A recent Texas Lawyer article by Shari Klevens and Alanna Clair, “Strategies for Collecting Fees from Clients,” reports on strategies for collecting unpaid legal fees.  This article was posted with permission.  The article reads:

Collecting legal fees can be just as important to a law firm’s success as effectively handling client representations. Although attorneys spend years honing their legal skills and may excel at advocating for their clients, some may find discomfort when pursuing fee collection.

While some firms put off the decision on how to address clients with unpaid fees until the end of the calendar year, confronting the issue earlier often yields more positive results. And if the firm waits too long, the firm might find that its options are fairly limited.

Suing a client is not an easy decision. The decision necessarily entails extra-judicial risks, such as harmful media exposure, negative word of mouth reputation, and bringing to light otherwise private information about the firm’s business practices, including rates and fee arrangements. Moreover, there are time and financial costs in litigation, and almost half of all suits filed by attorneys for unpaid fees result in the client asserting a counterclaim for legal malpractice.

Taking into account all of these risks, some firms make the decision to never sue a client. Other attorneys will only sue a client as a last resort. Having a carefully considered and effectively implemented collection plan can limit the number of times a firm must make that difficult decision.

Consistent Billing Cycles

Many attorneys agree that billing is one of their least favorite aspects of the practice of law. In addition to taking up time they would otherwise spend on client matters, most attorneys are not trained business managers and the practice can be outside of their comfort zone. But consistent billing is important because it satisfies client expectations and increases the likelihood of being paid.

Some common fee disputes result from untimely billing. Clients may have a harder time reconciling a large bill for multiple months of legal services submitted at one time. Indeed, clients may experience “sticker shock,” especially if the representation did not unfold as they anticipated.

Issuing timely and regular bills may help ensure that the client is satisfied with the services, but also increases the likelihood that the client will pay the bill in a timely manner. And if a client is one who is difficult and never intended to pay, an attorney can identify the issue before spending too much time working on the matter.

Communicate About Bills

As noted above, attorneys may find it uncomfortable to have to confront a client about an unpaid bill. Instead of avoiding the issue, reaching out to a client to understand why he or she has not paid may help remedy the non-payment.

There are some different reasons why clients may fail to pay the bills. The lack of payment may be an honest oversight. It is possible the client did not receive a bill because of technological error or other mishap. They may have had the payment slip their mind. If this is the case, a gentle reminder may be all it takes to receive payment, as well as maintain a positive attorney-client relationship. On the other hand, if the non-payment is intentional, communication can bring clarity to the dispute.

A second reason clients may not pay a bill is that they are unhappy with the outcome of the legal services they received or the perceived value of the representation. This reason can be one of the most difficult to remedy and may give rise to other obligations for the attorney, such as reporting the dissatisfaction internally at the firm or to the firm’s insurer.

Next, sometimes a client may be dissatisfied with an administrative issue. A common example is when attorneys charge a rate that is higher than the client expected or intended for the representation. Other times an attorney may have spent more hours on the matter than the client deemed necessary. Again, understanding and communicating about these issues early in the representation can ensure they are resolved for the majority of the representation.

Finally, some clients will not have the funds to pay their legal bills. This situation can also especially uncomfortable. Nevertheless, if the law firm decides to withdraw due to a client’s inability to pay, it is usually easier to do so early in the representation.

Handling Fee Disputes Prior to Litigation

There are generally three strategies attorneys use to resolve disputes before litigation.

The first step is to host an informal meeting between the firm and client to discuss the issue. At this meeting it is usually helpful to include an attorney that was not directly involved in the representation.

If the client and law firm cannot resolve the dispute informally, they may find it is more productive to attend a mediation with a third-party. A mediation can help both sides save on costs and time.

Arbitration limited to just the issue of fee recovery is another option that many attorneys and clients will use to resolve a dispute. This method of resolving the dispute can help with privacy concerns and malpractice claims that arise from formal litigation. In Texas, Bar Opinion 586 suggests that while arbitration clauses are permissible, the attorney may have to explain the effects of arbitration clauses to clients in accordance with Rule 1.03(b). This may mean explaining the cost and time savings associated with arbitration, the potential relaxation of the rules of discovery and evidence, and the lack of jury trial or appellate rights.

Making The Decision Whether to File Suit

Ultimately, a law firm may be left with the decision to either file suit or take a financial loss. This decision involves weighing the pros and cons of both options, which include the amount of outstanding fees and the likelihood of a malpractice claim. Implementing a consistent billing cycle, communicating with clients about their fees, and attempting alternative methods can, however, help reduce the number of instances in which this decision must be made.

Shari L. Klevens is a partner at Dentons and serves on the firm’s US Board of Directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons and focuses on professional liability defense.  Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance.”