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Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law

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Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law Fordham Law Review Volume 57 Issue 2 Article 1 1988 Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law Lester Brickman Lawrence A. Cunningham Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Lester Brickman and Lawrence A. Cunningham, Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law, 57 Fordham L. Rev. 149 (1988). Available at: https://ir.lawnet.fordham.edu/flr/vol57/iss2/1 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law Cover Page Footnote Professor of Law, Benjamin N. Cardozo School of Law. B.S. 1961, Carnegie-Mellon University; J.D. 1964, University of Florida; LL.M. 1965, Yale University. Associate, Cravath, Swaine & Moore, New York, New York. B.A. 1985, University of Delaware; J.D. magna cum laude 1988, Benjamin N. Cardozo School of Law. This article is available in Fordham Law Review: https://ir.lawnet.fordham.edu/flr/vol57/iss2/1 NONREFUNDABLE RETAINERS: IMPERMISSIBLE UNDER FIDUCIARY, STATUTORY AND CONTRACT LAW LESTER BRICKMAN* LAWRENCE A. CUNNINGHAM** TABLE OF CONTENTS Introduction .............................................. 150 I. The Lawyer as Fiduciary .................................. 153 A. Client's Right to Discharge............................ 155 B. Codification of Trust ................................... 156 C. Exceptions to the Discharge Right ..................... 157 D. Historic Development ................................. 160 1. Up to Martin v. Camp: Freedom to Discharge .... 161 2. Up from Martin v. Camp: The Parties' Intentions. 162 3. Proper Role of the Parties' Intentions ............. 163 4. Clever Lawyers and Mum Courts ................. 166 II. Lawyers' Compensation as Unrestrained by Law ........... 170 A. Fee Bill Statutes ...................................... 171 B. Reform .............................................. 172 C. Subsequent Statutory Revisions ........................ 173 III. Attorney-Client Agreements and Contract Law ............ 176 A. Liquidated Damages .................................. 177 B. Judicial Forfeiture .................................... 182 C. Mitigation of Damages ................................ 188 Conclusion ............................................... 189 * Professor of Law, Benjamin N. Cardozo School of Law. B.S. 1961, Carnegie- Mellon University; J.D. 1964, University of Florida; LL.M. 1965, Yale University. ** Associate, Cravath, Swaine & Moore, New York, New York. B.A. 1985, Univer- sity of Delaware; J.D. magna cum laude 1988, Benjamin N. Cardozo School of Law. FORDHAM LAW REVIEW [Vol. 57 INTRODUCTION T his Article examines the legal and ethical validity of nonrefundable retainers,' which are being used increasingly by lawyers.' Judicial consideration of nonrefundable retainers has been scant,3 case analysis has been superficial and outcomes inconclusive.4 Bar associations have opined both favorably5 and unfavorably.6 Where nonrefundable retain- 1. A nonrefundable retainer is an agreement between lawyer and client providing for the payment of part or all of the fee in advance of the lawyer's performance. The pay- ment is designated in the retainer agreement as nonrefundable. The dispute regarding the validity of these agreements usually arises when the client terminates the lawyer's em- ployment without just cause before completion of the task and demands return of the unearned part of the advance fee. 2. Nonrefundable retainer agreements are reproduced in lawyers' handbooks and study aids. See, e.g., R. Felder, Lawyers Practical Handbook to the New Divorce Law 27-29 (1980); J. McRae, Legal Fees and Representation Agreements 88 (1983) (Mono- graph Series, ABA Section of Economics of Law Practice); New York Matrimonial Prac- tice 197-98 (PLI 1979); L'Estrange & Tucker, Fee Agreements, 27 Prac. Law. 11, 23-25 (April 1981). They are commonly used throughout the New York metropolitan area. See Jacobson v. Sassower, 113 Misc. 2d 279, 284, 452 N.Y.S.2d 981, 985 (N.Y.C. Civ. Ct. 1982), aff'd per curiam, 122 Misc. 2d 863, 474 N.Y.S.2d 167 (App. Term. 1983), aff'd mem., 107 A.D.2d 603, 483 N.Y.S.2d 711, aff'd mem., 66 N.Y.2d 991, 489 N.E.2d 1283, 499 N.Y.S.2d 381 (1985). The authors have been informed by lawyers in other major metropolitan areas that nonrefundable retainer agreements are in common use in domes- tic relations and criminal law practices and are also in use in corporate practices. The existence of bar association opinions and judicial determinations of their validity also indicates their widespread use. See infra notes 5-6 and accompanying text. 3. This is probably explained by the economics of litigation. The authors have been informed by practicing attorneys that nonrefundable retainers in the amount