interest on unpaid legal fees
1. It is not improper for
a lawyer to include in a retainer agreement a provision charging interest
on unpaid legal fees when the lawyer (1) fully informs the client
of the circumstances where
interest may be charged, (2) those circumstances, the fee, and
the interest rate are reasonable, and (3) the client consent.
2. It is also not improper
to charge interest on unpaid legal fees, although the retainer
agreement is silent, when the lawyer (1) notifies the client that
the lawyer intends to charge a reasonable
interest rate on unpaid legal fees, and (2) provides the client with
a reasonable opportunity to pay the outstanding unpaid balance before
any interest accrues.
DR 2-101(C)(3); 2-106; EC 2-17; 2-18; 2-19; 2-23
lawyer inquires whether she may ethically charge a client interest
on unpaid legal fees where (a) the retainer agreement expressly provides
that interest will be charged and, alternatively (b) the retainer
agreement is silent. Assuming arguendo that charging
interest is ethical in either of these cases, the lawyer further asks
what interest rates ethically may be charged.
a written retainer agreement provide for interest to be charged
on unpaid legal fees?
In N.Y. City 1982-6, this Committee previously considered whether a written
retainer agreement may ethically provide for an interest charge on
unpaid legal fees. In that case, the specific question
under consideration was whether an annual interest charge of eighteen
percent could be imposed on legal fees not paid within one month of
billing. This Committee concluded that it is not improper to
assess a reasonable interest charge on unpaid legal bills if (1) the
arrangement is clearly and fully explained to the client in advance
and the client understands and consents to the proposed arrangement
and (2) the arrangement does not result in the charging of an
excessive fee. N.Y. City 82-6.
In this same vein, N.Y. State 399 (1975) also concluded that it is not per
se improper for a lawyer to charge interest on delinquent accounts
if the lawyer . . . advise[s] the client prior to performing
services of the fact that interest will be charged on delinquent accounts
which are delinquent for more than a stated period of time, the stated
period is reasonable under all the circumstances of the matter, the
rate of interest is reasonable, the fee is not excessive and the client
consents to such interest charge. Similarly, in ABA Formal
Opinion 338 (1974), the ABAs Committee on Ethics and Professional
Responsibility also approved of a lawyers charging interest,
noting: It is . . . the Committees opinion that
a lawyer can charge his client interest providing the client is advised
that the lawyer intends to charge interest and agrees to the payment
of interest on accounts that are delinquent for more than a stated
period of time. See also C. Wolfram,
Modern Legal Ethics, § 9.2.2, at 506-7 (1986) (Most states
now permit lawyers to make credit arrangements for the payment of
fees, such as through client use of credit cards. By the same
token, a fee contract can provide for a stipulated rate of legal interest
on amounts due.).
on these decisions, we conclude that when (1) the lawyer fully informs
the client of the circumstances where interest may be charged, (2) those
circumstances, the fee, and the interest rate are reasonable, and (3)
the client consents, it is not improper for a retainer agreement to provide
for charging interest on unpaid legal fees.
a lawyer charge interest on unpaid fees where the agreement with
the client is silent?
Having concluded that a lawyer may charge interest on unpaid balances where
the retainer agreement provides for it, we now turn to the more difficult
issue of whether a lawyer may charge interest on unpaid balances where
the retainer agreement is silent. Although our research does
not reveal any New York authority in point,
ethics committees in other states have divided over this issue.
Four other committees have allowed it.
One committee has prohibited the practice.
Another has conditioned it on client consent.
We begin by observing that although libraries have been written about the nature
and scope of a lawyers obligations to her client, there is surprisingly
little said about the clients corresponding obligations to the
lawyer. Nevertheless, it cannot be seriously debated that where
a client retains a lawyer on a fee-paying basis, the client is obligated
to honor the fee arrangement.
For its part, the Code plainly recognizes that an important obligation of a
client to the lawyer is to pay the lawyer's fee in accordance with
the fee arrangement. DR 2-110 specifically includes among the
grounds of permissible withdrawal the deliberate failure by the client
to comply with an agreement or obligation to the lawyer as to
expenses or fees. DR 2-110(C)(1)(f). And, any doubt
that the Codes drafters considered the clients payment
obligation to be extremely important is dispelled by the potential
consequences to the client that the Code allows if a lawyer is forced
to collect a fee. Indeed, in this circumstance, the Code creates
a limited exception to the lawyers sacrosanct obligation not
to disclose a clients confidences or secrets, which is one of
the bedrock duties underpinning the lawyer-client relationship, and
authorizes the lawyer [to] reveal . . . [c]onfidences or secrets
necessary to establish or collect the lawyers fee. . . .
