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When Someone Else Pays the Legal Bills

March 7, 2017 | Posted in : Articles, Coverage of Fees / Duty to Defend, Defense Fees / Costs, Fee Agreements, Fee Dispute Litigation / ADR, Fee Jurisprudence, Legal Bills / Legal Costs, Scholarship on Fees

A recent CEBblog article by Julie Brook, “When Someone Else Is Paying Your Fees,” writes about when a third party pays some of all of your legal fees in California.  This article was posted with permission. The article reads:

When, in a noncontingent matter, a third party is paying all or some of the attorney fees for your client, do you know how to deal with the issues that can arise?  Short answer: Address them upfront in your fee agreement.  Here are sample provisions to get you started.

You should be aware that Cal Rules of Prof Cond 3-310(F) requires informed written consent of your client when someone else is paying for his or her attorney fees.  In explaining this requirement to your client, advise him or her of the potential problems that might arise with this arrangement.

Here are two alternative sample provisions you can use in your fee agreement, depending on whether the third person will be a party to the agreement:

[Alternative 1: If the person/entity responsible for payment of fees and costs isn’t a party to the fee agreement]

Another person or entity may agree to pay some or all of Client’s attorney fees and costs.  Any such agreement will not affect Client’s obligation to pay attorney fees and costs under this agreement, nor will Attorney be obligated under this agreement to enforce such agreement.  Any such amounts actually received by Attorney, however, will be credited against the attorney fees set out in this agreement [or delivered to Client if there is no balance due Attorney].  The issue raised by having a third party pay the fees is the potential or perceived potential that the third party may try to influence the prosecution of the case to minimize costs or to achieve other goals.  However, the fact that another [person/entity] may agree to pay some or all of Client’s attorney fees will not make that [person/entity] a client of Attorney and that [person/entity] will have no right to instruct Attorney in matters pertaining to the services Attorney renders to Client.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [the person/the entity] paying all or a portion of the attorney fees, Attorney will not disclose any confidential information to [him/her/it].  By signing this agreement, Client consents to this arrangement and acknowledges that Attorney has advised Client of the advantages and disadvantages of this arrangement.

[Alternative 2: If the person/entity responsible for payment of fees and costs will be a party to the fee agreement]

[Name] agrees to pay attorney fees for services performed and costs incurred in the representation of Client under this agreement.  [Name] acknowledges that [his/her/its] agreement to pay attorney fees and costs does not make [him/her/it] a client of Attorney.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [name], Attorney will not disclose any confidential information to [him/her/it].

Alternative 1 avoids potential ethical issues posed by such arrangements by making it clear that the party paying the bills isn’t the client and isn’t party to the confidential attorney-client relationship.

But if you want a remedy against the third party if he or she stops paying, you must have an agreement with that individual or entity.  One way to do that, illustrated in Alternative 2, is to make the payor a party to the fee agreement.  It’s best, however, to have a separate written agreement with the payor rather than having him or her sign the same engagement letter as the client; this will preserve the attorney-client privilege of the fee agreement with the client.

Also, consider doing the following when a third party is paying the bills:

  • Give notice of fee dispute arbitration.  Even though the party assuming responsibility for payment doesn’t become your client in the sense of directing the representation or becoming privy to confidential information, you should send notice of the right to compel arbitration of a fee dispute to this individual or entity as well as to the client. Wager v Mirzayance (1998) 67 CA4th 1187.
  • Refund advanced fees at end of case.  To the extent funds advanced by a third party remain after the case is concluded, you should refund the balance to the payor, not the client.  See California State Bar Formal Opinion No. 2013-187.