Reducing Legal Malpractice Exposure with Effective

Engagement Agreements Jason E. Fellner Caitlin T. DiMaggio Murphy, Pearson, Bradley & Feeney 88 Kearny Street, 10th Floor San Francisco, CA 94108 (415)788-1900

THE SAN MATEO COUNTY BAR ASSOCIATION, FAMILY LAW SECTION

Opening the file – • Fee Agreements

Scope and Expectations Duties to Non-Clients Statutory Requirements

• Conflicts of Interest • Fee Disputes • Arbitration Agreements • Additional Considerations

Tax Consequences Liens

Closing the file – • Client Files • Discharge of the Attorney

Fee Agreements are Contracts:

• As a general rule, attorney and client may agree to the measure and mode of an attorney’s compensation (C.C.P. Section 1021.) Basic principles of contract law apply and any ambiguity is resolved in favor of the client.

Set Scope and Client Expectations:

• Reasonably restricting the scope of legal services by contract is permissible (Janik v. Rudy, Exelrod & Zieff, (2004) 119 Cal.App.4th 930, 940.)

Fee Agreements establish a date certain for the commencement of the attorney-client relationship, which set forth the terms and scope of the relationship.

Pursuant to Bus. & Prof. Code Section 6148(a)(2), a written fee agreement

must contain the general nature of the legal services provided. In legal malpractice cases, one of the most important documents is the fee

agreement because it identifies the client, date that relationship began, and scope of work agreed to perform.

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GOOD PRACTICES: • Attorney and Client should both sign agreement. It’s a mistake to

simply send letter memorializing agreement and/or have the client sign letter accepting terms of legal service.

• If the scope of representation changes after execution of the fee

agreement, counsel should amend the agreement to clarify the revised scope of services.

• An attorney’s standard of care is oftentimes defined by the scope of work

that he/she agreed to perform for a client. As a result, the scope of work detailed in the legal services agreement is a critical part in utilizing the fee agreement as a way to minimize malpractice exposure.

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Identify your client

When representing a minor or disabled person, the attorney client fee agreement should be entered into between the attorney and the guardian ad litem or conservator.

• (See Fam. Code Section 6710; Prob. Code Section 3603.)

Clients frequently ask other individuals to accompany them when consulting with a lawyer. Unless you clearly identify who your client is in a fee agreement, you run the risk that an implied-in-fact relationship will be found to exist (and all duties owed) to persons you may not intend to be clients. (Hecht v. Sup. Ct. (1987) 192 Cal.App.3d 560.)

If a third party is paying the fees for your client, make sure that it is clear who your client is in your fee agreement.

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Prior and Current Clients

Cal. Rules of Prof. Conduct Rule 3-310(C) requires informed written

consent when an attorney agrees to represent joint clients. A number of issues must be addressed when representing joint clients, including: (1) confidentiality and (2) potential conflicts.

Cal. Rules of Prof. Conduct Rule 3-310(F) requires informed written consent, which includes advantages and disadvantages of the arrangement, when a third party pays part or all of the attorneys’ fees. If third party is paying part or all of the attorney’s fees, not only does an attorney need informed written consent, the agreement should also eliminate any ambiguity on the issue. In so doing, the agreement must clearly identify the client as opposed to simply the third party

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Duty to check for Potential Conflicts before accepting representation:

• Attorney should check for any potential conflicts with those who are adverse and potentially adverse, including reasonably foreseeable parties and witnesses, before accepting representation of a client in any matter. (Cal. State Bar Form Opn. 2011-182.)

GOOD PRACTICE: Run and maintain a conflict check system that contains a database of former and current clients. A conflict check should be created and be part of the client intake process. A file should not be opened until a conflict check is cleared and a legal services agreement is fully executed.

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Following the Initial Consultation: If you choose to decline representation, do so in

writing.

Make a practice of sending written confirmation of nonretention or nonengagement to each person who has contacted you for legal advice or representation if you decide not to represent them. • This letter should state that you have declined to take the case and

you will not be protecting their legal interests or undertaking any work on their behalf. Avoid giving legal advice or commenting on the merits of the matter. Point out that the case may be barred if legal action is not taken with certain time limits provided by California law (If you know the statute of limitations will expire soon, specify this, but also mention other possible statutes of limitations may apply.)

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In some circumstances, even expressly identifying client and scope of services may not limit the scope of duty owed to the client and non-clients.