of $1000 to $3000 are most common. Since the attorney has usually performed some services before being discharged by the client, the amount being sought by the client will be less than the amount of the advance fee payment. Litigation costs to recover these sums often equal or exceed the amount in contention. Demands for return of advance nonrefundable fee pay- ments most often are referred to arbitration which yields no paper record that can be examined. See generally Millikan, Arbitration of Attorney-Client Disputes, 53 L.A.B.J. 270 (1977) (Los Angeles County Bar Association active in arbitration of fee disputes); The Resolution of Fee Disputes: A Report and Model Bylaws, Special Comm. on Reso- lution of Fee Disputes of the A.B.A. Sec. of Bar Activities 4 (1974) (recommending that arbitration committee hear client's fee grievance for merit even when lawyer refuses bind- ing arbitration); Comment, Arbitration of Attorney Fee Disputes: New Directionfor Pro- fessional Responsibility, 5 UCLA-Alaska L. Rev. 309 (1976) (arbitration most effective and efficient method for settling attorney fee disputes). 4. See, e.g., Federal Say. & Loan Ins. Corp. v. Angell, Holmes & Lea, 838 F.2d 395 (9th Cir. 1988) (invalid); Jersey Land & Dev. Corp. v. United States, 342 F. Supp. 48 (D.N.J. 1972) (ambiguous); Baranowski v. State Bar, 24 Cal. 3d 153, 593 P.2d 613, 154 Cal. Rptr. 752 (1979) (en bane) (ambiguous); Smith v. Binder, 20 Mass. App. Ct. 21, 477 N.E.2d 606 (1985) (ambiguous); Jacobson v. Sassower, 113 Misc. 2d 279, 452 N.Y.S.2d 981 (N.Y.C. Civ. Ct. 1982) (invalid), aff'd per curiam, 122 Misc. 2d 863, 474 N.Y.S.2d 167 (App. Term. 1983), aff'd mem., 107 A.D.2d 603, 483 N.Y.S.2d 711, aff'd mem., 66 N.Y.2d 991, 489 N.E.2d 1283, 499 N.Y.S.2d 381 (1985); Jacobs v. Holston, 70 Ohio App. 2d 55, 434 N.E.2d 738 (1980) (ambiguous). 5. See Disciplinary Board of the Hawaii Supreme Court, Formal Op. 29 (1985); Illinois State Bar Ass'n Comm. on Professional Ethics, Op. 722 (1981), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:3007; Maryland State Bar Ass'n Comm. on Ethics, Op. 80-21 (n.d.), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:4301; Oregon Bar Op. 509 (1986), digested in Law. Man. on Prof. Conduct (ABA/BNA) 1988] NONREFUNDABLE RETAINERS ers have been upheld, it has been without consideration of contract or fiduciary law principles.7 As a result, nonrefundable retainers have been categorized as sui generis and validated by judicial fiat, thereby escaping scrutiny and definition. This Article argues that nonrefundable retainers ought not to remain undefined. Rather, they are contractual forfeiture provisions whose ethi- cal and legal validity must be gauged according to well-established legal, fiduciary, and ethical concepts and doctrines.8 From these perspectives, most nonrefundable retainers are unethical and illegal. Courts and bar association ethics committees, however, refuse to apply these doctrines to nonrefundable retainers and treat attorney-client employment contracts differently from all other contracts of employment. Consequently, the position of lawyers has been aggrandized in relation to clients.9 901:7102; South Carolina Bar Ethics Advisory Comm., Op. 81-15 (1982), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:7903; Texas Bar Op. 391 (1978), digested in 0. Maru, 1980 Supplement to the Digest of Bar Ass'n Ethics Opinions 12,749 (1982). 6. See ABA Comm. on Professional Ethics, Informal Op. 998 (1967), reprintedin II ABA Informal Ethics Opinions 161, 165 (1975); Cleveland Bar Ass'n Op. 84-1 (1984), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:6952; Kansas Bar Ass'n Prof. Ethics Comm. Op. 84-12 (1984); Michigan Bar Op. CI-962 (1983), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:4873; Nassau County Bar Op. 85-5 (1985), digested in Law. Man. on Prof. Conduct (ABA/BNA) 801:6208. 7. See sources cited supra note 5. 8. These concepts and doctrines include general and special retainers, the right of a client to terminate a retainer agreement without penalty, the excessiveness or reasonable- ness of a lawyer's fee, judicial forfeiture clauses, liquidated damages and penalties, and mitigation of damages. 9. This is not the only example of lawyers creating special rules to govern their own conduct different from those they have developed to regulate the conduct of others. Con- sider the rules promulgated by lawyers for the medical and legal system. The malpractice doctrine rule for doctors evaluates conduct in light of the customary practice of physi- cians in good standing and requires that "there must be a want of ordinary and reason- able care, leading to a bad result." Pike v. Honsinger, 155 N.Y. 201, 210, 49 N.E. 760, 762 (1898); see Mack v. Lydia E. Hall Hosp., 121 A.D.2d 431, 503 N.Y.S.2d 131 (1986); P. Danzon, Medical Malpractice 139-40 (1985).
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