What is a Non Refundable Retainer?
What is a Non-Refundable Retainer?
As a general rule, lawyers should charge clients for the services and work they provide. "Deferred billing" is not in the client’s best interest, as the "cost will go unpaid at the risk of further legal action." Furthermore, "[b]illing and availability for soon-to-be-due deadlines and hearings are paramount to educating the client on how he or she is to expect to be billed."
One of the most common ways that lawyers charge for their services is by drafting "retainer agreements." Such agreements generally state the fee the lawyer charges (whether hourly or otherwise), and reimbursement of out-of-pocket costs. They also state what services will be provided, including when the lawyer may terminate the representation. However, one of the provisions that can be problematic is a non-refundable retainer provision. That is, on occasion, a retainer agreement will state that the retainer fee (i.e., the flat sum of the fee to be charged for all legal services) is non-refundable, even if the lawyer renders no services to the client.
Historically, such retainer fee agreements have not been permissible. In 1920 , the Supreme Court of the State of Iowa held that "[t]he general principle is well settled that at law a contract to pay for services is an entire contract [with] the service rendered [being] the consideration of the entire contract." That is, when an "advance payment" agreement is signed, it obligates the lawyer to perform all of the work that is covered by the fee, meaning that part of the retainer must be refunded if the lawyer fails to do so. There is only one exception: "where the contract was for a fixed sum for specified services which were of uncertain volume, the amount [to be refunded was] to be determined by the value of the services rendered."
Simply put, a non-refundable retainer is invalid.
Most courts have followed this exception to the general rule, holding that a lawyer can be paid in advance for a specific, clearly defined task, but that any unearned fees must be refunded to the client. The reason for this is straightforward: under American Bar Association Model Rule of Professional Conduct 1.16, a lawyer must refund unearned fees promptly upon termination of the representation.
Advantages of Non Refundable Retainers
Traditionally, with this type of arrangement, the money paid to the attorney goes into a trust account. That means that clients can get their money back at any time in the event that they are unhappy with the service. If you are dealing with a non-refundable retainer, this will not be an option.
Some of the benefits of a non-refundable retainer are obvious. Basically, when you pay to retain a lawyer, you know that the money you have spent has gone to secure representation. It is a strong symbolic commitment to keeping the matter that you are hiring an attorney for close to your heart. Then, once the representation has concluded, the money you paid is yours. In fact, non-refundable retainers are understood to be an upfront payment – a payment in full for services which are to be rendered by the attorney.
This means that for a lawyer, the money is non-refundable. They can keep it, and it will not matter if the client does not make use of the services. It is a way for countering client usage and billing. Often, an hourly fee can be an obstacle in itself, and where a matter is complex, an attorney may not be willing to work on a matter if they’re unsure of what form of commitment the client is willing to bring to the fight.
Without worrying about what the client is going to use the money for, attorneys will usually be more willing to take your case. They can get right to work without having to worry about getting stuck with a bill or without having to try to figure out a billing system that will end up working for both parties. A non-refundable retainer is easy for both clients and attorneys to understand.
The benefit is two-fold. An attorney wants the security of knowing that the money they are being paid is secured and that they will be able to get right to work with no question. The client is looking for the same things.
If they are paying an attorney an hourly rate, they do not want to have to spend too long wondering which parties are going to be charged for their time. It can end up being a huge source of stress, and one that has the potential to destroy clients’ relationships with their attorneys. By simply paying a non-refundable cost on the front end, a client can be sure of what they are paying for and where its going. If they have a problem with the service, they can always seek legal advice, and if they simply are unhappy, they’ll know that they don’t have to worry about what they lost.
Pitfalls
"Payment terms for the legal matters will be negotiated with you in separate instruments as required by law (including any applicable rule of professional conduct). In no event will your payment for legal services be non-refundable or be deemed non-refundable. This rule does not affect your obligations to pay for legal services rendered, if any."
The only real requirement with this provision is that the retainer agreement clearly state that any fees, costs and expenses paid are not non-refundable. You may want to consider adding a line like this to clear up any confusion:
"Payment terms for the legal matters will be negotiated with you in separate instruments as required by law (including any applicable rule of professional conduct). In no event will your payment for legal services be non-refundable or be deemed non-refundable. Even if you terminate our employment prior to completion of the task the scope of work will remain in effect and apply to any new matter should you employ us at a later time. This rule does not affect your obligations to pay for legal services rendered, if any."
