Scrutiny of Lawyer Contracts

Scrutiny of Lawyer Contracts

The earlier sections treated an engagement as a bargain, and ordinary contract law largely leaves the parties free to set its terms. A lawyer's contract with a client draws closer scrutiny because of the relationship behind it, and undue influence is the doctrine that explains why. Courts of equity developed it for cases in which duress was absent, since no one had made a threat, yet one party held strong influence over the other and abused that dominance to persuade the weaker party into a disadvantageous contract.¹ Duress gives relief to a party whose apparent assent was induced by an unlawful threat; undue influence addresses abuse of trust. Like duress, it makes the contract voidable at the victim's election.²

A victim who seeks relief must establish three elements:

1. a relationship of trust and dependency between the victim and the other party;
2. dominance over the victim arising from that relationship, with a resulting duty not to act contrary to the victim's interests; and
3. abuse of that position by unfairly persuading the victim to enter a contract adverse to the victim's interests.³

Most jurisdictions keep the doctrine inside those confines. It does not redress unfair persuasion in arm's-length transactions, and Restatement, Second, §177 reflects that narrow scope by limiting the doctrine to relationships of dependence and trust; the expanded concept of duress and the wide recognition of unconscionability supply the general regulation of bargaining.⁴ The narrowness is what makes the lawyer's position instructive, because the lawyer-client relationship falls inside it. That relationship imposes a fiduciary duty on the lawyer, and the duty extends beyond the matters on which the lawyer represents the client into every other transaction between them.⁵

The example shows that the relationship, and not the subject of the contract, changes the lawyer's position. A lawyer who hired a stranger to do the same work would have made an ordinary arm's-length bargain, which undue influence does not police.⁷

The same premise operates inside the engagement itself. A client in the middle of a representation has likely come to depend on the lawyer's services and may suffer adverse consequences if forced to seek new counsel to avoid a fee increase. A revised fee arrangement is therefore not void and may be sustained if fairly made with the client's full knowledge and understanding, but the law presumes it unfair, and a lawyer generally may not withdraw or threaten to withdraw to coerce a client into accepting an increase above a previously agreed rate.⁸

The four subsections that follow take up situations that recur in practice. In each, the Model Rules of Professional Conduct convert the fiduciary concern into a specific prohibition or safeguard: business transactions between lawyer and client, gifts and media rights, fee liens and contingent fees, and limits on malpractice liability.

Business Deals With Clients

A lawyer's fiduciary duty covers every transaction with a client, so a lawyer's own business dealings with a client draw rules of their own.⁹ Model Rule 1.8(a) is the conduct rule that governs them. It forbids a lawyer to enter into a business transaction with a client, or to knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to the client, unless four conditions are met. Buying the client's property, borrowing the client's money, taking a security interest in the client's assets, and going into business together are the usual examples. In each, the lawyer's financial interest runs against the client's, and a client who has relied on the lawyer's judgment finds the lawyer across the table.

Wrongdoing in such a deal is hard to prove afterward, because unfair persuasion normally takes place in private and must be shown by circumstantial evidence.¹⁰ The rule therefore works in advance: it permits the deal only when four conditions are met, and each condition closes off one way the client could otherwise be hurt.

Fairness and written disclosure address the two ways a deal with a lawyer can go wrong on its face. The fairness condition protects the substance of the bargain, since terms can be disclosed in full and still leave the client with a bad deal. Written disclosure closes the information gap: a writing fixes what was said, lets the client reread it at leisure, and obliges the lawyer to state the terms plainly. It must also be a writing this particular client can reasonably understand, so a dense instrument that only another lawyer could parse falls short even when every term appears in it.

The last two conditions do subtler work. A lawyer cannot serve as the client's adviser on a deal in which the lawyer is the counterparty, so the rule requires that the client be told in writing that independent counsel is desirable and be given a reasonable chance to consult one, which supplies the adviser the lawyer cannot be. The signed informed consent, meaning agreement given after the client has been told enough about the deal and its risks to decide with understanding, then confirms that the earlier conditions did their work. It must cover the essential terms and the lawyer's role, including whether the lawyer is also acting as the client's lawyer in the transaction, because a client who still believes the lawyer is protecting the client's interests in the deal has misunderstood its most important feature. Writings appear at three points: the lawyer's disclosure of the terms, the lawyer's advice about independent counsel, and the client's signed consent. An oral explanation, however thorough, satisfies none of the three.

