reason why lawyers hire administrators to run the business side of their firms!)

Despite their lack of knowledge, lawyers often do provide an estimate of costs when asked to do so by a client. In fact, many corporate clients – particularly insurance companies – actually require that their attorneys submit case “budgets” at the outset of a matter. And case budgets are, in reality, estimates of how much in legal fees a case will cost.

To be sure, large corporations and insurance companies have a lot of bargaining power with attorneys.  As such, they can require cost estimates from attorneys handling their cases. But for an individual client, unless the case is significant, there really is not much incentive for lawyers to provide cost estimates. And as there is so much danger for the lawyer in doing this, I am not sure why a lawyer would voluntarily do this.

And when the actual case costs do exceed the lawyer’s original estimate, even by a large amount, there may be legitimate reasons why this occurred. But for whatever reason or reasons the cost overruns occurred, the client is entitled to know in detail those reasons. Moreover, the lawyer has an ethical duty to tell this to the client and to explain it to the client’s satisfaction.[1]

One legitimate reason for the cost overrun could be that the client changed the scope of the work or otherwise asked the lawyer to do more work than was originally agreed to at the time of the initial engagement. And don’t forget, all those numerous and lengthy emails and phone calls that clients make to their lawyers. They can often add up to a considerable amount!  So, a client should first consider whether he contributed to the costs exceeding the original estimate.

Another legitimate reason for the cost overrun could be that the lawyer ran into some “unforeseen” difficulties.  This sort of explanation should begin with the lawyer detailing exactly what the initial estimate was based upon if this was not done at the beginning of the representation.   

A statement that the estimate was just based upon his “experience” in such matters is not good enough. The lawyer needs to break down the estimate and provide specific detail on how the estimate was determined. Then, the lawyer should provide the specific details of how the estimate was in error or otherwise identify the specific reasons for the cost overrun. This is because the client has a right to know exactly what these unforeseen or unexpected circumstances were and more importantly, why it was that the lawyer considered them to be truly unforeseen or unexpected.  

In considering the lawyer’s response, keep in mind that experienced attorneys who claim the expertise to take on a certain type of matter are presumed to have the required knowledge to actually handle the matter competently.  This knowledge would include knowing what types of things might occur in a matter that could increase costs. If not included in the original case estimate, they should at least have been identified as possibilities that could contribute to the increased costs.

But if there were no truly “unforeseen” difficulties (or at least none that were identified by the lawyer as the matter progressed) or the client did not change or add to the scope of the original agreement about what the lawyer was to do, then the lawyer could be bound by his original estimate.  This is because the law does not allow an attorney to simply walk away from a lowball or inaccurately prepared estimate – especially if the estimate was a critical part of why the client decided to employ the attorney.[2]

Also, the cost overrun issue may turn on how large the variance is between the original cost estimate and the final costs.   Giving the lawyer the benefit of the doubt, consider that estimating is not an exact science.  And if the final costs in a matter are somewhat “close” to the original estimate, this may not be sufficient grounds for a refund or to refuse to pay the final amount.

However, if the variance is large, and the matter did not involve anything truly “unforeseen” or result from the client changing the scope of work, then the client may have a right to hold the attorney to his original estimate.[3]

Also, even if a lawyer gives the client a reasonable explanation for the cost overruns, this may not be good enough if the cost overruns have been going on for some time.  This is because of a lawyer’s ethical duty to keep a client timely informed of mounting legal costs before they become cost overruns.[4]  Lawyers who do not keep their clients properly informed of mounting legal Information costs have been subject to lawyer discipline.[5]

[1] See RPC 1.4(b).

[2] See In re Crown Orthodontic Dental Group, 159 B.R. 307 (Bankr. C.D. Cal.1993)(“If an attorney estimates the cost of his or her services and that esti mate is a critical part of the negotiations upon in employing the attorney, unless there are some real, unexpected changes of circumstances, the attorney should be bound by that estimate”).

[3] See In re Chas. A. Stevens & Co., 105 B.R. 866 (Bankr. N.D. Ill. 1989) (“The court holds that when professionals . . . project estimated fees or budgets to a client, they should expect to be held to the same or some reasonable variation thereon.  For (the applicant) . . . to apply to this court after such enormous overruns and expect payment in full is unrealistic and unreasonable.”).

[4] See RPC 1.4(a) and (b); ABA Annotated Model Rules of Prof. Conduct (6th ed.. 2007), at p.57 “Duty to Inform Clients Promptly about Important Information.”

[5] See In the Matter of Daniel G. Areaux, 823 N.E.2d 1192, 1193 (Ind. 2005)(“The respondent violated Indiana Professional Conduct Rules 1.4(a) and 1.4(b) by failing to keep his client reasonably informed of her escalating attorney fees owed to respondent and Baker & Daniels.”). In the Matter of Patrick R. Taylor, 741 N.E.2d 1239 (Ind. 2001) (“Failure to keep a client apprised of escalating fees may constitute a violation of Prof.Cond.R. 1.4.”)

Why Weaponized ADR Clauses In Retainer Agreements Require “Informed Consent”

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I am a big supporter of using alternative dispute resolution (ADR) to resolve fee bill disputes when direct negotiation fails. Having been a registered mediator, I have seen firsthand how ADR can work to resolve not just fee bill disputes, but all kinds of disputes.