The enforceability of a non-refundable retainer is not clear. One proposal has been to define non-refundable retainers as a "advance fee" which is non-refundable under Rule 1.16(d) or as a "classic retainer" where the lawyer sets aside the funds in an account to make the client feel special and not to be spent on the client’s matter. The problem with this proposal is that lawyers in most states have the ability to amend their rules of conduct to prohibit a non-refundable retainer. This would nullify any advance fee or classic retainer. Therefore, it would be important to check with your local bar to determine the enforceability of such a provision.
In an analysis of non-refundable retainers that was done by attorney Susan R. Brooks, a member of the Ethics Committee of the New Jersey State Bar Association, Ms. Brooks took the position that such provision was not ethical under the New Jersey Rules of Professional Conduct, Rule 1.16(d) and 5.4. She states:
"[t]he ethical requirement that a lawyer return a "non-refundable" retainer to the client, does not permit the lawyer to take payment for legal services that the lawyer knows the client will never receive."
But as a practical matter, it would be a mistake to sue the client for failing to pay the bill. As stated before hostile clients usually go to the bar when they get sued for fees. Malpractice suit for employee embezzlement would also be unlikely to succeed. It makes sense to draft a non-refundable retainer that at least has some teeth.
Common Situations
There are a few cases in which a non-refundable retainer agreement is appropriate. The first is when there is a high likelihood of urgency to the case. Family law matters can become extremely urgent. For example, if a husband and wife file a divorce action, one side may obtain a temporary Order of Protection based on an incident that happened last week. If they are unable to afford the retainer, their lawyer will get nothing for drafting that emergency petition. There is not enough time to go to the client to secure a second retainer. The only immediate way to pass that cost onto the client is to make that portion of the retainer non-refundable. Otherwise, every month when the client gets a bill there is a chance that the matter will be resolved by a court, at which point the attorney will have done half the work for free.
The second good case for a non-refundable retainer agreement is where a lawyer attempts to negotiate a settlement with a party represented by a lawyer. There is a cost difference between the attorney who does all the legal work himself vs. the lawyer who has to go through both the client and the other party’s lawyer to settle a case. When representing an individual, this is essential, or the case needs to be restructured. For example, when billing by the hour, the time spent drafting a motion and staying on top of a busy calendar proceeds at a healthy pace, while the time spent collecting documents and conferring with the client and the client’s family and friends takes way more time than justice could ever require. The result may be a $10,000 bill for a divorce that was as simple as signing the papers, but which took two months in court to reach that stage. It is inequitable to ask the opposing party’s client to foot the bill for the time it takes to sort out issues and obstacles that should never have been necessary. The client should pay that bill as it relates to his own needs.
The third scenario is the exact opposite. It is a case that is nearly impossible to settle and will take a lot of motion practice and discovery. In this case, the lawyer should be able to estimate the time just to bring the case to preliminary conference to be a full 6 months of motion practice and discovery just to get to the stage where the lawyer can present the strongest case possible. In short, the lawyer needs to do a lot of investigating, meet with experts, and spend hours going through thousands of pages of disclosure documents. The only way to run a responsible practice where they never turn away clients based on their ability to pay or need for legal services is to work with an affordability plan where they bill monthly and require a small portion of the retainer be held in reserve, never to be touched as long as the billing goes according to the plan.
How to Prepare a Clear Agreement
To begin with, an unambiguous statement is a non-refundable retainer agreement stating that part of a client’s payment is for a non-refundable retainer. If the parties understand that part of the payment is not repayable under any circumstance – unless perhaps due to attorney malpractice – it will make any subsequent dispute over the ultimate allocation between a non-refundable deposit and earned fees difficult to pursue.
I suggest expressly stating in the retainer agreement or engagement letter that the retainer may be satisfied before any balance is due, after which the Client will be required to pay additional amounts to the extent that the fee exceeds the retainer. Alternatively, the fee may be billed against the retainer before it is exhausted or until the Client pays a further amount to bring the balance of the retainer up to a sum sufficient to cover future fees.
In other cases I have seen retainer agreements stating that the initial retainer may be treated as a deposit against earned fees, with the rest being waived if not earned. Whether or not that can be applied to the non-refundable portion of the retainer is an issue that could well be subject to dispute.
In advance of undertaking any work, the attorney should also describe the services covered by the retainer and indicate that the retainer portion may be applied for the services rendered without additional authorization.
Billing against a retainer deposit may run afoul of state law requirements regarding billing and retaining money paid by a client, even when the fee is based on a retainer.
Resolving Disputes
Claims and Dispute Resolution: Strategies, Practices and Procedures
Mediation, arbitration and other alternative dispute resolution ("ADR") forums are always options available to be embedded into the non-refundable retainer agreement.
