What is a Non-Refundable Retainer Agreement?
Non-refundable retainers can be an effective way to ensure that clients actually pay their attorney’s fees, but they are also risky. That is because they create a risk that they will be found to be usurious, or contrary to public policy, or otherwise unenforceable. But used in the right situations, non-refundable retainers can be an effective tool for both lawyers and clients. First, let’s look at what goes into a non-refundable retainer agreement.
A non-refundable retainer agreement is theoretically a contract for services , in which the client pays a flat fee up-front in exchange for the lawyer’s promise to represent the client through the duration of a legal matter. Whether the payment is a deposit or signature bonus, the money is for the lawyer’s availability, lets the client know that the lawyer cannot represent anyone else until that case is closed, and provides payment before work has been done. A non-refundable retainer is generally only encompassed by general fees (like hourly fees) if the fees are stated in an hourly amount. They generally do not cover expenses beyond fees. Non-refundable retainers are most commonly used in civil litigation matters.
Legality of Non-Refundable Retainers
The enforceability of non-refundable retainer agreements has been a matter of legal contention. In general, courts have upheld their validity and enforceability. Nevertheless, several factors can affect this outcome.
Clients: Clients must understand that, while such agreements may be permissible, they may also subject them to risks—including those that cannot be completely accounted for. Clients must have full transparency into the implications of these agreements, such that they can make informed decisions about signing them. For example, in some states, an attorney must return unearned fees to a client, even though there may be a signed non-refundable retainer agreement. Additionally, if the attorney does not earn the full paid amount, it is not awarded as damages in the event of a fee dispute. Further complicating this situation are companies that proffer these contracts. Their contracts may expressly provide that they are binding on the clients irrespective of state law. Therefore, if a client does not know that anything but the governing state law applies, it may be banned from asserting available state laws against the provider.
Even when clients fully understand any risks involved, limitations on remedies may still exist. The breadth of governmental agencies’ enforcement powers to protect consumers varies by state; some states may lack the resources or desire to take action in cases of perceived unfairness. That said, regardless of any limitations on legal recourse, if a client ever feels he or she was wronged, a complaint to the state bar could result in an investigation against the lawyer and a possible professional sanction. If the retainer agreement deviates from standard American Bar Association and state bar guidelines, it may expose the client to ethical problems in the future. Even if the agreement passed bar muster six months ago, it is virtually impossible to predict how the ethics authorities will interpret the clause today. Under the ABA rules, lawyers must generally refund fees if a case is settled without them or is dismissed. If a client signs a non-refundable retainer agreement that is clearly at odds with this rule and the agreement is not otherwise reasonable, it may be considered to be unconscionable by the bar. As such, the lawyer may be ethically constrained from holding an unearned fee.
Reasons to Use a Non-Refundable Retainer
Non refundable retainer agreements are contracts that can be advantageous for both attorneys and clients. For clients, the commitment the attorney is making by agreeing to a retainer upfront is a promise, a contract, to do certain things. It’s a commitment by the lawyer to keep the client in the loop, be there when they need them, and be on top of their case. From the attorney’s perspective, you are committing yourself to a certain amount of money paid upfront, which means you will have a guaranteed income stream. For the most part what I hear from clients is that they value the convenience of paying one time up front for the case.
I can promise clients – if you take a retainer we’ll spend up to that amount. I can’t give the same promise if we are billing hourly, because your case may take longer than I expect or we may discover evidence that raises the stakes exponentially – like a felony instead of a misdemeanor.
Frequently Used Industries for Non-Refundable Retainers
Non-refundable retainers aren’t exclusive to just the legal industry. More and more industries around the United States are starting to use these types of agreements.
Industry professionals across numerous fields have found ways to incorporate non-refundable retainer agreements into their contracts with clients. For example, the accounting industry has been using non-refundable retainers for years. When an accounting firm sets its hourly rates, it’s not uncommon to have clients pre-pay a retainer. A non-refundable retainer is charged if the full amount is not used. This practice is not a scam or a way to get more money from your clients; rather, it’s a way for the accountant to charge a retainer that’s based on the agreed amount of work. Many business owners often have retainer contracts with advertising agencies. Advertising agencies use retainer contracts to help keep clients on long-term strategies, rather than adopting a short-term approach. As the name would suggest, retaining an agency requires you to keep a retainer and make consistent payments. Another common industry that utilizes non-refundable retainers is web development. Like accounting, this industry typically charges its clients for a retainer each time they want to create a new website design. The only difference is that the payment is either based on the work completed or the estimated hours required to complete the project. In most cases, if an accounting client pays for a retainer up front, like an advertising firm would require, and end up leaving the relationship midway or before it can use all the hours allotted in the retainer, the client will not be refunded for the hours unused. As a business owner, if a client stipulates that they would prefer a non-refundable retainer in their contract, you may consider this request.
