Patrick Fraioli, a partner in the law firm of Moldo Davidson Fraioli Seror & Sestanovich, offers some tips on how consultants might avoid getting into legal hot water with clients.
Avoiding the Client Nightmare…Is It Possible?
by Patrick A. Fraioli, Jr.
Well…not always. But there are certainly things that you can do to minimize the risk that a particular client engagement will turn into a nightmare. The most important of these is that you and your client have as much clarity and agreement as possible on how you will handle the essential areas of your work.
The best way to achieve clarity and agreement is with a written Engagement Letter or Retainer Agreement. This sets out, and should manage and control, the expectations of both parties right from the outset.
Ideally, if a problem arises later, this is the first place the parties should go to resolve it and, with any luck, the matter will be covered there. Of course, each profession has different rules and expectations, so you will have to tailor your agreements to your own circumstances. But here are some common areas that you may want to cover in an agreement.
Define the Scope of Your Engagement
Expectations are everything. When a client hires a professional, it is almost always because the client does not have the kind of expertise that the professional does. He or she probably does not understand the scope and limits of the professional’s business. So, misunderstandings can easily develop about what is included in the “services” you will render.
If something goes wrong later, it will be easy for even the most honest clients to feel they “should have been protected” by the professional, who “should have foreseen that this would happen” (“That’s what I hired you for, isn’t it?”). Therefore, perhaps the most important thing you can do to avoid problems down the road is to clearly define the scope of your engagement at the outset.
For example, “You have engaged me to do this.” To be even clearer, you can specify what the client has not engaged you to do (“We have agreed that I will not undertake the following services…”).
Address Payment Issues Very Clearly
Depending on your profession, you may or may not be able to withhold services or work product if a client does not pay you. So, it is important to understand your own profession’s ethical rules as well as your state’s statutes governing your profession.
However, non-payment is something that cuts across all professions and all localities. It is important that you specify clearly from the outset what you will and will not do in the event of non-payment. Also, if you have obtained a security interest in a client’s property (to secure payment), you may need to be careful about how you try to enforce your lien, again depending on your profession and your state.
Who Owns Your Work Product and “File” Documents?
Certain professions, such the legal profession, give ownership of virtually the entire file to the client, regardless of payment status. Others, such as accounting and psychology, often allow the professional to withhold certain items of work product (such as the report the client contracted for) if the client has not paid his or her bill. It is important to understand your own profession’s restrictions in this regard, so that you can specify this point (and thus manage expectations appropriately) right from the start.
What If You End Up in Litigation with Your Client?
At the outset of your engagement, you will want to consider the possibility of litigation with your client. Of course, you should try to avoid litigation, but it may be inevitable. If so, you will be glad that you considered a few alternatives before you began your work.
First, you may want to have an agreement to arbitrate any disputes. This can simply be a clause in your engagement letter. However, you may not want to arbitrate. Arbitration can be—and is supposed to be—cheaper and faster, if you do not have lots of hours in front of the arbitrator. Unlike a judge, an arbitrator (or worse, a panel of three arbitrators) gets paid for every hour they devote to your case. So, the more hours they have to decide motions or review papers, the more it costs.
Judges do not charge you for their time in this way, but the court process is not, in theory, as streamlined as arbitration. And it provides an appeals process that usually makes it far easier to appeal, and perhaps to win, than arbitration. Your choice on arbitration depends on your circumstances, the depth of your pockets vs. those of your client, and your bargaining power.
You also may want to agree that, in the event of any dispute, attorney’s fees and costs will be paid by the loser to the “prevailing party.” This can be tricky, since you do not know at the outset if you will be found by the judge or arbitrator to be the “prevailing party” or not. What you do know, at the outset, however, is whether you or your client is more likely to sue, for what each of you would be suing (e.g., your suit will most likely be for fees), and who has the upper hand economically if a suit gets expensive.
Another option to consider for your agreement is mediation, which is much more common than it used to be. Unlike arbitration, mediation is completely voluntary and the mediator is not empowered to “decide”—only to help both sides try to reach a deal.
Increasingly, parties are inserting clauses into their agreements that require the parties to follow a “ladder” of dispute resolution procedures before filing suit. For example, parties often stipulate that, if a dispute arises and either party wishes to seek attorney’s fees and costs at the end of a case, that party must first seek to mediate the dispute with the other party before requesting arbitration or filing a lawsuit. This gives the parties an economic incentive to resolve the issue (or at least to make it look like they tried).
Learn from History—Don’t Repeat It
“Fool me once, shame on you; fool me twice, shame on me.” Everyone makes mistakes, but you certainly should not make the same one twice. So, at a minimum, when you discuss a client engagement letter with your lawyer, you should explain 1) how your business works, 2) your concerns and priorities with this particular client and situation, and 3) the kinds of problems you have seen arise in the past both in your profession and with clients in the position or industry in which your client operates.
This is perhaps the most valuable part of this process, since you know your business (and, presumably, the client’s business or problem) as well as anyone.
When All Else Fails
Sometimes, you simply make a mistake. If you do, be honest with your client and endeavor to fix it. Don’t just automatically “clam up and lawyer up.” Instead, “Do the right thing” and let the client know that it is important to you to solve the problem. In my experience, this type of “stand up” behavior would avoid many lawsuits—if professionals would follow the advice.
Note: Nothing herein may be construed as legal advice or counsel of any kind.
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Patrick A. Fraioli, Jr. is a partner in the Century City law firm of Moldo Davidson Fraioli Seror & Sestanovich LLP (www.mdfslaw.com) and Chair of the firm’s Litigation Department. He litigates cases and advises businesses and wealthy families in the areas of trade secrets, intellectual property, employment, contracts, and fraud prevention and investigation, emphasizing “preventive lawyering” strategies and techniques.
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