Excerpts from 

STATEMENTS OF PRINCIPLES 

The Task Force on Lawyer Business Ethics

Copyright 1996 by the American Bar Association; The Task Force on Lawyer Business Ethics

[If you wish a copy of the complete Statements of Principals, 
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INTRODUCTION 

  In the spring of 1993, the Chair-Elect of the American Bar Association (ABA) Section of Business Law (Section) appointed a Task Force to consider issues of ethical business conduct by business lawyers.   He recognized that standard legal ethics codes, including the ABA's Model Code of Professional Responsibility (1969) (Model Code) and Model Rules of Professional Conduct (1983) (Model Rules), deal only tangentially with matters involving the business dealings between lawyers and clients and between lawyers and those they seek to have as clients. 

. . .  

  With a principal focus on billing practices of lawyers--including billing for legal services and disbursements and other charges--the Task Force recognized that one of its important functions was to attempt to reconcile the justified concerns of both clients (receiving cost-effective legal services), and lawyers (providing legal services that are economically advantageous). . . . 

  In its deliberations, the Task Force addressed a number of issues relating to ethical considerations implicated by the necessary and everyday business dealings between lawyer and client.   The three areas chosen for this first report are: (i) Billing for Legal Services; (ii) Billing for Disbursements and Other Charges; and (iii) Marketing Legal Services.   . . . 

  This Introduction presents a brief discussion of some of the issues addressed. . .   While the Principles contained in the Statements  . . . are predicated upon an understanding between lawyer and client.   To be valid, such an understanding requires, at the least, a fully informed client, whose information usually comes from the lawyer seeking agreement.  The form, nature, and extent of the disclosure will depend on the sophistication and knowledge of the client as to legal matters and business dealings with lawyers.   Thus, what might constitute acceptable disclosure to an in-house counsel accustomed to negotiating with lawyers over engagement letters and fee arrangements might be unacceptable when dealing with a business executive very knowledgeable about technical aspects of the business, but relatively inexperienced in dealing with lawyers over fee arrangements, the custom in the community with respect thereto, or the availability of alternative fee arrangements. 

. . .  

  In December 1993, the ABA's Standing Committee on Ethics and Professional Responsibility (Standing Committee) issued Formal Opinion 93-379, "Billing for Professional Fees, Disbursements and Other Expenses" (Opinion), interpreting in great detail the meaning and limits imposed by Rule 1.5 of the Model Rules on billing practices relating to both fees for legal services and disbursements. . . .  Because the Standing Committee is the one designated by the ABA to speak on issues of interpretation of the Model Rules, the Opinion is the definitive interpretation of Model Rule 1.5 in the areas in which it speaks.   The Task Force believes, however, that there are many other criteria that go into the determination of a reasonable fee--even one based on an hourly rate. .--and that its work product, the Statement of Principles in Billing for Legal Services, should serve a constructive purpose in applying the Opinion.

. . .

 BILLING FOR LEGAL SERVICES

  The black-letter law of the legal ethics codes requiring that a lawyer's fee be reasonable, and setting forth some generalized criteria to be considered in making that determination, is of little practical help to either the lawyer or client in their negotiations of an appropriate fee for a specific task.

. . .

  The Task Force believes that it is in the best interest of both lawyer and client for a written fee agreement to be in effect for all representations, whether or not required by local ethical or court rules or statute.  . . .    Because a writing is rarely required by applicable ethical rules, there is little authority on the issues discussed here.   The best way to avoid misunderstandings between lawyer and client, and to further their mutual interests, however, is to have full and frank discussions and a writing memorializing the understanding.     the Task Force cannot overemphasize its recommendation that fee and other engagement terms be reduced to a writing signed by lawyer and client
.. . .