Crafting an Effective Non-Refundable Retainer Agreement
All non-refundable retainer agreements should include the following clauses:
Scope of Services: non-refundable retainer agreements should enumerate the attorney’s specific duties to the client, including time estimates for the various services. Unfortunately, clients often exceed the scope of services and retainers become a source of dissatisfaction and misunderstanding. Without a scope of services clause, lawyers face difficulties estimating their fees.
Indemnity Clause: non-refundable retainer agreements should be accompanied by an indemnity clause . This clause should state that the client agrees to fully defend, hold harmless and indemnify the firm for the full amount of any non-refundable retainer, all accrued interest, and all prevailing attorney’s fees and costs, medical bills and damages.
Limitation of Liability: non-refundable retainer agreements should include Limitation of Liability clauses which eliminate or limit the lawyer’s liability with respect to claims made against that lawyer during the representation. This covers any mistakes made with the client’s funds. Limiting the liability helps to avoid litigation over the retainer agreement.
Things Clients Should Consider Before Signing a Non-Refundable Retainer
A non-refundable retainer is a statement or forecasting of the anticipated legal work and costs for a client’s case. While this can be a very useful tool for both an attorney and a client, it is very important for the client to consider a few things before signing a non-refundable retainer.
1. Is there a real basis for a non refundable retainer in this case?
While there are cases where a non refundable retainer makes sense, it is important that you determine if there is a legitimate need for a non refundable retainer in your case. For instance, if a deposition is coming up and the lawyer needs to prepare, and represents that the preparation will cost $3,000, the lawyer may ask for a $3,000 non refundable retainer. This is fine, as the lawyer is telling you that the work needs to be done and if for some reason the work isn’t done, and the lawyer finishes up the case without the need of further depositions, then the lawyer has earned the entire $3,000.
However, another example would be a situation where the lawyer represents that he or she needs $10,000 in order to make it through the next hearing in a pending case. The lawyer then promises that the case will settle after the next Court date. This is not an appropriate situation for a non refundable retainer, because the $10,000 isn’t reasonably necessary to get you through the next Court date. Therefore, if you were to fire your lawyer after paying a $10,000 non refundable retainer, and you never finished the case with that lawyer, that $10,000 would be earned at the rate of $500 an hour, about 20 hours of work. Which, again, would be going to the next Court date, but if you fired your lawyer, you wouldn’t get to finish the case with that lawyer. Therefore, you would not get your case finished. So in that situation, the non refundable retainer is inappropriate, and the lawyer is essentially trying to sign you up for their retainer amount, not for your case.
2. If you agree to a non-refundable retainer, try to get the non refundable amounts broken down into different categories in writing.
For example, if you or the lawyer needs $4,000 for depositions, $2,000 for discovery responses, $2,000 for motions, and $600 per hour for other work, then that should be broken out and put in the non refundable retainer agreement. That way, you will know that if you run through the $4,000 for depositions, which should be reasonable for most cases, then the non refundable retainer amount is $8,600, not $10,600. You should be able to ask your lawyer, ‘we went through the $4,000 for depositions, then that category is finished and we will not be billed for depositions again. We still have $2,000 for discovery responses. Then we have $2,000 for motions, and other work at $600 per hour. We will not be getting any more of the non refundable retainer money back once the $2,000 for discovery is used, as it can only be used to pay for work in that category.’
3. Make sure you understand the difference between a flat fee and a non-refundable retainer.
A flat fee is a fee that is quoted to you as the customary fee to finish your case. This could be a fee that is equivalent to a retainer, or less. In other words, a lawyer may give you a flat fee of $5,000, then bill you later after the case is completed. This process is not non refundable, and is instead a flat fee. A flat fee is customary in many types of cases, especially in uncontested divorce cases.
4. Ensure you understand the retainer engagement terms.
Make sure you understand how expenses are paid, bills will be generated, and how you will be informed when a retainer is exhausted or how with the remainder is refunded, etc.
The information contained in this blog is for general informational purposes only. None of this information is to be considered legal advice.
Other Options to Non-Refundable Retainers
Clients and attorneys may consider different alternatives to a non-refundable retainer. An attorney may charge an "earned upon receipt retainer". A retainer is an advance payment for services. By agreeing that a retainer is earned upon receipt, the attorney is entitled to keep the retainer. However, the earned upon receipt retainer is not a non-refundable retainer. A non-refundable retainer is a fee that the client is not entitled to receive back, even if it is not used. In a non-refundable retainer, the client agrees that the attorney need only earn the initial non-refundability.
Marketplace options from corporations or subscription services offer a different type of relationship between attorneys and clients . Like Texas law permits for flat fees, subscription legal services commonly charge advanced defense fees for unlimited services, and attorneys are not paid according to the expenses of defending the client’s matter.
Contingency fee arrangements, usually common in personal injury actions, represent another type of payment option. In a contingency arrangement, the attorney does not receive any compensation unless there is a recovery in the lawsuit.
Finally, some attorneys bill at an hourly rate, and the client pays the attorney for the number of hours the attorney works on the client’s case.