Chapter 2: Ethics and Fee Arrangements ^[1]

I.   Introduction

§2.1   This chapter focuses on the application of Michigan ethics rules to setting and charging attorney fees to clients. Although form fee agreements (or “engagement” agreements as they are often referred to with clients) can provide a good basis from which to craft an agreement that suits a lawyer’s practice and complies with the ethics rules, the lawyer is responsible for modifying the form agreements as necessary to fit each case and the prevailing practices in the community.

Even the most carefully drafted agreement will not avoid all fee disputes. Chapter 4 suggests a variety of options if the client does not pay the bill. In addition, fee disputes may be resolved by alternative dispute resolution.

II.   Engagement Agreements

A. Effect of Ethics on the Contract

§2.2   An engagement agreement or fee agreement between a lawyer and client is a contract. In addition to the special nature of engagement agreements as discussed in chapter 1, all elements of contract law apply in resolving disputes about the arrangement, including offer and acceptance, consideration, meeting of the minds, terms, reliance, substantial performance, estoppel, capacity of the parties, rescission, reformation, breach, and discharge. This is consistent with MCL 600.919, which provides that “[t]he measure of the compensation of members of the bar is left to the express or implied agreement of the parties subject to the regulation of the supreme court,” and with Grievance Adm’r v Cooper, 482 Mich 1079, 757 NW2d 867 (2008) (when a lawyer’s written fee agreement was unambiguous regarding a minimum nonrefundable fee, the agreement did not violate specified ethics rules). Many of the terms of the engagement, therefore, may be reached by negotiation between the lawyer and client. The lawyer may not subsequently unilaterally impose or change the terms of the agreement. Because the agreement, whether written or not, is usually drafted by the lawyer and not the client, its terms may be construed against the lawyer in the event of a civil dispute in which the lawyer bears the burden of proof if a court applies the maxim of contra proferentem. This means a document is construed against the drafter in situations of ambiguity.

A lawyer must be cognizant of the ethics rules. For example, the client has a right to discharge the lawyer. MRPC 1.16(a). The fee charged by a lawyer may not be clearly excessive. MRPC 1.5(a). See §2.6. For any new client, a lawyer must explain the basis and rate of the fee to be charged in a manner the client will understand, preferably in writing. MRPC 1.5(b). Pursuant to MRPC 1.5(c) and MCR 8.121(F), contingent fee arrangements must in writing and a copy given to the client. Under MCR 8.121(E), the lawyer may not offer contingent fees in personal injury, wrongful-death, or no-fault benefit matters without first advising the client that other fee arrangements may be available. Pursuant to MRPC 1.15(b)(3), the lawyer must promptly provide an accounting of all funds that a client or third party is entitled to receive when the client or the third party requests one.

B. When Written Agreements Are Required and Recommended

§2.3   Ethics rules do not require all engagement agreements to be in writing, but a writing is strongly recommended and “preferred” by MRPC 1.5(b). Early ethics opinions apply the maxim of contra proferentem, an inclination in contract interpretation to analyze an ambiguous contract term against the drafter of the contract, to the Michigan Rules of Professional Conduct (MRPC). See, e.g., R-11 (July 26, 1991); RI-162 (Apr 30, 1993). Therefore, the best practice is to use an unambiguous, clear, and concise written fee agreement.

Ethics rules require written agreements or terms in some situations. The following are examples of retainer or fee agreements that must be in writing:

1. Contingent fee agreements. MCR 8.121; MRPC 1.5(c).
2. “Mixed-fee” arrangements based partially on hourly or flat or fixed fees and partially on a percentage basis. See RI-6 (May 19, 1989).
3. Agreements providing for the arbitration of subsequent fee disputes. MRPC 1.19. See §2.8.
4. An arrangement in which a client grants a security interest in property to secure the lawyer’s fee. MRPC 1.8(a); RI-40 (Dec 14, 1989). But see MRPC 1.8(j) concerning the limits of a lawyer’s ability to take an interest in a cause of action or litigation the lawyer is conducting for the client.

Agreements for nonrefundable retainers should also be in writing. There is no rule that requires it, but ethics opinions list written fee agreements as one factor among several that can be used to argue for the reasonableness of a fee under MRPC 1.5(a). See RI-69 (Feb 14, 1991); RI-10 (Apr 6, 1989). For a discussion of Grievance Adm’r v Cooper, 482 Mich 1079, 757 NW2d 867 (2008), see §1.9.

C. Prohibited Terms

§2.4   Some fee agreement terms are prohibited, whether or not they are in writing. Because ethical rules are promulgated by the Michigan Supreme Court and compliance is a condition of the lawyer’s license to practice, a lawyer and client may not, by contract, circumvent or abrogate the lawyer’s ethics responsibilities. The following are some specific examples of this principle:

1. A lawyer may not request at the outset of representation that a client sign a stipulation for withdrawal when fees are not paid. In re Daggs, 384 Mich 729, 187 NW2d 227 (1971); RI-20 (June 15, 1989).
2. A lawyer may not condition a client’s responsibility for the payment of court costs and litigation expenses on the outcome of the case. MRPC 1.8(e).
3. A lawyer may not require a client to consent to a referral fee as a condition of providing a referral. RI-158 (Mar 15, 1993).
4. A lawyer may not include a term prospectively limiting the lawyer’s legal malpractice liability to the client (except if permitted by law and if the client has independent representation in making the agreement). MRPC 1.8(h). R-24 (July 22, 2016) concludes that a fee agreement may not shorten the time available for asserting a claim of legal malpractice unless (a) the provision is permitted by law, (b) the client is actually independently represented in making the fee agreement, (c) the agreement is a separate document from the fee agreement, and (d) the provision is objectively fair and reasonable in the circumstances.
5. A provision for arbitration of fee disputes must be in writing, setting forth the advantages and disadvantages of arbitration to which the client must give informed consent. MRPC 1.19.
6. A lawyer may not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client absent certain exceptions. MRPC 1.8(j); RI-354 (Feb 7, 2012); RI-182 (Nov 19, 1993); RI-40 (Dec 14, 1989).

