How New York Rules on Retainer Agreements Help Support Alternative Billing

Effective in 2002, the Appellate Divisions of the Supreme Court of the State of New York modified the Part 1215 to Title 22 of the Official Compilations of Codes, Rules and Regulations of the State of New York regarding written engagement letters, setting forth particular requirements for New York Lawyers.

Specifically, the section requires that an attorney representing a client from whom the attorney would be collecting a fee provide the client with a written engagement letter before beginning the representation (or within a ‘reasonable time’ thereafter if it is otherwise impracticable or if the scope of services cannot be determined at the beginning of the engagement).

The rules specifically contemplate circumstances under which there might be a change in the scope of services as originally contemplated by the attorney and the client. The rule states, “Where there is a significant change in the scope of services or the fee to be charged, an updated letter of engagement shall be provided to the client.“

The letter of engagement is required to address the scope of the services to be provided, and must include an explanation of the attorney’s fee to be charged, as well as expenses and billing practices. Where otherwise required, the engagement letter must also specifically advise that the client may have a right to arbitration of fee disputes.

There are some limited exceptions to the above rules. Specifically excluded circumstances are: if the fee to be charged is expected to be less than $3000, if the attorney’s services are of the same general kind as previously renedered to and paid for by the client, where the matter is a domestic relations matter governed by 22 NYCRR 1400, if the attorney is admitted to practice in another jurisdiction and maintains no office in the State of New York, or where no material portion of the services are to be rendered in New York.

When speaking with attorneys about using alternative billing arrangements, one of the main questions that arises is the question of how to set the fee. Many lawyers fear fixed fee arrangements because they are afraid that they will under-estimate the amount of work required, or that unforseen circumstances will arise which were not originally contemplated by the attorney, and therefore were not factored in to the original fee calculation.

Contrary to popular belief, using fixed fee agreements does not require that lawyers have the ability to see the future and anticipate every single circumstance which might arise. In New York, the rules specifically address the potential for a change in the scope of services.

The key to creating an effective fee structure and writing a good engaement letter is to define the scope of services as specifically as possible at the outset of the engagement, and make it clear to the client that the fee quoted is based only on the scope of services contemplated by the agreement. Additional services not included in the orignal agreement will be the subject of a supplemental services agreement, if necessary.

Comments

[Allison Shields]

Liz:

I agree that one of the stumbling blocks in implementing value pricing or alternative billing not based on hours is the courts. Part of the problem is that courts are slow to change, and many of them have been basing reasonableness of fees on hours multiplied by rate for a very long time. But inherent in that discussion is whether the hourly rate is reasonable and whether the time expended was reasonable under the circumstances, and some of the same issues of value arise there.

Another part of the problem may be that when lawyers are submitting their fees for review, they are only submitting hours and rates, and are not submitting documentation regarding value (and specifically value discussions with the client as evidenced by the retainer agreement).

There's no question that the profession has a long way to go. But given the current economic climate and the changes in the marketplace, lawyers will have to show why their services are not mere commodities and demonstrate their value. Why not tie fees to that value, rather than time?

[Liz Harris]

We have had very similar provisions in place in most Australian states for a number of years. The problem comes when there is a legal dispute and costs are arbitrated (or here, assessed by a court or court appointed assessor). In the assessment, costs which are "fair and reasonable" are allowed and there is still the view that "fair and reasonable" is measured by looking at the time spent and multiplying by a market hourly rate. Value does not come into it. Certainly "downunder" there is a way to go before lawyers embrace value billing.