DR 4-101(4). Conversely, it is hardly surprising that
there is no provision in the Code precluding a lawyer faced with a
client who dishonors a fee arrangement from charging interest.
This Committee yields to no one in refusing to allow the rules of conduct governing
our learned profession to become captive to the morals of the marketplace.
But this does not mean that in interpreting these rules, we can, or
should, ignore commercial reality and the consequences that would
attend a rule subordinating the rights of a lawyer to the rights of
other creditors seeking payment from a lawyer's client. Certainly,
clients can be presumed to act in their own economic self-interest
and faced with the choice between paying obligations to other
creditors all carrying interest charges
and a legal bill with no interest, the temptation to unduly delay
payment of the lawyers statement can prove irresistible.
Given this reality, we believe allowing interest to be imposed, and placing
lawyers on a more equal footing with other creditors can, at least
in some situations, serve the salutary purpose envisioned by EC 2-23
of avoiding fee disputes. Conversely, a rule precluding a lawyer
from charging interest could foster litigation because a lawyer prevailing
in fee litigation can recover prejudgment interest under CPLR § 5001
from the earliest ascertainable date the cause of action existed.
See, e.g., Hecht v. Clowes, 224 A.D.2d 312, 638
N.Y.S.2d 42 (1 st Dept 1996) (under CPLR § 5001, attorney entitled
to pre-judgment interest on successful fee claim).
Our conclusion that an interest charge may be imposed is fortified by long-standing
New York case law enforcing an account stated on behalf
of an attorney where a client fails to respond to a bill. In
New York, a lawyer may assert a cause of action for account stated
against a client with proof that a bill, even if unitemized,
was issued to a client and held by the client without objection for
an unreasonable period of time. It is not necessary to establish
the reasonableness of the fee since the clients act of holding
the statement without objection will be construed as acquiescence
as to its correctness. OConnell & Aronowitz v. Gullo,
644 N.Y.S.2d 870, 871 (3d Dept) (citations omitted), appeal
denied, 89 N.Y.2d 803 (1996).
Significantly, an account stated will be enforced regardless of whether
there was an initial retainer agreement between the attorney and client.
See, e.g., Ellenbogen & Goldstein,
P.C. v. Brandes, 641 N.Y.S.2d 28, 29 (1st Dept
1996), appeal denied, 89 N.Y.2d 806 (1997). An
account stated may include interest even though there was initially
no express agreement to pay interest. Davison v. Klaess,
280 N.Y. 252, 256 (1939); Emerick Assocs. v. Classic Tool Design
Inc., 688 N.Y.S.2d 792, 794 (3d Dept 1999) (affirming judgment
in favor of plaintiff on account stated, finding that based
on plaintiff's express notification that it would begin charging a
1.5% monthly finance charge on all balances past due more than 30
days . . . Supreme Court did not err in its award of interest to plaintiff.).
Accordingly, the Committee concludes that when the lawyer (1) notifies the client
that the lawyer intends to charge a reasonable interest rate on unpaid
legal fees and (2) provides the client with a reasonable opportunity
to pay the outstanding unpaid balance before any interest accrues,
it is not improper to charge interest on unpaid legal fees although
the retainer agreement is silent.
At the same time, the Committee wishes to underscore its strongly held view
that it is far better practice to address all the terms of an engagement,
including all payment provisions and any interest to be charged on past
due bills, in a written retainer agreement entered into at the inception
of the engagement. The Committee echoes the cautionary note sounded
by the draft Restatement of the Law Governing Lawyers that [a]
lawyer . . . usually has no justification for failing to reach an agreement
at the inception of the relationship or pressing need to modify an existing
agreement during it. The lawyer often has both the opportunity
and the sophistication to propose appropriate terms before accepting
a matter. Restatement of the Law Governing Lawyers,
Proposed Final Draft No. 1, § 29A(1) at 42 (March 29, 1996). But
not every lawyer at the outset of the engagement will contemplate that
the client will fail to discharge her payment obligation and where this
occurs, we believe that interest may be imposed under the circumstances
C. The amount of any
interest must be reasonable.
