April 3, 2000
A lawyer may not enter into an agreement with a prospective client that contains a waiver of liability as consideration for a reduced billing rate to be charged by the lawyer for work performed.
An agreement with a prospective client to have the client pay the lawyer's malpractice premium to initiate services may create an impermissible fee arrangement with the client, if it creates an unreasonable or clearly excessive fee.
References: MRPC 1.2(b), 1.5(a), 1.8(h)(1); R-17; ABA Annotations to 1.8(h); Hazard & Hodes, The Law of Lawyering, 1998, Supp § 1.8.
A lawyer practicing in the area of patent law, inquires whether it is ethically permissible to require prospective clients to execute a fee agreement wherein the client waives any right to take legal action against the lawyer for breach of contract, negligence, gross negligence, etc. with regard to the legal services subsequently provided. In exchange for this waiver, the lawyer agrees to charge the prospective client a reduced billing rate.
The lawyer argues that such an arrangement is necessary, because the legal work involves matters that have financial value up to millions of dollars per year. As a sole practitioner, the lawyer asserts that there is no way that affordable liability insurance premium to adequately cover the liability exposure associated with these client matters can be purchased.
The parameters regarding lawyer-client fee agreements and fees generally are set forth in MRPC 1.5(a). While this particular section provides little guidance regarding the issue posed, MRPC 1.8(h)(1) addresses the issue more specifically. It provides:
The answer to the lawyer's question then revolves on two sub-issues: 1) is such an agreement permitted under Michigan law? and 2) Does the lawyer contemplate that the client be independently represented when making the agreement?
Without specific legal authority, permitting such a waiver provision on these facts as presented, it may not be included in the lawyer's fee agreement. This is the case, whether it is done for consideration in the form of lower hourly or project billing rates or not. Admittedly, MRPC 1.8(h)(1) would be easier to apply if the rule provided some further definition concerning the clause "unless permitted by law."
The American Bar Association's consideration and development of its comparable provision to MRPC 1.8(h)(1) provides some guidance as to why this clause was included in the model rules. In the proposed final draft, "unless permitted by law" was not included, precisely for the reason that the lawyer outlines in this request. The Kutak Commission proposed the limited exception, i.e., only that the client must be independently represented prior to execution out of concern that in certain instances the risk of malpractice was "so great" that lawyers would likely "refuse representation without a limitation on liability." Hazard and Hodes, The Law of Lawyering, 1998 Supplement p. 281.
Subsequently, the language "unless permitted by law" was added to create another barrier to use of these exoneration agreements. The practical effect, as expected, was to essentially ban their use altogether, because the instances when such use is even contemplated, let alone legally permitted, are nearly non-existent (e.g., R-17 that concludes that MRPC 1.8)(h)'s limitation on prospective agreements limiting lawyer's malpractice does not prohibit lawyers from practicing in the form of a limited liability company, as long as statutory requirements are met.) See Hazard & Hodes, The Law of Lawyering, 1998 Supplement p. 281.
Unlike the express statutory authority relative to LLC's, supra, there is no provision in Michigan law that either addresses or permits the type of arrangement outlined by this inquiry. As worded, the absence of such legal authority effectively prohibits this proposed arrangement. The client does not change this conclusion, alternatively, declaring in a separate writing that, as consideration for reduced billing rate, it has no intention and will not take legal action against the lawyer for malpractice.
Even if such an agreement were legally permitted, the proposed agreement still violates MRPC 1.8(h)(1). While the lawyer's proposed agreement recommends that the client have the contract reviewed by other counsel prior to execution, the rule provides that this consultation is mandatory not discretionary. Certainly this point could be easily resolved, but on the facts presented, this infirmity also renders the proposed agreement impermissible under MRPC 1.8(h)(1).
The lawyer further inquires if whether the agreement is not permissible, the lawyer may request and the client may agree to purchase liability insurance for the lawyer. As indicated, the lawyer/client fee structure is governed by MRPC 1.5. Any client agreement for payment of fees to the lawyer must be evaluated in the context of the factors set forth in this rule.
The specifics of the proposed malpractice policy are unknown. Nevertheless, a client's agreement to separately pay a malpractice premium to or on behalf of a lawyer to induce the lawyer to perform legal services, although not prohibited per se, runs the risk of being determined "unreasonable" or even "clearly excessive" under MRPC 1.5. Therefore, such an arrangement should be approached with extreme caution. The lawyer must objectively believe that the representation will not be adversely affected by such an arrangement. In the final analysis, such "reasonableness" is a factual determination, frequently dependent upon subjective factors such as the sophistication and experience of the client, and the ability of the client to evaluate the "implications, risks and advantages" of the proposal. See MRPC 1.7(b).
Alternatively, any assertion that such payment is an advance against expenses ordinarily paid by the client, pursuant to MRPC 1.8, is similarly invalid. A lawyer's malpractice premium is an expense NORMALLY absorbed by the lawyer as a cost of doing business and as a matter of course, is not separately billed to the client as an expense, whether in litigation or not, unless the "client" is the employer of the lawyer.