D. Engagement Agreements That Violate Ethics Rules

§2.5   An engagement or fee agreement that violates ethics rules may subject the lawyer to misconduct charges and may be unenforceable. More and more frequently, clients are defending suits for attorney fees by alleging that the attorney violated ethics rules in the fee agreement or during the course of the representation. These are not styled as malpractice claims for damages, but rather are styled as claims for breach of fiduciary duty. Relief requested includes reduction of owed fees, disgorgement of fees already collected, or forfeiture of the fee.

The legal theory is that the courts of this state will not enforce, either in law or in equity, a contract that violates a statute or that is contrary to public policy. Bloomfield Estates Improvement Ass’n, Inc v City of Birmingham, 479 Mich 206, 737 NW2d 670 (2007); McKay Consulting, Inc v St John Health, No 273132 (Mich Ct App Jan 20, 2009) (unpublished).

In Dupree v Malpractice Research, Inc, 179 Mich App 254, 259, 445 NW2d 498 (1989), defendant Malpractice Research, Inc., agreed to provide expert witness services to plaintiffs in a medical malpractice case in exchange for a 20 percent contingent fee plus a schedule of fees for reports, travel costs, and other items. Plaintiffs and their counsel signed the agreement. After the malpractice case resulted in settlement, plaintiffs filed a declaratory judgment action to rescind the contract with Malpractice Research, Inc. The court held that such contingent fee contracts with witnesses are so “repugnant to established Michigan public policy, as expressed by statutes, court rules and court opinions, that to permit recovery [even] on a quantum meruit basis would defeat or subvert those policies and threaten the integrity of the judicial system.” Id. at 259

In Reynolds v Polen, 222 Mich App 20, 564 NW2d 467 (1997), the Michigan Court of Appeals considered whether an attorney was entitled to quantum meruit on an interrupted contingent fee when the lawyer allegedly wrongfully withdrew from representation of the client. The court held that as long as a discharged attorney does not engage in disciplinable misconduct prejudicial to the client’s case or conduct contrary to public policy that would disqualify any quantum meruit award, a trial court should take into consideration the nature of the services rendered by an attorney before discharge and award attorney fees on a quantum meruit basis.

In Evans & Luptak, PLC v Lizza, 251 Mich App 187, 650 NW2d 364 (2002), plaintiffs brought a contract claim to enforce payment of a referral fee. Defendants argued that public policy prevented them from paying the fee because plaintiffs had a conflict of interest and payment would violate the conflict of interest rule. The court agreed.

However, in the unpublished opinion in Lusader v Law Firm of John F Schaefer, PLLC, No 249683 (Mich Ct App Dec 21, 2004) (unpublished), the court of appeals stated:

Although plaintiff’s complaint alleged that defendant violated MRPC 1.5(a) (a lawyer may not charge or collect a clearly excessive fee), MRPC 1.0(b) states that the MRPC “do not … give rise to a cause of action for … damages caused by failure to comply with an obligation or prohibition imposed by a rule.” Therefore, insofar that plaintiff’s complaint alleged a violation of MRPC, it failed to state a cognizable claim for relief. See [Watts v Polaczyk, 242 Mich App 600, 607 n1, 619 NW2d 714 (2000)].

In In re Mardigian Estate, 312 Mich App 553, 879 NW2d 313 (2015), aff’d by an equally divided court, 502 Mich 154, 917 NW2d 325 (2018), a lawyer, unrelated to the testator, amended a trust and will that left the bulk of the very valuable estate to the drafting lawyer, violating MRPC 1.8(c). The decedent’s family members and girlfriend challenged the documents on the death of the testator. The probate court granted summary disposition in favor of the family and girlfriend. The lawyer appealed. The court of appeals reversed.

On review, the Michigan Supreme Court was equally divided, leaving the ruling of the court of appeals in place. The final results were (1) that no per se rule of undue influence automatically voids a testamentary gift on the breach of applicable professional conduct rule; (2) adoption of the professional conduct rule has no effect on proper resolution of a matter involving alleged undue influence; and (3) the purpose of the will and trust did not run contrary to public policy. The lawyer, however, was suspended for 90 days for violation of MRPC 1.8(c). Grievance Adm’r v Papazian, No 18-28-GA (ADB 2020) (hearing panel report notes that lawyer gave up any claim to inheritance to lessen sanction).

Regarding malpractice claims, note that even an expired or stale malpractice claim may be a setoff defense to a collection suit. MCL 600.5823 states:

To the extent of the amount established as plaintiff’s claim the periods of limitations prescribed in this chapter do not bar a claim made by way of counterclaim unless the counterclaim was barred at the time the plaintiff’s claim accrued.

Therefore, a former client sued for fees may assert a malpractice counterclaim against the attorney even though the malpractice statute of limitations has run if the malpractice action was not barred at the time the collection suit accrued.