“14% of Bills Go Uncollected” Clio Legal Trends Report 2017
A Maryland law firm (OMNG) was engaged to represent Burley in the administration of an estate in 2002. The administration included the sale of real property. The firm billed Burley monthly during the first year of the representation. When Burley was unable to pay the fees, “the firm claims to have proposed a modification of the billing and payment terms of the representation in mid-2003. Under the alleged proposal, the firm would continue to provide Ms. Burley with legal services, but it would not issue new monthly billing statements, and payment would be deferred until the real property was sold.” The firm had no documentation of Burley’s agreement to this change, but continued to provide legal services from 2003 to 2012, carefully accounting for services rendered and hours worked. In all that time the firm did not bill Burley. In October 2012 the property was sold.
In February 2015 the firm sued Burley for unpaid legal fees and accrued interest for $332,569. Burley denied that she had ever agreed to the proposed change in billing and refused to pay. At trial the firm did not call the now former member of the firm who allegedly communicated the change in the fee agreement to Burley. The firm admitted in oral argument that the former member would testify that he had not communicated the billing change to Burley. The trial court ruled in favor of Burley.
The appellate court affirmed the trial court. It focused on the trial court’s opinion as follows:
- The court was flabbergasted that a law firm would enter into an agreement to defer billing and payment for a decade without documenting it in any way. The absence of documentation confirmed the court’s conclusion that the parties had never made such an agreement.
- [T]he court said that it was “absolutely unreasonable” for the firm to do $275,000 of work without informing the client on a periodic basis of what it had done and how much she owed. The court also said that it would have been inequitable to impose liability on Ms. Burley in view of the firm’s failure to memorialize the alleged agreement and its failure to keep her informed about what it had done and how much she owed.
The appellate court summed up its affirmation of the trial court’s opinion in this paragraph:
- Because OMNG did not send periodic statements detailing the specific work that it had done, who had done the work, what rates it had charged for the work, and how much debt the client had incurred, the court reasoned that Ms. Burley was precluded from making a reasonable assessment about whether she wanted to continue with the representation, instruct the firm to do less work, object to the amount of work or the amount of the charges, or exercise her right to engage different counsel. We see no basis to second-guess the circuit court’s conclusion that the firm could not reasonably rely on Ms. Burley’s silence or acquiescence in its work when the firm failed to provide her with the information necessary to evaluate the work and to register any pertinent objection to the services performed or the proposed charges. (O’Malley v. Burley, 2017 BL 148106, Md. Ct. Spec. App., No. 31, 5/2/17, unreported.)
Billing Requires Risk Management Too
An unusual case like O’Malley demonstrates how a seemingly routine business function like billing can be risky. When billing goes bad and a firm decides to sue for fees, the risk of a counter-suit for malpractice is further increased. This prompts us to offer our risk management advice for smart billing and avoiding costly and time-consuming efforts to get paid.
Letter of Engagement
The first risk management action to take with every new matter is the preparation of a comprehensive letter of engagement including fee terms and conditions. A fee agreement at a minimum should:
- Clearly identify the client or clients represented – it is absolutely necessary to establish whose interest a lawyer represents.
- Specify the scope of the representation – what the lawyer is supposed to do for the client and what is excluded from the representation.
- Explain the basis for fee charges to include whether a retainer is required and charges for costs and expenses. This explanation should include consideration of other fee types that may be more advantageous to the client.
- Explain the firm’s billing procedures to include:
- The client’s responsibilities for fee payment.
- How often the client will be billed.
- When payment is expected to be made.
- The firm’s options when fees and costs are not paid timely.
- Whether interest will be charged for late fee payment.
- What fees are due if the client discharges the lawyer before completion of the representation. *
* ABA/BNA Lawyers’ Manual on Professional Conduct, Fees, Fee Agreements, §41:101 et seq. The Manual provides a thorough treatment of fee agreement issues and is the place to start in researching fees
The second risk management action is to avoid common billing mistakes. Such as these:
- The bill is as big as the client’s file – looks like over-practicing the matter.
- Client gets a large bill that is the first thing the client has heard from the lawyer since the initial interview.
- Secret identities – no names and no billing rates for the work done.
- Over-qualified personnel for the work or conversely, charging lawyer rates for administrative work.
- Too many meetings, telephone calls, and research hours – looks like over-practicing the matter.
- Billing for several lawyers reviewing or preparing to discuss the file – looks like over-practicing the matter.
- Billing for several lawyers attending a meeting when one would have been adequate – looks like over-practicing the matter.
- Billing for “soft costs” without the client’s prior agreement and general overhead costs (heat, air conditioning, etc.).
- Itemized bills with generic terms such as “phone call” or “meeting” with no substantive information.
- All telephone calls take exactly .3 hours; all dollar amounts are nice round numbers or end in five; and inserted along with all the routine itemized expenses is a charge for expert witness fees of several thousand dollars.
- Billing for billing – this adds insult to injury.
- A too-quick billing reduction if client complains strongly implies that the lawyer must be overcharging.
- Billing out of cycle with the client’s preference.**
**This list is a composite of articles by Amy Stevens (Wall Street Journal), Larry Bodine (Lawyers Weekly USA), and Jay Foonberg (Lawyers Weekly USA) listing their 10 favorite “Billing Bloopers.” and some of Lawyers Mutual’s own.
Good Billing Practices
Always bill in a way that is fair, understandable to the client, and consistent with good business practices. The single best billing practice is to bill early and bill often. Whatever billing cycle you are using, stick to it religiously. There are a number of good checklists on smart billing. Automation is key to billing success. Almost all of it is based on good client communications. Howard L. Murdock in his article Better Communication Increases the Likelihood That Bills Will Be Paid emphasizes this point by developing 12 ways lawyers can improve their chances of getting paid by proper billing:
- Improve client communications - at the outset explain the entire billing process.
- Prepare a client for the total cost of legal services being provided.
- Prepare written fee letters outlining the specific terms of an engagement.
- Use retainer arrangements, especially when a client’s ability to pay is in question.
- Identify for the client the people being assigned to work on a matter.
- Use the billing process to communicate details of the work performed.
- Reach an agreement about what time and costs will be charged to a client and what will not be charged.
- Discuss billing formats and what information will make invoices easier for the client to process.
- Provide a budget, as a matter of firm policy, on all matters in excess of a specified amount.
- Schedule periodic meetings with clients to discuss ways to improve service.
- Review invoices to ensure that they contain no mistakes.
- Send regular reminders for invoices that remain unpaid.
Anthony E. Davis, a highly regarded risk management expert, in his article How to Better Manage the Billing Process*** offers the following advice on how to eliminate billing fraud, avoid fee disputes, and get paid:
- Establish strict policies regarding accuracy in timekeeping and recording of time. Do not require minimum hours to be billed to clients. To do so encourages bill padding.
- Enforce frequent time reporting – preferably daily.
- Monitor the billing process with internal audits and independent review of all expenses either claimed by a lawyer or billed to a client.
- Send bills that, in addition to reflecting charges, demonstrate the progress made in the client’s matter during the billing period.
- Avoid billing for overhead items. Only bill or have the client pay directly out-of-pocket third-party expenses.
- Send a cover letter with a bill that includes:
- A thank you for past payments.
- A simple “plain English” summary of how the work performed as described in the bill advanced the client’s interest toward the desired outcome.
- An explanation of the activities planned for the next month and how these advance the client’s interest toward the desired outcome.
- An invitation for the client to call with any questions regarding the bill.
***Lawyer to Lawyer, Ed. XIX, 9/2002, Chubb & Son.