In my role at the Attorney Grievance Commission, I often have to evaluate retainer and fee agreements. If not done correctly, retainer agreements can be a source of many headaches, and even potential ethical issues. In this column, I will identify several common ethical pitfalls related to retainer agreements.

HAVE A CLEAR, DETAILED, WRITTEN RETAINER AGREEMENT

This first one may seem like it’s cheating, but one of the biggest and, sadly, very common pitfalls is not having a written retainer agreement in the first place. Simply having a written retainer agreement is not enough; it needs to be a good one. Even when not technically required, the best practice is having a clear written agreement that details items like the expectations of the parties, policies (such as those regarding document retention, costs, and billing), fee structure,¹ scope of representation, and any other details necessary to ensure that everyone is on the same page.² This helps prevent issues and disputes from arising and allows you to defend yourself in the event a dispute with the client arises or if the client files a grievance.³

It is particularly important to define and clarify the scope of representation if it is at all ambiguous or if it is limited or differs from what might ordinarily be within the scope of representation. Failure to do this may result in things being considered within the scope of representation that were not actually intended to be.⁴ Failure to properly define the scope of representation and fee structure and adequately communicate the same to your clients may also result in professional discipline.⁵ The agreement should also address any conflicts of interest, and waivers should be obtained when necessary. Similarly, if someone besides the client, such as an insurance company or parents, is paying the legal fees or will be involved in the case, properly disclose that and ensure compliance with all ethical rules.⁶

It is often advisable (and sometimes necessary) to employ certain disclosures or disclaimers and have your client acknowledge being informed about certain information.⁷ Examples include ones about how marijuana is still illegal federally when doing marijuana licensing work, how you represent the business entity and not the individual owners (to avoid confusion about the identity of the actual client), and any reporting obligations, such as those under MCR 9.120(A)(1).

In some circumstances a written agreement is required, such as for contingent fee arrangements.⁸ Also, if you are charging more than a certain interest rate on past due legal fees, that must be in writing.⁹ The agreement should address what will happen if a court awards sanctions or attorney’s fees because that is often considered to be a matter of contract between the lawyer and the client.¹⁰

MAKE SURE YOUR FEES ARE ALLOWED

The part of the agreement that sets forth the arrangement regarding fees can cause the biggest issues. As discussed above, make sure this part is clear and make sure that the fee you are charging is reasonable and not prohibited by law.¹¹ If you are charging a contingency fee, make sure the total fee is reasonable and allowed by law, and that you’ve complied with any other applicable requirements of MRPC 1.5 and MCR 8.121. Also remember that contingency fees are prohibited for criminal and domestic relations cases (with some exceptions).¹² It is also important to ensure that the fee agreement doesn’t create a type of transaction prohibited by MRPC 1.8.¹³

Non-refundable fees are currently not prohibited in Michigan,¹⁴ although the American Bar Association has issued a formal opinion taking a stance against such agreements.¹⁵ That said, charging and collecting such a fee poses certain risks and all fees must be reasonable pursuant to MRPC 1.5.¹⁶ An agreement providing for a non-refundable fee must be clear and unambiguous and clearly labeled as non-refundable within the retainer agreement.¹⁷ Although a non-refundable fee may be fixed or flat, those terms are not synonymous.

If you take money up front, be sure to spell out what it is for (is it for costs or is it your fee?) and, if it is an advanced fee, when it is earned.¹⁸ Also remember that there are certain things you generally cannot charge a client for including overhead,¹⁹ time spent responding to a grievance,²⁰ and time spent preparing a motion to withdraw (unless withdrawal is requested by the client).²¹

EXCESSIVE INTEREST RATES ON UNPAID LEGAL FEES

One issue I see often — usually while investigating other misconduct — is otherwise permissible retainer agreements that include a usurious interest rate on unpaid legal fees.²² It appears that many attorneys don’t know the proper amount of interest, which is problematic because including a usurious interest rate in your fee agreement violates MRPC 1.5(a) even if you don’t actually charge it to the client or try to collect it.²³

One argument that sometimes gets raised in defense of excessive interest rates is that the attorney is charging a time-price differential and not an interest rate, thereby making MCL 438.31 inapplicable. However, this only works if it truly is a time-price differential and not just an interest rate in disguise. In order for it to be a true time-price differential, the client must be given an option between paying a cash price now or paying an additional charge for buying on credit.²⁴ If an agreement says bills shall be paid in full within 30 days or a time-price differential of 1% per month will be applied, that is likely to be considered an interest rate in disguise because the bills are due in full and the client isn’t being given a true choice. Consequently, MCL 438.31 applies.