The client's choice to skip a second opinion does not defeat compliance, because the rule requires that the advice be given in writing and the opportunity be real; it does not require the client to use it. The instinct that costs points on a stem about such a purchase is to treat a fair price as the end of the inquiry.

Fairness is one condition of four, so strength on one cannot make up for a gap in another. A lawyer who omits the written advice about independent counsel has violated the rule even when the client understood the deal and signed willingly.

Separately from the conduct rule, the common law polices the same deals through undue influence, and its main tool is the burden of proof. Because of the fiduciary duty the lawyer owes the client, the lawyer bears a heavy burden to show that the transaction is free of undue influence.¹¹ If the deal is called into question, the lawyer must show:

1. that the transaction was fairly and equitably conducted;
2. that the lawyer fully informed the client of the nature and consequences of the transaction;
3. that the lawyer fully revealed the lawyer's own interest in the matter; and
4. that the lawyer saw to it that the client obtained independent advice or gave the client the kind of advice a disinterested lawyer would have given.¹²

These showings echo the conduct rule's conditions, so a lawyer who has assembled the writings the rule demands already holds much of the proof the burden calls for. The fourth showing is not identical to the rule's third condition. The rule requires that the client be offered a chance to consult independent counsel, while the common-law showing asks whether the client in fact obtained independent advice or received the advice a disinterested lawyer would have given.

The burden has decided real disputes. In Miller v. Sears, the client could rescind a contract for the sale of property because the attorney failed to establish that he had fully disclosed all material terms, and the court placed on the attorney the burden of proving compliance with his fiduciary duties by clear and convincing evidence.¹³ The same allocation reaches fee terms. In Matter of Warhol, a court assessing the reasonableness of attorneys' fees in an estate matter stated that the attorneys bore the burden of establishing that the terms were fully and fairly presented to and understood by the client and were fair and reasonable under the circumstances.¹⁴ The court added that a reasonable fee depends on the nature of the services rendered, the size of the estate, the responsibility undertaken, the difficulty of the legal issues, the ability of the attorney, and the time spent.¹⁵

Some courts dispense with undue influence altogether. If the lawyer got the better of the bargain, the agreement can be invalidated unless the lawyer shows that the client was fully aware of the consequences and that the lawyer did not exploit the client's confidence.¹⁶

Neither layer forbids a lawyer to contract with a client on matters outside legal services, but courts call the practice not advisable because of the heavy burden just described.¹⁷ Lawyers share that disability with other fiduciaries, and a client who has made such a contract also stands differently than under a retainer agreement, since the client cannot terminate the outside contract without cause.¹⁸ A lawyer who wants a business relationship with a client should therefore build the four conditions into the deal before it closes, while the writings can still be created and before any dispute begins.

Gifts and Media Rights

A lawyer's performance often benefits people to whom the lawyer's promise was never addressed. The client who asks for a will is the promisee, and a person named in the will who benefits from the lawyer's performance is a beneficiary in the sense taught earlier.²⁰ Most beneficiaries raise no professional concern, but Model Rule 1.8(c) singles out one pairing. A lawyer may not solicit a substantial gift from a client, including a testamentary gift, which is a gift made by will. A lawyer also may not prepare an instrument for a client that gives the lawyer, or a person related to the lawyer, a substantial gift, unless the lawyer or other recipient is related to the client. Model Rule 1.8(d) adds a separate limit on literary and media rights, taken up after the gift rule.

