Accounts Receivable

What to Do if Your Bill Isn't Getting Paid?

One of the biggest strains on a law firm is that of the outstanding accounts receivable. Attorneys, like everyone else, want to be paid for the work they have done. When a bill is past due, it can cause tension within the law firm and irreparable harm to the attorney-client relationship. If a bill remains unpaid, the attorney may be tempted to immediately "fire" the client and sue for fees. But attorneys who file fee suits must be cognizant of the substantial risks that may arise from those and should avoid scenarios such as the one below:

Attorney Hap Less represented Clint Client in a dispute with a neighbor over a boundary line. The litigation was protracted and expensive. Clint ultimately lost the case and was very unhappy with the result, refusing to pay the significant outstanding balance. Clint states it was Hap's fault that the case was lost and says he will sue if Hap pursues the bill. Despite Clint's threats, Hap immediately files suit and receives the promised legal malpractice counterclaim in return.  Hap reports the matter to his insurance carrier who defends him on the counterclaim. It comes to light that Hap had overlooked a significant defense; had such an argument been raised, Clint likely would have prevailed. Based on its investigation, the carrier and Hap agree to a settlement with Clint that includes payment of Hap's significant insurance deductible as well as Hap's agreement to drop the fee suit. Hap is undoubtedly worse off financially than he would have been had he written off the bill.

The above scenario, although fictitious, is illustrative of some of the issues that can arise when an attorney sues a client for fees. Although no magic elixir exists to get bills timely paid, there are ways to minimize these risks:

(1) Get a realistic retainer at the outset. Attorneys sometimes hesitate to ask for a retainer out of concern that the client may be scared off. However, if the client is not able to come up with money at the outset of the relationship, this may be a harbinger of future inability to pay. Getting a retainer, and having it replenished as warranted, is one of the simplest ways to avoid accounts receivable issues.

(2) Include fee arrangement provisions in your engagement letter. All billing components should be communicated to the client, including the basis for the fee and the frequency of billing. Include when the payments will be due to the firm and what out-of-pocket charges will be billed to the client. Further, if your jurisdiction allows, consider including an arbitration clause requiring binding arbitration of fee dispute claims.

(3) Provide a budget. Make sure to provide a client with a realistic assessment of potential fees and costs. Do not lowball to get a client to retain you. A client will be much happier to pay less than what was estimated than to be billed more than what was budgeted.

(4) Practice monthly billing. Experts advise that the most preventable basis for a fee dispute is when significant bills are sent late. Clients don't like surprises and getting an unforeseen invoice will only add to their dissatisfaction. Make sure your firm has a procedure in place to get the bills out on time, and that the procedure is being followed.

(5) Regularly communicate with the client. A client who knows what is going on with his or her case should not be surprised when the bill comes.  Do not let an invoice be your only point of contact. Clients should never have to learn the case status by reviewing an invoice.

(6) Don't allow accounts receivable to accumulate without a plan. When a bill (or two or three) goes unpaid, don't ignore it and hope for the best.  The responsible lawyer (not an associate, paralegal or billing clerk) should meet with the client and find out the reason for the unpaid bill. In a best-case scenario, there may be an unintentional oversight and the embarrassed client will provide payment immediately. However, if the client has insufficient funds or is dissatisfied with the services, addressing the issues early will give the attorney the opportunity to consider withdrawal or other options. If you do elect to withdraw, make sure to comply with your jurisdiction's ethical rules.

If you have talked to your client about the outstanding balance and are unable to come to a meeting of the minds, carefully weigh your options before filing a law suit. Experts opine that up to 40% of suits for fees result in counterclaims for legal malpractice. Some bar associations have free or low-cost fee mediation and/or arbitration services that may provide a satisfactory result for both you and your client.

If you have exhausted all other avenues and still want to proceed with a fee suit, we suggest you take the following steps in consideration thereof:

(1) Research the statute of limitations for a potential legal malpractice claim. If feasible, wait until it has expired before filing suit to minimize the possibility of a counterclaim for malpractice.

(2) Ask a trusted colleague to review your file to opine on whether any errors were made that could make the firm susceptible to a legal malpractice counterclaim.

(3) Look closely at the entries on your unpaid invoices. Does the firm's file support the work outlined in the invoices? Were all billing entries appropriate? Does the billing comport to the written fee agreement?

(4) Analyze the net recovery to the firm if the fee suit is won – consider any outside counsel or collection agency fees, taxes owed on a recovery, lost billable time to the firm, etc. Further, determine if a judgment against the client will be collectable.

(5) Review your legal malpractice policy.  If there is a counterclaim for legal malpractice, what is your deductible? Does your carrier consider fee suits when determining pricing and future eligibility for insurance?

Be objective in your cost benefit analysis. If you still elect to file a fee suit, proceed with caution and continue to look for resolution opportunities. A fee suit may be a distraction from your practice and have other unintended consequences. Such litigation should be a last resort, not a first strike.

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.