DISBURSEMENTS AND OTHER CHARGES

  Even more so than with principles applicable to fees for legal services, the ethics codes appear to provide no guidance at all with respect to which services provided by the lawyer to the client should be charged as part of the legal services and billed as such, and which may properly be separately billed to the client, either for direct payment to the vendor or for reimbursement to the lawyer or law firm.   During the 1980s, a trend toward the unbundling of services grew significantly.   Items that just a few years before were considered by both lawyer and client to be part of the overhead necessary to provide the legal services expected by the client were billed in addition to fees for legal services. 

  Some examples of services routinely charged or sought to be charged separately and in addition to fees for legal services include word processing, computerized research, in-office meals with or without client participation in the meeting at which food is served, and secretarial overtime, meals, and transportation.   It seems generally true that little attention has been paid by the bar as to what ethical rules should or do apply in determining what charges beyond fees for legal services are appropriately unbundled. 

  There is nothing inherently ethical or unethical either for a law firm to unbundle costs into components, some of which it hopes to pass on to clients, or for clients to agree to or reject such charges.   As clients become ever more cost sensitive, however, lawyers can expect greater efforts to limit what is unbundled and how those unbundled charges are determined.    

, , , The Standing Committee examined three issues: (i) what items of cost are properly subject to additional charges; (ii) to what extent, if at all, may clients be charged for more than actual out-of-pocket disbursements; and (iii) on what basis may clients be charged for the provision of in-house services.   The Task Force concurs with the position of the Standing Committee that, absent agreement to the contrary, ethical obligations of lawyers limit rather significantly the latitude available for creative charging of clients for costs.

  Because of the trend toward unbundling previously discussed, and in order to provide flexibility and reason to the dealings between lawyers and their clients, the Statement of Principles applicable to disbursements and other charges puts the obligation on the lawyer to assure that the client understands what will be charged for and how the charges will be determined. As with an explanation of fees for legal services, what is required to meet the test of client-understanding depends on the sophistication of the client.   . . . the basis for the charges not included in the fees for legal services should be clearly understood by the client.   In many cases this is not an easy chore.   The Standing Committee recognized the difficulty in deciding what constitutes "cost," passing the buck to "our colleagues in the accounting profession."  The final warning in this regard set forth in the Opinion, and one that is of the utmost importance to the practicing lawyer, is that "in the absence of an agreement to the contrary, it is impermissible for a lawyer to create an additional source of profit for the law firm beyond that which is contained in the provision of professional services themselves."    . . .   As part of its disclosure to the client, the law firm should indicate how it determines which duplicating jobs are sent to outside vendors, and for those that are, whether there is a mark-up for the overhead expense associated with messengers, checkers, or others.   . . .   This is given as but one example of the issues that exist whenever "cost" is stated to be the basis for charges to the client.   Others would include (i) allocation of taxes on telephone charges, (ii) treatment of the non-deductible portion of business meals, (iii) allocation among clients of volume discounts from vendors, where the discount is not the result of the work charged to any specific client, but rather to all clients charged and may not be known until well after the client has been billed, and (iv) in-office food service in cases where the food may be purchased, but office personnel are used to serve and clean up, or where the law firm has its own in-house catering service.   . . .

. . .

STATEMENT OF PRINCIPLES IN BILLING FOR LEGAL SERVICES

   . . .

 DISCLOSURE AND UNDERSTANDING 

  It is the obligation of the lawyer and law firm to assure that the client fully understands and agrees to the basis for billing for legal services rendered.     The client's agreement may be by express written or oral agreement, or by implied agreement through knowing use of the lawyer's services after the lawyer's full disclosure of the basis on which legal services will be billed to the client.

. . .  

COMMENTARY TO STATEMENT OF PRINCIPLES IN BILLING FOR LEGAL SERVICES

. . .  