The gift rule has two triggering acts and an exception, and each answers a different danger. A gift is the opposite of a bargain, since a bargain is an agreement to exchange promises or performances²¹ and a gift asks nothing in return. With no exchange to measure, a tribunal cannot later weigh whether the price was fair, so the protection must operate when the gift is sought or papered. The soliciting prong addresses the request itself, because a client who has long relied on a lawyer's judgment finds it hard to refuse that lawyer. The preparing prong addresses control of the document: whoever drafts an instrument decides what it says, and a client who trusts the drafter tends to sign what is placed in front of the client. The prohibition sends an instrument that benefits the lawyer's side to another lawyer, who has no stake in its terms.

The exception rests on a different reason. A gift within a family is ordinarily explained by natural affection, so the circumstances that make influence suspect elsewhere are weaker there. The rule therefore looks to the relationship between the recipient and the client. Related persons include a spouse, child, grandchild, parent, grandparent, or other relative, and also an individual with whom the lawyer or the client maintains a close, familial relationship. The rule reaches only substantial gifts, so a small holiday present or token of appreciation falls outside it.

The two scenes differ in one fact: whether the recipient is tied to the client. In the first scene the tie runs only to the lawyer, and that tie is what triggers the rule. In the second the recipient stands in the client's own family. A different gift shows the rule's edge. A will that leaves the client's house to the client's longtime friend, who has no connection to the lawyer, falls outside the rule altogether, because neither the lawyer nor a relative of the lawyer receives anything.

Model Rule 1.8(d) addresses a different way a lawyer's own interests can attach to a client's matter. Before the representation concludes, a lawyer may not make or negotiate an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation. The reason lies in what a story is worth. A book or film about a pending matter gains value from how the matter unfolds, so a lawyer who holds such a contract has a personal reason to prefer the dramatic course, such as a trial over a quiet settlement. A client relies on the lawyer's disinterested judgment in exactly those decisions, and a rights deal made mid-representation puts the lawyer's financial interest on the opposite side of them. The raw material for the account is also the client's own information, which the lawyer learned only because of the representation.

The prohibition attaches to making or negotiating an agreement, and that wording reaches back further than contract formation. An agreement exists only when two persons manifest mutual assent, so talks that have not yet produced assent have formed no agreement.²³ The rule forbids the talks anyway, because the conflict arises as soon as the lawyer starts bargaining for a stake in the story, whether or not anyone has signed. A lawyer who opens discussions with a publisher about a book on a pending case violates the rule, while one who waits until the matter is over does not. The trigger is the end of the representation, which may come later than the end of the trial if the lawyer is still handling an appeal or other post-judgment work.

Fee Liens and Contingent Fees

Model Rule 1.8(i) forbids a lawyer to acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client. It then permits two ways of being paid out of the matter: a lien authorized by law to secure the lawyer's fee or expenses, and a contract with the client for a reasonable contingent fee in a civil case. A proprietary interest is an ownership-type stake held in the lawyer's own right, such as title to part of disputed land or a share of the claim itself. The rule belongs beside the gift and media-rights prohibitions because it reaches the same hazard from a third direction: a lawyer's personal financial interest attached to the client's matter. A fee arrangement is a bargain, an exchange of the lawyer's services for a price,²⁵ and the rule limits what the price may consist of: money, security for money, or a percentage of a money recovery, and never a piece of the dispute itself.

A lawyer who owns part of what the case is about has a personal interest that can diverge from the client's. In a suit over title to a farm, the client's objective is to come out as well off as possible, and the decision whether to accept a settlement belongs to the client. A lawyer who held half the farm would be advising on that decision while owning a share of one of the possible outcomes. A settlement that pays the client cash and leaves the land with the other side would wipe out the lawyer's stake, and a decision to fight on to trial would put the lawyer's property at risk along with the client's. Whatever the lawyer recommends, the client cannot tell whether the advice serves the client or the lawyer, which is the same difficulty that justified the rule on literary and media rights.

The two exceptions are the ordinary ways to be paid for legal work, and each ties the lawyer's compensation to the matter without giving the lawyer ownership of the thing fought over. A lien is a claim on the client's property or recovery that secures payment of a debt, here the lawyer's fee or expenses, and it is enforceable only to the extent that debt goes unpaid. It does not make the lawyer a co-owner, because it ends when the fee is paid and cannot reach beyond the amount owed. The rule limits the exception to a lien authorized by law, which borrows local law on which liens are available and does not let lawyer and client invent a security interest the law does not authorize.