Examples: •Loss of Consortium - the attorney has duty to inform client’s spouse of a potential loss of consortium claim when consulting a client on a personal injury action. (See Meighan v. Shore (1995) 34 Cal.App.4th 1025.) •Intended Beneficiaries - attorney may owe a duty to intended beneficiaries of a will or trust. (Chang v. Lederman (2009) 172 Cal.App.4th 67.) GOOD PRACTICE: Identifying potential risks associated with representation will help to eliminate claims of malpractice. As a result, don’t take every client that walks into your office!

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Contingent Fee Agreement • Bus. & Prof. Code Section 6147 sets forth requirements for Contingent Fee Agreements. Contingent

Fee Agreements must be in writing to be enforceable, except those for recovery of worker’s compensation benefits or certain merchant’s claims. The contingent fee agreement must specify:

the fee agreed on; how the costs of prosecuting the case will affect the fee and the client’s recovery; and a statement that the fee is negotiable.

Irrespective of Fee Agreement, good practice dictates to identify hourly rate of attorney in legal services agreement to specify reasonable value of services.

Noncontingent Fee Agreement

• Bus. & Prof. Code Section 6148 sets forth requirements for Noncontingent Fee Agreements. Noncontingent Fee Agreements must provide the following in order to be enforceable:

the basis of compensation, including hourly rates, statutory fees, or flat fees; and other standard rates, including costs.

GOOD PRACTICE:

• Always have a signed fee agreement before you begin work! Having a fee agreement limits potential for disagreement and strengthens attorney’s position if and when a fee dispute arises. Absent a fee agreement, an attorney is only entitled to quantum meruit as compared to the full value of the contract.

• Statute of Limitations: A written agreement is subject to a 4 year statute of limitations (C.C.P. Section 337) compared with an oral agreement subject to a 2 year statute of limitations (C.C.P. Section 339).

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Probate: • Attorney fees for work done for personal representative in a probate proceeding,

while the personal representative is acting in his or her official capacity, are statutory and do not arise from contract. (Estate of Lee (1981) 124 Cal.App.3d 687, 693; Prob. Code Sections 10800, 10810, 13660.)

Foreclosure:

• Attorney fees in judicial foreclosure matters are set by the trial court, regardless of any contrary provision in the mortgage or deed of trust. (C.C.P. Section 730.)

Worker’s Compensation:

• Attorneys fees for representation in Workers’ Compensation Appeals Board matters are set by the Appeals Board (Lab. Code Section 5801) and by the court or Appeals Board in third party matters. (Lab. Code Section 3860(f).)

GOOD PRACTICE: When accepting employment in an unfamiliar

area of the law, counsel should investigate possible limitations on the ability to negotiate fees.

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Fee is unconscionable when it is “so

exorbitant and wholly disproportionate to the services performed as to shock the conscience.” • (Tarver v. State Bar (1984) 37 Cal.3d 122, 134;

see also Cal. Rules of Prof. Conduct Rule 4-200(B).)

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Scope of Services: Fee disputes arise from the failure of an

attorney and client to reach a clear understanding of what services are and are not covered under the agreement. To that end, include language in agreement that specifically identifies those legal services that are excluded. The clarity of the attorney fee contract is essential to protecting against fee disputes. In addition, it is equally important that legal service bills are sent to clients and the attorney does not allow the accounts receivable on a client file get too high.

• For expensive cases, get a large retainer and avoid fee disputes and retaliatory claims of malpractice. Place retainer in Client Trust Account under Cal. Rules of Prof. Conduct 4-100.

GOOD PRACTICE: Limit accounts receivable on a client file to a

specified amount and communicate effectively when outstanding fees are due. Oftentimes, clients will threaten malpractice action or file malpractice action to reduce or eliminate outstanding fees owed. 13 of 19

The client has the right to elect arbitration under the Mandatory Fee Arbitration Act – it is voluntary for the client and mandatory for the attorney when the client elects it. (Bus. & Prof. Code section 6200-6206.)

However, the parties may provide in their fee agreement that

the fee arbitration will be mandatory. (Bus. & Prof. Code section 6200(c).)