DISCLOSURE AND UNDERSTANDING

  The first guiding principle for the lawyer with respect to billing for legal services should be an understanding with the client of the basis for such billing arrangement through full disclosure by the lawyer.   . . . Such understanding between lawyer and client should include not only the method to be used in calculating fees for legal services but also the scope of the legal services to be performed (and charged for) to the extent that an understanding with respect to the scope is expected to be an important factor in the lawyer-client relationship.   For example, is the matter of such critical importance to the client that a "leave-no-stone- unturned" approach is appropriate, or does the client prefer to accept some risk in order to avoid some of the costs attendant to such an approach?   In addition, do billable legal services include lawyer time spent in preparing bills?   As clients demand more detail and/or complexity in presentation of their bills for legal services (such as task-based billing), the lawyer may wish to consider billing for lawyer time spent in accommodating the special demands of the client.

. . .

LAWYER'S RESPONSIBILITY IN PREPARATION OF INVOICES

. . . The lawyer and law firm should make every reasonable effort to provide clients with complete and accurate invoices describing the legal services provided and the amounts charged for same.   The lawyer responsible for billing should review each invoice to confirm that the invoice has been prepared in accordance with the billing arrangement reached with the client at the beginning of the engagement and should also take steps as necessary to ensure, prior to sending an invoice to a client, that the invoice is reviewed for accuracy.   Each invoice should clearly identify the legal services provided in such specificity as the client requests, the fees charged for such services, and the disbursements and other charges relating to the period being billed. . . .  

HOURLY BILLING ARRANGEMENTS

. . .

  The agreement by a client to be billed for legal services on an hourly basis does not justify the lawyer spending an unreasonable number of hours on a particular matter or task.   The amount of time spent on a matter should be reasonable in relation to the client's goals and expectations and must also be consistent with the lawyer's professional ethical obligations.   In general, the lawyer should have an obligation to address the matter that is to be billed on an hourly basis in a cost effective manner and to avoid "churning" hours, whether due to the lawyer being under-worked and therefore spending more time than is reasonable on the matter, the assignment of the matter or task to a lawyer who is too inexperienced to perform it competently and/or cost- effectively, or otherwise.

  The lawyer is expected to use professional judgment in determining whether the number of hours spent on a matter is reasonable under the circumstances of the engagement.

. . .

Travel Time 

  Experience shows that, even among lawyers, there is a wide disparity of viewpoints with respect to charging for travel time.   This points up the importance of a specific agreement with the client in this area in order to avoid misunderstandings.   .[A]bsent some other arrangement with the client, travel time may be billed at normal hourly rates to the client for whom the travel is being conducted (unless the lawyer is working for and billing another client while traveling. . .  

Premium Billing 

  . . . [An] example of opportunity cost would be a client who demands an unreasonable turnaround time for certain work, thereby rendering it impossible for the lawyer to attend to other business or personal matters in the normal course.   Such "rush" demands may provide a reasonable basis for a surcharge or higher hourly rate.   If such a surcharge is to be implemented, however, it would require advance disclosure to and agreement by the client. 

Hourly Billing Rates 

  When legal services to be performed are to be billed on an hourly basis, the hourly rates or range of rates for lawyers involved (or expected to be involved) in performing work for the client should be disclosed to the client.. . It is suggested that the understanding or agreement between the lawyer and the client with respect to billing for legal services anticipate and expressly address prospective future changes in hourly rates, as well as, if applicable, the existence of multiple hourly billing rates for the same lawyer depending on the type of service provided.
. . .

  .   The lawyer should not have any affirmative duty to disclose the existence or amount of negotiated non-standard rates for other clients when quoting rates to a client.   . . .  

Minimum Time Increments 

. . . Legitimate use of a minimum time increment may depend on how the lawyer records the balance of the increment.   Two fifteen-minute charges for two five-minute calls within the same fifteen-minute period seem inappropriate; some balancing should be used. 

Maximum Hours Per Day

   Absent a specific agreement with the client, there is no specified maximum number of hours in a single day that may be billed by the lawyer if worked, except of course the obvious twenty-four.   The number of hours worked in a single day or over a period of several days may, however, affect the lawyer's efficiency.   If the lawyer's efficiency has been materially impaired for reasons that are unrelated to that particular client's demands on the lawyer's time, such impairment should be taken into account in determining whether such client's bill is reasonable.   If, on the other hand, the excessive hours causing impairment are due to that particular client's demands, a premium may be appropriate.