Mediation is an informal negotiation process with a third-party neutral to help the parties discuss and reach an amicable and non-adversarial resolution to their issues. It may be appropriate for small claims and business disagreements that do not involve complex litigation.
Arbitration is used where a highly specialized knowledge of the industry is needed to make an informed and connected judgment. Typically , this involves a team of neutral arbitrators who are knowledgeable in the subject area of the claim. In the event that an individual arbitrator cannot be determined by agreement of the parties, then two arbitrators will be selected by each party and the two will choose a third. At the conclusion of the arbitration, the findings of the arbitrators are provided in a written decision along with the damages and remedies awarded. In cases of arbitration, there is no further right of appeal. According to the AAA, in the past eight (8) years, the average time span to complete a small claims arbitration is twenty-four (24) months.
Alternatives to Non Refundable Retainers
In addition to non-refundable retainers, there are other courses of action that may be appropriate in certain cases, in lieu of or in addition to a non-refundable retainer.
Contingency Fees
A contingency fee is one in which the lawyer agrees to invest time and effort up front before ever getting paid and recoups his or her investment if the case is successful. For instance, if a client’s insurance company refuses to pay a claim and the lawyer agrees to investigate and file suit against the insurance company, the lawyer will not get paid until there is a settlement or a verdict. When that happens, a percentage of all money recovered is paid to the lawyer for having accepted the risk of not getting paid.
Contingency fees work best in personal injury and wrongful death cases, where the injured party has no way to pay a lawyer until a verdict or settlement is received. Contingency fees also work well when the damages are large enough to warrant a lawyer’s time and investment. In a lawsuit over $25 million, a percentage of the recovery could still leave the plaintiff millions of dollars.
But if the attorney’s time investment is large and the damages are small, the percentage of recovery left after the attorney’s fees and expenses may not be worth the troubles associated with the litigation. For example, if a client claims that his neighbor’s fence encroaches a foot onto his property, and the value of that foot of land is small, a contingent fee with the possibility of thousands of dollars in litigation costs may not be worth it.
Contingency fees do not work quite as well in commercial business cases, as businesses typically have the cash flow to pay an attorney during the course of the litigation.
Examples in Practice
In California, for example, a federal district court found that a service agreement labeled as a "non-refundable retainer" was not enforceable because the contract failed to define or limit the scope of the services to be provided by the attorney. See Akopyan v. McDonald, 260 F. Supp. 2d 844 (C.D. Cal. 2003). The Court determined that the attorney agreed to provide case preparation and trial preparation work for a flat fee and nothing in the contract permitted the attorney to earn the fee merely because the client "pulled the plug" on him.
In other states, such as Ohio, non-refundable retainers are generally enforced when the work has been completed or the contract has been terminated involuntarily; however, the Ohio Supreme Court has held that no attorney fee is ever earned by a lawyer unless he performs legal services for which it is paid. See Land Title Abstract & Title Co. v. Dworken, 40 Ohio St. 2d 29, 32 (1974).
Further, California’s State Bar Committee on Professional Responsibility and Conduct Ethics Opinion 1989-115 states that a non-refundable retainer is unethical. The opinion states: [A]ttorneys may not make use of a so-called non-refundable retainer [$1,000], which requires the client to pay the entire amount prior to starting the project … . Thus, the attorney who attempts to charge a non-refundable retainer must contend with the minimum fee schedule for purposes of a refund. The minimum fee advisedly does not include all normal incident costs, and the bar’s purpose is of course to protect the clients from frivolous charges. Similarly the bar believes there is a fundamental unfairness somewhere in the contractual formula if the attorney tries to bill for the incidental time when he has not done the work, and yet bargained away his right to a reduction because of that failure.
Predictions for the Future of Retainer Agreements
As more lawyers seek to protect their time, it is likely that the use of non-refundable retainer agreements will continue to increase. However, as discussed above, some cases may impose restrictions on them. Indeed, the Florida Bar is exploring a proposal which would not require attorneys to refund amounts for non-legal services (now known as block-billing). If a billing structure can be developed that simply requires attorneys to refund the legal work that is not completed, then non-refundable retainers may become even more popular . Additionally, other jurisdictions, such as Washington, are expressly permitting the use of non-refundable fees for all attorneys, not just solo practitioners or small firms.
Whether these trends will find their way into the Model Rules is an open question. But as long as clients continue to disappear without paying, lawyers will certainly attempt to find new ways to collect their payment. Given how difficult collecting fees can be as compared to other businesses, the use of non-refundable retainer agreements is likely to increase.
