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Suing a client for unpaid fees can be met with an allegation of negligence. This article provides some risk management tips to avoid being in this difficult situation.

LPLC regularly sees counterclaims alleging that a practitioner was negligent as a response to a practitioner’s decision to sue a client for unpaid legal fees.

Often in these cases the client is seeking to recover losses that they believe — mistakenly or otherwise — they have suffered because of the practitioner’s actions. Sometimes the reason the client has objected to paying the fees is because the matter did not progress as they expected, they did not achieve the outcome they wanted, or they thought the matter took too long or cost too much.

It is not uncommon in these cases for the practitioner to be stuck in a lengthy and expensive dispute or litigation which cannot be resolved and where the quantum of the counterclaim and defence costs exceed the unpaid fees. This, combined with the diverted time and focus away from the practitioner’s other legal work, can end up being vastly disproportionate to the invoices at stake.

In one example, a practitioner issued proceedings to recover unpaid fees of many thousands of dollars. The client retaliated with a counterclaim against the practitioner in negligence for millions. Attempts to resolve the claim were unsuccessful despite a substantial commercial offer by the practitioner to pay the client significantly more than the value of the initial fee recovery claim and the matter proceeded to a trial.

While the practitioner ultimately succeeded with both their fee recovery claim, and defence to the professional negligence claim, by the time judgment was delivered years later the client was insolvent. Not only had the practitioner expended substantial time and effort dealing with the matter, but the unpaid fees and their substantial defence costs were unable to be recovered.

Practitioners obviously want to get paid for the work they do, but cost recovery can be a problematic choice and lead to an unsatisfactory outcome. To avoid being in this situation, there are some practical risk management measures practitioners can implement.

First, when contemplating legal action for unpaid fees, review the file; carefully consider the client’s mindset and the reason why they might not be paying their bills. Undertake a costs-benefit analysis to consider whether it is worthwhile pursuing the fees in light of the risks, cost and time involved. Sometimes it is difficult to look at the issue through an objective lens and it may be useful to ask a colleague to review the situation with a fresh set of eyes.

Second, be proactive and set yourself up from the outset of a matter to avoid the potential for fee disputes in the first place with effective costs disclosure, billing processes and management of the client’s expectations. Here are some things to consider:

Put yourself in the client’s shoes. As well as being a requirement under the Legal Profession Uniform Law and at general law (with serious consequences for non-compliance), remember that the costs of the matter and timing of payments will be integral to a client’s decision making. Communicating effectively about costs will help a client to make informed choices about their options and if, or how they will proceed.

Properly scope the retainer. Estimating legal costs is rarely a straightforward task. Investing the time to thoroughly scope the retainer clearly and precisely identifying what work the law practice will and will not be doing for the client is crucial to providing realistic and accurate estimates as to the likely costs to be incurred in the matter.

Check that your client understands. After sending a costs agreement and disclosure statement or estimate to the client, check that they understand it, and that they consent to your fees. Arrange a meeting or call with your client to go through your cost estimate, the work you will and will not be doing under the retainer, and the factors which might cause a change to your estimate. Record the client’s instructions in the file.

Monitor how actual costs are tracking against the estimate and keep the client informed. Throughout the engagement, practitioners should provide regular costs updates in writing. Also keep the client informed on how their matter is progressing and any unforeseen issues, change in scope or delay which might impact the costs of the matter so the client can assess their options.

Issue regular interim invoices. Where possible, regular interim billing will help manage expectations, minimise unwelcome surprises or ‘bill shock’ and avoid bills not being paid. Where this is not possible and contingency fees or other arrangements are in place, provide monthly ‘work in progress’ updates to manage expectations and avoid misunderstandings.

Be prepared to have difficult conversations. When a client’s invoice is not paid by the due date, practitioners should not delay in reaching out and talking with their client to understand why it has not been paid and resolve any underlying issue. If the circumstances are appropriate, remind your client that you may have to cease to act for them if they are not paying your accounts, or an arrangement is made. Though you think the conversation is uncomfortable to have now, it will not get any easier, and it may just resolve things for both the client and the practitioner.

See also LPLC's resources on engagement/retainer management and the Victorian Legal Services Board + Commissioner's Information about legal costs disclosure.