An exam stem that pays the lawyer out of the very thing in dispute invites two opposite mistakes: treating every such payment as forbidden, and treating any property interest the lawyer takes as a lien. The inquiry turns on what the lawyer took, whether ownership of the subject matter, security for a fee, or a percentage of a money recovery.

The second exception covers the contingent fee, which the rule allows in a civil case when it is reasonable. Under that arrangement the lawyer agrees to render services for a fee that is a percentage of the amount the client recovers, and if there is no recovery the lawyer receives no fee.²⁶ The percentage often varies with whether the case settles or is tried and with the size of the recovery, and a common figure is 30 to 40 percent.²⁷ The lawyer is paid out of the money result and owns no share of the claim or of any property, which is the difference between this fee and the deed in the farm example. The arrangement also has a justification of its own: it has allowed injured people of limited means to obtain good legal services, and an individual fee looks less exorbitant when one considers the cases the lawyer loses and is never paid for.²⁸

The word reasonable does real work in the exception, because a percentage can pay a lawyer far more than the effort deserved in a case that is won easily. When the parties never fixed a percentage, or later dispute the figure, the lawyer may sue the former client in quantum meruit, a claim for the reasonable value of the services, recovered from the settlement or judgment.²⁹ The arrangement also carries a conflict that the exception tolerates and the lawyer must manage. Because the lawyer's pay depends on the result, lawyer and client may see a settlement offer differently, and the lawyer remains obliged to put the client's interests first.³⁰

The same one-third promised to a lawyer defending a client in a criminal case falls outside the exception, because the exception speaks only of civil cases, and the fee rules separately bar a contingent fee for defending a criminal case. Those rules also require a contingent fee agreement to be in a writing signed by the client and to state the method of calculating the fee, matters for the fee rules and not for this section.

A neighboring rule, Model Rule 1.8(e), limits financial assistance to a client in connection with pending or contemplated litigation. A lawyer may advance court costs and expenses of litigation, with repayment contingent on the outcome of the matter, and may pay those costs and expenses on behalf of an indigent client. Advances of that kind are the working complement to a contingent fee, because a client who could not afford a filing fee and an expert's bill could not bring the claim at all, and repayment out of the recovery leaves the lawyer sharing the risk of loss. Beyond those permitted advances, financial help to a litigating client, such as a loan for rent or living expenses, is generally prohibited. A lawyer who lends money to a client in the middle of a case acquires a financial stake in how it ends and gives the client a debt to the lawyer, which makes it harder for the client to take the case to another lawyer.

Limiting Malpractice Liability

Model Rule 1.8(h) governs agreements that reduce or resolve a lawyer's liability for professional mistakes, and the safeguard it requires differs with the kind of agreement. Under paragraph (h)(1), a lawyer may not make an agreement that prospectively limits the lawyer's liability to a client for malpractice unless the client is independently represented in making the agreement, and the limit must also be one the law recognizes as lawful.³² Malpractice is a lawyer's failure to meet the standard of professional care owed to a client. Prospectively means the agreement is made in advance of any particular mistake. Independently represented means that a different lawyer, one with no stake in the clause, is advising the client about it. Two further points complete the rule: an arbitration clause that changes only the forum falls outside the prohibition, and paragraph (h)(2) governs settlements of claims that have arisen or may arise. The safeguard differs in each case because the danger differs.

The prohibition matters because of what the earlier sections established about the terms of an engagement. A term of an agreement is the portion of the parties' manifested assent that relates to a particular matter,³³ while a term of a contract is the portion of the legal relations resulting from the promise that relates to a particular matter, whether or not the parties manifested an intention to create those relations.³⁴ A clause that caps or excludes liability is a stated term of the first kind, since it records the parties' assent on one matter, the consequence of breach. What it limits reaches both kinds of term: the promises the engagement letter states and the duties the law supplies to the relationship, such as the duty of reasonable care. A client who sues for breach of an express promise, for breach of the law-supplied duty, or for negligence would find each recovery shrunk by the same clause. The rule leaves the engagement alone and polices the one clause that diminishes the remedy for every other term.