In my book, The Art Of Hiring The Right Attorney, I discuss the importance of a clause in the retainer agreement that calls for arbitration or mediation if a dispute arises over the legal services or the fee bills. Also in my book, The Definitive Guide To Resolving A Legal Fee Bill Dispute, I recommend arbitration or mediation over filing a suit or filing a disciplinary complaint if direct negotiations fail to resolve a fee bill dispute with the lawyer. I even provide a list of free or low-cost mediation or arbitration services available through state or local bar associations.

Most attorneys include ADR language in their retainer agreements because it makes good business sense, although many states and some malpractice insurers require it. Unfortunately, in some of the retainer agreements I have come across, some attorneys seem to be using an ADR clause not as a way to peacefully and economically resolve a dispute with a client, but more as a way to intimidate and discourage the client from actually using ADR. They do this by bypassing any state or local bar free or low-cost mediation or arbitration services for fee bill disputes and mandating that the ADR be binding arbitration through the American Arbitration Association (AAA).

Now, don’t get me wrong. I am not against the AAA. They provide good arbitration services. However, AAA arbitrations are expensive and sometimes are to be held in cities that are inconvenient for the client. Moreover, retainer agreement ADR clauses may provide that the loser has to pay all the winner’s costs including all of the AAA costs plus the law firm’s costs to prepare for and participate in the AAA arbitration.

In my view, lawyers who mandate binding AAA arbitration in their retainer agreements as the exclusive way to resolve disputes are really weaponizing their arbitration clauses against their clients. However, this weaponization of an ADR clause may not always work out as intended, at least according to the recent case of Dick-Ipsen v. Humphrey, Farrington & McClain, P.C., 2024 IL App (1st) 241043 (App. Ct. of Ill., First Dist., Second Div., Aug. 30, 2024).

The case involves a client who had filed suit against the law firm for malpractice in a matter the firm had handled for the client. But the firm sought to have the malpractice suit dismissed citing the arbitration clause in their retainer agreement. The clause provided for binding AAA arbitration (to be held in Kansas City, MO), as the exclusive remedy for any claims against the firm. The client, though, stated he did not understand the effect of binding arbitration and that the firm never explained it to him. The client also objected to the AAA arbitration being in Kansas City which was over 500 miles from the client’s home in Illinois (plus the client was disabled and unable to drive).

The trial court found for the client holding that the arbitration provision was “procedurally unconscionable.” The appellate court agreed that the firm had failed “to fully inform plaintiff about the meaning and consequences of the arbitration clause.” The court went on to state that “[a]ttorneys who have drafted a retainer agreement have the burden to show that the contracts are fair, reasonable, and fully known and understood by their clients” and that “[d]efendants’ failure to inform plaintiff [the client] about any of the potential effects of the arbitration provision constitutes an infirmity during the process of contract formation, such that plaintiff lacked the requisite knowledge to make a meaningful choice.” As authority, the court cited supporting case law, applicable Model Rules of Prof. Conduct (RPC), and ABA Formal Op. 02-425, Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims.

It is clear from the appellate court’s opinion as well as all other authorities on point that a lawyer needs to provide such information as is needed in order for a client to make a “meaningful choice” to agree to a mandatory and binding arbitration clause in a retainer agreement. But, and here’s the kicker for lawyers, the appellate court held that a client’s agreement must be based upon “informed consent” citing Castillo v. Arrieta, 2016-NMCA-040, 368 P.3d 1249 (N.M. Ct. of App., Feb. 2, 2016)(“we hold that the plain text of this unusually broad arbitration provision reasonably applies to Plaintiff’s malpractice claim, but that it is unenforceable if it was signed without Plaintiff’s informed consent.” emphasis supplied).

“Informed consent” is a discrete term that is set out in RPC 1.0(e) that inter alia requires a lawyer to provide “adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of action.” Requiring “informed consent” from a client is a big deal. So much so that if you ever mention to a lawyer that he needs to get informed consent from a client, he will usually sigh and roll his eyes. As it relates to binding arbitration, it would require an explanation of “reasonably available alternatives” such as free or low-cost bar or other types of arbitration or mediation services. To be on the safe side as I used to tell lawyers in my CLE ethics seminars, never leave anything out. Always give complete information on the pros and cons of anything that requires informed consent. If you leave anything out, you do so at your own peril.

Although it can be done orally, I believe it important that all the information conveyed about something that requires informed consent be in writing. I say this because guess who wins a swearing match between a lawyer who swears that he told the client everything there was to say about the effects of binding arbitration and a client who swears that the lawyer never told him about all the effects of binding arbitration (which is exactly what the client swore in the Illinois case).

Also, instead of trying to cram all there is to say about the pros and cons and the effects of binding arbitration into the retainer agreement, the information being conveyed to obtain the client’s informed consent should be in a separately signed writing (as is required by some RPC). It should also be reviewed by another attorney of the client’s choice.

Of course, one easy way to completely avoid the problems involved in obtaining a client’s informed consent for a clause mandating binding AAA arbitration as the exclusive remedy for claims against the attorney would be to not include it in the retainer agreement. Instead, include a more reasonable and fair ADR clause (to the client) that just calls for mediation or non-binding arbitration to be utilized before filing suit to try to resolve any dispute with the firm as to its services or its fees or with the client for non-payment of fees.

Unfortunately, for attorneys who seek to press for every advantage they can wring out of an individual client, other weaponized terms in the retainer agreement may also require “informed consent” such as requiring a client to pay for electronic research services such as Westlaw or LEXIS. See ABA Annotated Model RPC (9th ed. 2019) Comments to RPC 1.5 at p. 86, Expenses Chargeable To Client (“Access charges for electronic legal research are normally treated as overhead, but may be passed along to the client if the client has given informed consent.”). But that is all grist for another post.