When is a Flat Fee Refundable?

An interesting issue has arisen regarding a fixed or flat fee, in which the billing rate is determined and stipulated in the engagement letter before the assignment even begins.

What happens if the client terminates the relationship before legal services are concluded? How does the lawyer apportion work already done versus work yet to be done, especially when the fee agreement is silent on the subject?

Is a flat or fixed fee earned upon the signing of the agreement, or must there be an apportionment if there is a separation between client and attorney before the matter is concluded? And in the case of the latter, on what basis must this be done?

One purpose of a fixed-fee arrangement is to provide knowledge of the cost of the legal services to the client before work begins. Under such circumstances, termination of legal services before conclusion and a corresponding fee dispute is unlikely. But as we’ve learned in other circumstances, unlikely does not mean impossible.

A lawyer must refund any advance payment of a fee that has not yet been earned because the work has not yet been done, irrespective of whether it’s a fixed fee, retainer or advance payment of hourly billing. The lawyer is a fiduciary who must keep accurate records of fees and trust account transfers under every state’s rules of professional conduct to prevent misappropriation or negligence. Often, a client will pay such a fee in advance.

If the flat or fixed fee is billed at the completion of the matter, there seems to be no issue. With a fixed or flat fee, however, does this mean that the lawyer must keep careful track of time in order to be prepared in the unlikely event of a dispute?

If so, is the very reason for having such a fee structure in the first place — to do away with having to keep track of the billable hours — negated? The fixed-fee design, after all, renders pricing modality irrelevant, which is what helps to make it attractive to those not interested in utilizing time-keeping as a management tool.

The concern centers on what is stipulated in the engagement agreement; specifically, if the lawyer requests and the client agrees that the flat fee is not refundable for work completed.

Consider the example of a lawyer who has an estate-planning practice and provides for flat fees that are non-refundable. A client requests an estate plan. The lawyer completes the documents and sends them to the client for signature. The client then informs the lawyer that she has changed her mind and does not want the type of trust that has been created — and worse, she wants the fee refunded.

As a matter of professional courtesy, the lawyer made an adjustment that was accepted by the client.

In a technical sense, a refund likely is not necessary. If a lawyer charges a flat fee and the fee meets the Rule of Professional Conduct 1.5 standard of being “reasonable,” and the client knowingly accepts the fee in a written fee agreement, it is ethically acceptable to retain the fee on the submission to the client of the finished work product.

The practicality of doing so from a client-relations standpoint is, of course, another matter. By contrast, if a lawyer takes a flat fee in advance as a retainer, and work is promised in exchange for that fee, the failure to perform the work requires a refund. But how much was earned?

This issue illustrates the position that even when using fee alternatives to the billable hour, lawyers may be safer keeping some record of time expended. Where your billings may come into question or when, as in this instance, a refund is needed, the tried and true method of demonstrating what you’ve done usually comes back to hourly metrics.

So if a client agrees to a flat fee, does it matter whether you keep track of time? The most important argument in the affirmative is based on the ethical requirement, under the ABA Rules of Professional Conduct and all state bar regulations, that fees charged must be “reasonable.”

If a client wants to dispute whether a value charge for a service was reasonable, a time record can provide useful backup documentation.

Of course, the real issue here is good client relations and effective, frequent communication between attorney and client to make sure such disputes don’t arise and/or are settled quickly.