The reason for requiring more than ordinary consent runs through timing and information. A limit written into the engagement letter takes effect before either side knows whether any mistake will occur or what it will cost, so the client is asked to price a risk that has not yet appeared, on the advice of the very lawyer whom the clause protects. Comment [6] to Rule 1.7 observes that if the probity of a lawyer's own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice, and a lawyer whose own liability is at stake in a clause stands in that position.³⁵ Independent representation answers the problem, because a second lawyer can explain what is being surrendered, ask what the client receives in return, and advise the client to refuse.

The usual error is to treat an informed, signed, written consent as enough, because other rules on lawyer-client dealings are satisfied that way. Paragraph (h)(1) asks whether the client was actually represented by someone else in making the agreement. A client who had taken the same letter to a second lawyer, who reviewed it on the client's behalf and advised on it before signing, would satisfy that condition. Even then, the rule's reach depends on what the law recognizes: a limit that local law does not permit stays unenforceable no matter who advised the client.³⁶

Arbitration clauses occupy a middle position. In 2002 the ABA Committee on Ethics and Professional Responsibility addressed clauses in retainer agreements that require fee disputes and malpractice claims to be submitted to arbitration (Formal Opinion 02-425). The committee concluded that such clauses do not violate ethical standards, but it conditioned their acceptability on two factors. First, the client's acceptance must rest on informed consent. Second, the effect of the clause cannot be to limit or exclude the lawyer's liability exposure to the client.³⁷ The committee reasoned that the mere fact that a client must arbitrate rather than litigate does not violate Rule 1.8(h), even though arbitral procedures can differ markedly from those of a court.³⁸

The two conditions follow from what such a clause changes. A forum clause decides who hears a claim and under what procedures, and it leaves untouched what the lawyer owes if the claim succeeds. The danger that justified independent representation, a reduction in exposure agreed before anyone knows the stakes, is therefore absent. What remains is the risk that the client does not understand the procedures being given up, and the lawyer's duty to explain matters under Rule 1.4(b) answers that risk: the lawyer must explain effectively what arbitration is and its benefits and drawbacks, in enough detail for the client to give informed consent.³⁹ A client who signs the lawyer's form also stands where the weaker party stands in any contract of adhesion. When the bargain involves disparate parties, adhesion to the point of unconscionability can in theory void an arbitration agreement, a doctrine meant to protect the weaker party from the stronger party's rank overreaching.⁴⁰

A letter that sent disputes to the same arbitrator but forbade any award above the fees paid would be doing the cap's work through the arbitration clause. It would limit liability, the opinion's second condition would fail, and the analysis of the cap above would apply with full force.⁴¹

Paragraph (h)(2) addresses a different moment, the point after a mistake has happened or may have happened. A lawyer may settle a claim or potential claim for malpractice liability with a client or former client who has no lawyer only if that person is advised in writing of the desirability of seeking independent legal counsel and is given a reasonable opportunity to do so. A settlement is itself a bargain, an exchange in which the client releases a claim for money or other value, so the ordinary rules of agreement and bargain govern its formation.⁴² The professional rule adds a safeguard on top of those rules, and the safeguard is lighter than the one for a prospective limit because the facts are different. The dispute is identified or at least foreseeable, so the client can see what is being surrendered and what is offered in return, and no one is being asked to price an unknown risk. What remains is the lawyer's informational advantage and the client's trust, which written advice and a chance to consult counsel address. The rule requires that advice be offered and does not require that it be taken. The words potential claim matter as well, because they reach settlements made before the client has asserted anything, when the client may not realize that an error occurred.

The two standards are easy to confuse. A prospective limit calls for a client who is actually represented by another lawyer in making the agreement, while a settlement calls only for written advice and a chance to consult one. An arbitration clause that changes only the forum calls for neither, because what the client needs there is an explanation sufficient for informed consent.