For several years, demand for law firm services has remained largely flat. Consequently, firms have sought to capture additional market share and have adapted their economic practices to ensure viability.

In addition to strategic firm management decisions and rate increases, firms are also focusing their efforts on managing and collecting receivables. Historically, firms have avoided suing clients for unpaid legal fees, leaving them uncollected, and for good reason—work was abundant and productivity consistently trended higher. Other reasons governing this decision were unfavorable press, exposed business practices and increased costs.

But stagnation in the legal industry means that firms of all sizes and locations have been more willing to take on these risks to get paid. When working to collect receivables, the challenge is to avoid reaching the point when suing the client is the only remaining option. This involves following some simple but important steps.

Send invoices early and frequently

Billing is simultaneously one of the least enjoyable aspects of a law practice and one of the most important. Good billing practices benefit client relationships because most clients prefer to know early and often how much they owe and for what. Moreover, the California Rules of Professional Conduct require attorneys to keep clients reasonably informed about developments relating to the representation, which arguably encompasses fees rendered for legal services. See Rule 3-500.

The single most preventable basis for a fee dispute is untimely billing where sizable bills are sent late (and even after the matter has been resolved). On the other hand, regular, monthly billing is easier to digest than one big bill at the end. Additionally, bills sent while there is a higher possibility of success are more palatable than those sent after a loss. As a result, the most effective method for collection begins with creating and sending invoices early and regularly.

Pursue nonpayments

Nonpayments rarely resolve themselves with the passage of time. Instead, the outstanding fees inevitably become the focus of every conversation, meeting and written communication. Left unaddressed, nonpayment can evolve into claims.

Effective collection techniques typically involve use of a diary system that provides routine reports on when payments are received and when they are not. Bills older than 60 days require attention and follow-up, while those older than 90 days require action.

Determining why a client has not paid a bill is an important step in the collection process. There are four common reasons a client has not paid a bill. The first is an unintentional oversight—the bill was lost or misfiled, the client reassigned the responsibility for accounts payable to a different person, or there was a computer or system processing error. In these situations, the goal should be for a quick follow-up to remedy any minor issues to allow for payment.

Second, the client may have an administrative issue with the bill. For example, the rate charged or number of hours worked on a project might be higher than the client and the firm agreed. Perhaps the statements for services rendered do not comply with agreed billing procedures. More often than not, the problem is resolvable and may be addressed before creating an issue for future invoices.

Third, a client may have insufficient funds to pay the bill. When faced with this situation, many attorneys will evaluate the likelihood of getting paid, the impact of never getting paid, and the significance of the lawyer-client relationship. This evaluation involves far less risk when conducted before the receivable has grown from a manageable write-off to a potentially debilitating bad debt.

If the law firm decides that it cannot continue without payment, it needs to communicate that decision to the client promptly. If the client offers no acceptable alternatives, then the firm may seek to withdraw from the representation in accordance with the applicable rules and laws.

Finally, some clients are simply dissatisfied with the work performed or the value of the services billed. When that happens, attorneys and law firms have to consider the options for resolving the fee dispute.

Resolve the dispute

When a fee dispute arises, there are three options to consider before resorting to litigation.

An informal meeting between the client and the firm can yield good results. It also can help to involve an attorney other than the one whose services are at issue for this discussion. The challenge is to eliminate personal emotions so that a business solution is possible. In the end, a good business decision will weigh the costs and risks against the likelihood and amount of recovery.

In some situations, informal discussions regarding outstanding fees are just too difficult for the law firm and the client to discuss in a productive way on their own. When those situations occur, mediators can bridge the communication gap and save both parties fees, expenses and time. Absent a client who is set on bringing an action for legal malpractice, the most common law firm response is to propose mediation before filing an action for attorney fees.

Finally, there is arbitration. California has a Mandatory Fee Arbitration Code, under which the Mandatory Fee Arbitration Program (MFA) is administered to provide informal, confidential and relatively low-cost fee dispute arbitrations. MFA arbitration is mandatory for the lawyer if the client requests arbitration.

This service is beneficial for attorneys because it does not involve a counterclaim for legal malpractice, although the arbitrator can reduce an award if he or she believes the malpractice reduced the value of the attorney's services. The decision to pursue fee arbitration, whether binding or nonbinding, is often considered before bringing an action for attorney fees and could be addressed in the fee agreement.

Carefully consider litigation

Deciding whether to sue a client for unpaid fees requires a careful balance of risks and rewards. Although litigation is sometimes inevitable, the decision to sue is one not to be made precipitously.

In California, attorneys sometimes wait until after the statute of limitations for legal malpractice has expired to demand payment of unpaid fees because the time to sue for breach of contract is generally much longer than the time to sue for malpractice. Nonetheless, by following these simple steps in the collection process, firms may be able to avoid having to reach that decision.

As published in The Recorder