 Learning Curve

   Some clients have indicated that they do not wish to (or will not) pay for the cost of training lawyers or bringing them up the learning curve with respect to a particular substantive area of the law or a particular type of case or transaction.   Resolving this issue requires communication with the client in order to ascertain the nature of the concern.

   Provision by the lawyer or law firm of cost-effective services to clients requires that certain tasks be performed by less experienced lawyers whose hourly billing rates are lower but who, in the judgment of the managing attorney on the project, have sufficient expertise and experience to perform such task.   Lack of experience should be appropriately reflected in a lawyer's hourly rate.   . . .   While clients may request that only certain levels of lawyers work on their account, if they do make such a request, the lawyer should explain that such external control by the client may result in less cost-effective management by the law firm of a particular matter.   The lawyer should also explain to the client that it may incur delays and experience a staffing conflicts when the chosen senior individual or individuals are not available.

   If the primary purpose of participation in a meeting or project by a less experienced lawyer in a law firm is to train such lawyer, then the lawyer's time should not be billed to the client.  

 Staffing Considerations

  Staffing is related to the issues surrounding the "Learning Curve" previously discussed, but is a distinct issue.   The touchstones for determining such issues as staffing should be cost-effectiveness and quality of legal service to the client.   Staffing should be discussed with the client if the client has expressed an interest in such information and must be disclosed if the lawyer has created an expectation that the matter will be handled by a particular lawyer or one with a certain experience level and such is not in fact the case.   . . .

. . .  

  In recognition of the value of continuity of representation, law firms should endeavor to staff a specific client matter with a relatively consistent team of lawyers.   If a change must be made in a critical member of the team (other than in response to a client request), and this change necessitates any significant expenditure of time by the new member of the team in getting up to speed, counsel should make appropriate downward adjustments to the fees billed in such matter to avoid unreasonable charges to the client.

. . .  

STATEMENT OF PRINCIPLES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES
. . .
 

  Definitions: The term "disbursements" means, for purposes of this Statement of Principles, expenses paid by a law firm to third parties and incurred in furtherance of the client's work.   The term "other charges" means, for purposes of this Statement of Principles, all charges, including in-house costs, proposed to be charged to a client and not constituting either disbursements or fee for legal services. 

DISCLOSURE AND UNDERSTANDING 

  It is the obligation of the lawyer and law firm to assure that the client fully understands and agrees to the basis for billing for disbursements and other charges.   . . .

. . .  

COMMENTARY TO STATEMENT OF PRINCIPLES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES

 DISCLOSURE AND UNDERSTANDING

 . . .    What constitutes full disclosure in this area, though, can be problematic.   Firms now provide varying degrees of disclosure on policies for billing disbursements and other charges, from no written policies to detailed standard firm policies.   While a lawyer may provide this disclosure orally, the Section strongly encourages lawyers to provide this disclosure to clients in writing.

   The test of whether the disclosure provided to a specific client meets the tests of the Statement of Principles turns on whether the client fully understands the firm's policies.   The lawyer should take appropriate steps to ensure the client understands the policies.

 REASONABLENESS

 With regard to other charges incurred on behalf of a client, such as photocopying and computer research, firms should charge its costs, unless an understanding with the client specifies otherwise.  "Costs" as used in connection with other charges incurred on behalf of a client may include indirect costs reasonably allocable to the service provided as well as direct costs.

 CLIENT APPROVAL

. . .

   No agreement as to the basis of charges can justify knowingly incurring or billing unnecessary or excessive charges.   The lawyer's invoice for disbursements and other charges billed to the client should be consistent with what has been disclosed and agreed to by the client.

   A client may specifically agree to pay an otherwise disproportionate share of a disbursement or other charge (e.g., all of the travel expenses of a lawyer who devotes her/himself to other matters in connection with such travel), but the lawyer has the burden of establishing that the client was fully aware of the situation and specifically approved the arrangement. 

