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Official Magazine of the Denver Bar Association

Engagement Retainers: Handle with Care ~ By Alec Rothrock

Engagement retainers are dangerous in the wrong hands and are only appropriate in specific circumstances. All too often, Colorado lawyers label an advance payment of attorney fees as an engagement retainer so that they can pay themselves something before they have performed any substantial legal work — in other words, it becomes a signing bonus. They then treat the engagement retainer fee as compensation for legal services to be performed in the future. Lawyers who erroneously call an advance payment of fees an engagement retainer and who subsequently treat the money as their own risk the presumptive consequence of disbarment. Lawyers who are unclear about engagement retainers should avoid them altogether.

What is an Engagement Retainer?

An “engagement retainer” is also called an “engagement retainer fee,” which is the term used in the Comment to Colo. RPC 1.5. In other jurisdictions, it is referred to as a “classic” or “general” retainer. The Colorado Supreme Court defines an engagement retainer as a “fee paid, apart from any other compensation, to ensure that a lawyer will be available for the client if required.” The concept of “availability” means foregoing other client matters or giving the client’s work priority for a certain period of time.

An identifying characteristic of an engagement retainer is what it is not: It is not compensation for legal services. (As a Comment to Colo. RPC 1.5 states, “A fee is an engagement retainer only if the lawyer is to be additionally compensated for actual work, if any, performed.”) A lawyer must bill separately for legal services rendered.

An engagement retainer fee is earned upon receipt. The theory is that the client receives an immediate benefit from the lawyer’s agreement to be available to the client for a defined period of time or to give priority to the client’s work. By providing the client with this interpretation of “benefit,” the lawyer satisfies an important principle stated in Colo. RPC 1.5(f): “Fees are not earned until the lawyer confers a benefit on the client or performs a legal service for the client.”

Even though an engagement retainer is earned upon receipt, it is subject to refund. This, however, seems inconsistent. The only way to reconcile these principles is to recognize that what the client receives immediately is not so much availability, or priority — which is inherently prospective in nature — but rather the intangible peace of mind that accompanies the attorney’s pledge of availability or priority.

What are “Availability” and “Priority”?

“Availability” and “priority” are tangential concepts. “Availability” refers to when a lawyer is ready to provide legal services to a client, even if it means declining other clients’ work or other commitments. For example, a lawyer must turn down work requested by another client or prospective client if that work, because of its labor-intensiveness, would prevent the lawyer from devoting time to the client who paid the engagement retainer. Availability also means turning down matters that would create a conflict of interests that would prevent the lawyer from representing the client who paid the engagement retainer.

Typically, a lawyer agrees to be available to a client for a set period of time, such as a term of months or a year. Theoretically, a lawyer could agree to remain available to a client indefinitely, but if the client pays the engagement retainer in monthly or yearly installments, the lawyer’s promise of availability becomes monthly or yearly.

“Priority” is similar in meaning to “availability.” Sometimes a lawyer gives priority to a client in order to comply with his or her agreement to be available to that client. Sometimes it simply means that the lawyer agrees to do the client’s work before the work of others and without regard to any of the lawyer’s other commitments, professional or personal. The corollary is that the lawyer will complete the client’s project before other clients’ projects. A lawyer who promises clients availability or priority in a promiscuous way may charge an unreasonable fee and mislead clients if the promises prove illusory.

Documenting and Handling an Engagement Retainer

According to Colo. RPC 1.5, fee agreements for including an engagement retainer should comprise the amount of the engagement retainer, the service or benefit that justifies it and a statement that it is earned upon receipt. In any official inquiry, it is advantageous for the fee agreement to specify the service or benefit. At a minimum, this means noting the time period that the engagement retainer covers. If the client has had another lawyer review the fee agreement, that fact should be documented in the fee agreement or elsewhere in writing.

Even though the fee agreement should state that the engagement retainer is earned upon receipt, it should not state that it is nonrefundable. Engagement retainers are refundable, and, as Colo. RPC 1.5 makes clear, it is improper for a fee agreement to label a fee or retainer as nonrefundable.

An engagement retainer is subject to refund in the event of “changed circumstances.” The phrase “changed circumstances” is not defined in Colo. RPC 1.5. It includes any circumstance in which the lawyer cannot continue to be available or give priority to the client’s work for the remaining period covered by the engagement retainer. One example is when a client terminates the lawyer’s representation prior to the end of the engagement retainer period. The lawyer would, in that instance, be required to refund the remaining, unperformed portion of the engagement retainer — notwithstanding the fact that the engagement retainer is considered fully earned upon receipt. Another example is when the lawyer is unable to carry out the remaining period of availability or priority because of ill health, suspension of the lawyer’s law license or a career change. Calculating the refund may be as simple as counting the number of days the lawyer was and was not available during the period covered by the engagement retainer.

Since an engagement retainer fee is earned upon receipt, it must be deposited in the lawyer’s operating account. In contrast, a retainer paid for future legal services must be deposited in a trust account as stipulated in Colo. RPC 1.5 and Colo. RPC 1.15 until it has been earned. It goes without saying that, when refunding an engagement retainer, the refund must come from the operating account or the lawyer’s personal funds, not the trust account. Again, fees for legal services must be charged separately.

A lawyer should not treat a single payment of money as compensation for both availability and future legal services. Trust account funds intended for deposit must be deposited intact as provided in Colo. RPC 1.15C(a). Therefore, the client (or third-party payer) must make separate payments, one for the advance fee (deposited in a trust account) and another for the engagement retainer (deposited in an operating account).

An Engagement Retainer Must be Reasonable

As with any fee charged by a lawyer, an engagement retainer must be reasonable in amount. In considering the issue of reasonableness, a court or regulator will consider the factors set forth in Colo. RPC 1.5(a), some of which involve circumstances existing at the time the fee agreement was entered into and others of which involve circumstances occurring afterwards. Lawyers must be prepared to show what they did to earn the engagement retainer, such as turning away business or working on the client’s matter at the expense of other client matters. If the engagement retainer is nothing more than a one-time payment to entice the lawyer to take the client’s case, it is not a true engagement retainer, and it may be considered misleading to call it one.

At least in theory, the amount of fees that the lawyer charges the client for services rendered should have no bearing on the reasonableness of the engagement retainer. However, if the cumulative amounts charged for the engagement retainer and the legal services are high and the lawyer can only provide a cursory explanation of the benefit conferred on the client in exchange for the engagement retainer, the overall impression will be one of overreaching. Facts weighing in favor of the reasonableness of an engagement retainer include: a detailed explanation of the engagement retainer in the fee agreement; a pre-execution review of the fee agreement by the client’s independent counsel or the lawyer’s recommendation to the client to have the fee agreement reviewed by independent counsel; and the sophistication of the client in legal matters in general and engagement retainers in particular. It also helps if the client is wealthy and if he or she is the one who proposes the engagement retainer.

Conclusion

There is a time and a place for engagement retainers. However, they are relatively rare and often misunderstood, even by the lawyers who charge them. Lawyers must be prepared to overcome the impression that engagement retainers compensate the lawyer for doing nothing or that they constitute a premium paid on fees charged for legal services. In short, lawyers who do not understand engagement retainers should not charge them. D

 

 

Alec Rothrock is a shareholder with the Greenwood Village law firm of Burns Figa & Will, P.C. and an adjunct professor of legal ethics at the University of Denver Sturm College of Law. He practices in the area of legal ethics and the law of practicing law. He is a former chair of the Colorado Bar Association Ethics Committee. He can be reached at arothrock@bfwlaw.com.

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