LIENS ON CLIENT PROPERTY

One way lawyers try to ensure they receive payment for legal fees is through various types of liens, some of which require a prior written agreement.²⁵ Liens are often permissible, but have many ethical implications and can give rise to a multitude of ethical issues.²⁶ Therefore, it is necessary to exercise care and determine if enforcing the lien is worth the risk or if another avenue should be pursued to seek payment of past due fees such as collections or a lawsuit. Just make sure the representation is completely terminated and you have a signed order substituting you out of the case before pursuing a lawsuit, otherwise you could run afoul of conflict rules.²7

If you decide to proceed with a lien, make sure you have complied with all applicable rules. While it is sometimes permissible to assert a lien against documents or other property until your bills are paid, there are certain rules that must be complied with and asserting of a lien needs to be done correctly, so it may not always be worth the risks.²⁸ Additionally, a lawyer cannot retain property if the client needs the property to pursue their legal rights or if it would prejudice the client.²9 Liens can also be problematic if they involve property that is the subject matter of the representation; that is usually considered a prohibited transaction under MRPC 1.8(j).³⁰ Even when not required to be in writing, it is a good idea to provide the client with information regarding the various liens that may arise from the representation up front.

A somewhat similar method lawyers have used to guarantee that clients pay their legal bills is having the client sign (at the outset of representation) a stipulation for the lawyer to withdraw representation if the client doesn’t pay later in the case. As long as certain rules and restrictions are followed, lawyers are often allowed to terminate representation if a client doesn’t pay their legal bills.³¹ However, having a client sign a stipulation for withdrawal just in case it is needed later is considered unethical.³2 The best practice is for the retainer agreement to spell out how and when the lawyer will seek to terminate representation if fees are not paid and provide that the client will be given advance notice and a time to cure the nonpayment. The agreement should also mention that while either party can seek to terminate the relationship, if litigation is ongoing the presiding court must give permission for the lawyer to withdraw before the relationship can be terminated.³³

ARBITRATION CLAUSES

Across the board, binding arbitration clauses are becoming more popular in contracts of pretty much every type, and retainer agreements have been no exception.³⁴ While these clauses can serve a purpose, there are also several potential pitfalls and critiques that are presented, such as the potential disparity in bargaining power and legal acumen between the client and lawyer. For a long time, the Michigan Rules of Professional Conduct did not directly address this issue, although some of the MRPCs were applied to provide some limitations.³⁵ However, the Michigan Supreme Court recently adopted MRPC 1.19, which directly addresses arbitration clauses and when and how they may be used. The rule does not prohibit these clauses outright but requires that the client is either reasonably informed in writing about the scope and advantages and disadvantages of the clause, or that the client is represented by independent counsel when making the agreement.³⁶ MRPC 1.19 did not change the fact that lawyers cannot enter into agreements with clients prospectively limiting liability for malpractice unless the client is independently represented (and the agreement is permitted by law), the agreement cannot restrict the ability to report unethical conduct to disciplinary authorities, and a lawyer cannot settle a claim for malpractice liability without advising the client in writing about seeking independent counsel.³⁷

CONCLUSION

It is advisable to always have a written retainer agreement that clearly defines the scope of representation, the fee arrangement, and any relevant policies and does not include any impermissible provisions. It is also important to stay abreast of best practices and changes in the law and regularly review your retainer agreements to ensure they comply with the applicable ethical rules and laws. Also, much like when drafting motions or other contracts, the best practice is to consider starting the process with a template from a reputable source like the State Bar of Michigan³⁸ and double-checking the template for legal compliance, making tweaks to the language to suit your individual needs.