SPECIFIC ISSUES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES

Travel

   A firm should develop guidelines that its lawyers will follow when incurring travel expenses on behalf of clients.   Those guidelines may then become part of the disclosure to the client.   The firm should consider the detail it should provide to meet its obligation for full disclosure in such matters as type of accommodations, class of air travel, car rental, use of taxicabs and limousines, etc . . .

 Business Meals

   A firm should state its policies as to the types of occasions on which lawyers may charge meals to the client.   This may include disclosure of those instances the firm will charge the client for food service related to (i) client meetings held in the firm's office at which the client or its representative is present, (ii) such meetings at which no representative of the client is present, (iii) restaurant meals including the client, (iv) meals eaten while working on a client matter before or after normal business hours or while traveling on behalf of the client, as well as the basis of the rates for the food and drinks for which it will charge.

Computerized Research

   A firm should describe the basis of charges it makes to clients relating to the use of computerized research (LEXIS and Westlaw).   For example, a firm may describe (i) whether the client receives credit for any discount the firm receives based on usage and (ii) whether overhead other than direct charges paid to the vendor are included.

 Duplicating Charges

   A firm should expressly state its rates for duplicating services.   It should consider describing as specifically as practicable the situations when outside duplicating services would be used.   It should consider providing the client with a choice as to whether outside services or in-house services will be used, particularly when large quantities of duplicating are anticipated.   It also should consider disclosing whether any portion of the duplicating charges include a charge for overhead allocations (e.g., copy center staff time, rent on space).   The Section believes that a per page charge, if approved by the client, is appropriate.

Word Processing/Special Printing

  If a firm charges a client for word processing or other special printing arrangements, it should describe clearly when it would expect to impose such charge.   It also should consider stating the method by which it charges for word processing or other special printing arrangements (i.e., fixed hourly rate, rate per document page).

 Long Distance Telephone Service

  A firm should state the basis of the charges for long distance telephone calls.   If it has a policy of not charging clients for de minimis amounts, it should consider stating that fact.

 Facsimile Service

   A firm should state the basis of the charges for sending and receiving faxes.   For instance, if the rate is based on "cost" and a portion thereof includes overhead allocation for depreciation of equipment or personnel charges in addition to telephone expenses for the cost of a per-minute or per-page fax charge, it should consider stating that basis.   The Section believes that a per page or per document charge, if approved by the client, is appropriate.

 Employee Overtime

   A firm should disclose the circumstances under which it expects to bill the client for overtime pay to firm staff (including paralegals) and the basis on which charges will be computed.   Similarly, if the firm expects to charge the client for meals eaten by such employees who have or will work overtime that day for the client, the basis on which such charges will be computed (e.g. actual restaurant charges, in-house catering costs as otherwise disclosed, etc.) should be disclosed.

 Messenger Service

   A firm should state the basis on which it will charge the client for messenger service.   It should consider stating whether it expects to use its employees to provide messenger service, and if so, the basis for charging therefor.   The nature of the disclosure discussed herein may vary considerably from community to community (e.g., use of subway or other public transportation versus use of firm or individual-provided automobile, taxicab, etc.).

 Video Conferencing, E-Mail and Electronic Transmittal of Documents

   If a firm anticipates charging a client for video conferencing, E-Mail or electronic transmittal of documents, it should disclose the basis for the rates it will charge.

 

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The Task Force on Lawyer Business Ethics was formed in April 1993.  The members of the Task Force included William G. Paul, George W. Bermant, Charles E. McCallum, Micalyn S. Harris, Samuel S. Friedman, Ronald L. Fein, Daniel G. Kelly, Karol K. Denniston, Myron M. Sheinfeld, S. Allen Lackey, Mark S. Howard and Ann Yvonne Walker.   George W. Bermant and William G. Paul were the Co-Chairs of the Task Force and Ms. Walker and Messrs. McCallum and Howard were Chairs of the drafting groups responsible for the three Statements of Principles.

 

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