• Although Bus. & Prof. Code section 6204(a) only discusses postdispute arbitration agreements, the Supreme Court has held that predispute arbitration agreements are still enforceable even though the client retains the right to resolve the fee dispute under the MFAA. (Schatz v. Allen Matkins, (2009) 45 Cal.4th 557.) If the client does not request nonbinding arbitration under the MFAA, or if it is held but does not resolve the dispute, then the MFAA “has played its role” and the matter may proceed to the binding arbitration that the parties agreed to. (Id.)

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The use of arbitration as a method of resolving legal malpractice claims has been found not to violate CRPC 3-400(a). (Cal. State Bar Formal Op. No. 1989-116.)

A fee agreement provision for binding arbitration of any malpractice claims arising from the representation, either with or without an express waiver of the right to

a jury trial, is valid and enforceable, provided there is no ambiguity about the effect or scope of the agreement. (Powers v. Dickson, Carlos & Campillo (1997) 54 Cal.App.4th 1102.)

• The clarity and scope of this agreement should specifically mention

malpractice. (Lawrence v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501 [court refused to

compel arbitration of malpractice dispute when arbitration provision did not expressly mention legal malpractice, and only stated “in the event of a dispute between us regarding fees, costs, or any other aspect of our attorney-client relationship, the dispute shall be resolved by binding arbitration.”].)

GOOD PRACTICE: Depending on the sophistication of the client, a space

should be included for the client to initial that they understand that by agreeing to mandatory arbitration, the client gives up the right to trial by jury or judge and to appeal.

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It is very important for an attorney to inform the client at the outset of the representation about the possibility that a settlement or award of damages may have significant tax consequences. The client should be informed in writing that he or she should seek tax advice. Standard Language should be incorporated into the Legal Services Agreement if the matter has tax implications:

• Attorney has advised Client that any settlement or judgment obtained as a result of the representation may be partly or wholly taxable. Attorney has informed Client that tax advice is specifically excluded from the scope of the services Attorney will provide under this agreement. Attorney has informed Client that he/she is not an expert in tax law, and has recommended that client obtain advice from a tax practitioner concerning the tax consequences of any recovery or any other tax matter

GOOD PRACTICE: Stay away from legal areas that you do not practice. Mistakes are made when you are learning on the job.

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A lien is a charge imposed on a specific property to make it security for the performance of an act. (Civil Code Section 2872.) The attorney and client may provide in their fee agreement for a lien on a future recovery to secure the client’s obligation to pay attorney fees and costs when that recovery is received. (“Levin v. Gulf Ins. Group (1999) 69 Cal.App. 4th 1282.)

An attorney’s charging lien is only created by contract. • Because an attorney’s charging lien is potentially adverse, the attorney

who seeks such a lien is required to comply with Cal. Rules of Prof. Conduct Rule 3-300.

GOOD PRACTICE: Obtaining client’s initials showing reasonable opportunity to consult independent attorney when contracting for lien as a security.

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Attorney is ethically obligated on termination of employment and at client’s request to promptly release client file. (Cal. Rule of Professional Conduct, Rule 3-700.)

Unless the attorney-client relationship is terminated, a lawyer is required to carry through to conclusion all matters undertaken for a client. The duration of the attorney-client relationship depends upon the agreed upon scope of the relationship. (Matter of Allen (Rev.Dept. 2010) 5 Cal. State Bar Ct.Rptr. 198, 204.)

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Client has absolute power to discharge attorney at any time with or without cause. (Fracasse v. Brent (1972) 6 Cal.3d 784, 790.) Discharged attorney is entitled to recover reasonable value of services rendered to the time of discharge. (Id.)

Attorney may withdraw at any time as permitted under the Rules of Professional Conduct, which include: (a) client consents; (b) client’s conduct makes it unreasonably difficult for attorney to carry out the employment effectively, and (c) client fails to pay attorney fees or costs as required by the legal services agreement. (Cal. Rule of Professional Conduct, Rule 3-700.)

GOOD PRACTICE: Send closing letter with final bill to begin clock

on any legal malpractice action. The time for filing a legal malpractice action is one-year from the date that the plaintiff knew or should have discovered the malpractice. The statute is tolled for continued representation. (See C.C.P. Section 340.6.)

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Reducing Legal Malpractice Exposure with Effective

Engagement Agreements

THE SAN MATEO COUNTY BAR ASSOCIATION, FAMILY LAW SECTION

Jason E. Fellner Caitlin T. DiMaggio Murphy, Pearson, Bradley & Feeney 88 Kearny Street, 10th Floor San Francisco, CA 94108 (415)788-1900