In response to the third inquiry concerning the appropriate interest
rates that can be charged we note that the fee charged a client
shall not be illegal or excessive and shall be reasonable,
see DR 2-106; EC 2-17. Though interest is not part of the
fee, but rather compensation for delay in payment of the fee, the rate
of interest should be subject to the same reasonableness requirement.
Furthermore, any interest charged must also comply with all applicable
laws, including usury laws.
In reaching this conclusion, this Committee relied upon DR 2-106 and EC
2-17, EC 2-18 and EC 2-19 of the Code of Professional Responsibility (the
Code ). We did not refer to DR 2-101(C)(3), which we
believe also supports this conclusion. On its face, DR 2-101(C)(3)
provides that attorneys may include information in advertisements about
credit arrangements accepted. Because credit arrangements
almost always provide for interest to be charged on outstanding balances,
DR 2-101(C)(3) strongly suggests interest can be ethically charged under
Also instructive is N.Y. City 1995-1, where we determined that it would
not be improper for a lawyer to enter into a relationship with a third
party financing the payment of legal fees: Implicit in
any financing plan is the charging of interest. We conclude that
if a financing plan . . . otherwise complies with all ethical rules,
the fact the client is charged interest is not in and of itself improper
so long as full disclosure of that arrangement is made in advance to
the client and the client agrees.
In N.Y. City 1982-6 (see page 2 above), we determined that a
lawyer could not unilaterally make prospective changes to a fee arrangement
contained in a retainer agreement by written notice to the client.
Unlike the first part of that opinion where the Committee focused on
the propriety of providing for charging interest in a retainer agreement,
in the second part of the opinion, the Committee cast its net much more
broadly because a fee arrangement in addition
to the charging of interest captures such diverse subjects
as retainers, contingent fees and staffing issues, each of which may
implicate different ethical considerations. In determining whether
a lawyer could unilaterally alter terms relating to these subjects,
we did not address, much less decide, the issue before the Committee
here: a lawyers ability to charge interest when confronted
with a clients breach of the obligation to pay the lawyer in a
See Massachusetts 83-1 (1983) (attorney may ethically
charge interest on unpaid balances for legal services previously rendered
whether or not the attorney and client agreed to such charging of
interest prior to the rendering of services, provided that the client
has notice and a reasonable opportunity to pay the balance due without
interest.); Georgia 45 (1985) (attorney can comply with
EC 2-19 and unilaterally charge interest without a prior specific
agreement with a client if notice is given to the client in advance
that interest will be charged on fee bills which become delinquent
after a stated period of time, but not less than 30 days );
Rhode Island 98-06 (1998) (lawyers may unilaterally charge interest
on unpaid legal fees provided the client receives advance notice
with a reasonable opportunity to pay the balance due without interest
); and North Carolina 98-3 (1998) (lawyer may unilaterally charge
interest, but only at the legal rate).
West Virginia 93-02 (1993) (Because the imposition of
a finance charge is a new concept which has the potential to confuse
the client even further, fairness to the public mandates voluntary,
written client consent at the outset of representation. Requesting
a client in the middle of representation to consent to such charges
would carry with it the implied threat that the attorney might withdraw.
Client consent under such circumstances has the potential to be coerced.).
Arizona 86-9 (1986) (Absent a written fee agreement or
the clients consent after notice with opportunity to bring the
account current, interest may not be charged on delinquent invoices.).
See e.g., N.Y. State Bar Association, Statement
of Client's Responsibilities ¶ 3 (1998) (as adopted by the Administrative
Board of the Courts) (The client must honor the fee arrangement
as agreed to with the lawyer, in accordance with law.)
See also Ruskin, Moscou, Evans & Faltischeck,
P.C. v. FGH Realty Credit Corp., 644 N.Y.S. 2d 206, 207 (1st
Dept 1996) (Defendant's receipt and retention of the plaintiff
law firm's invoices seeking payment for professional services rendered,
without objection within a reasonable time, gave rise to an actionable
account stated.); Legum v. Ruthen, 621 N.Y.S.2d 649 (2d
Milstein v. Montefiore Club of Buffalo, Inc., 365 N.Y.S.2d
301, 303 (4th Dept 1975) (reversing denial of summary
judgment to plaintiff on causes of action for account stated and interest;
[h]aving determined that [plaintiffs] are entitled to summary
judgment on the first cause of action [for account stated], it follows
that summary judgment also should be granted . . . on the second cause
of action [for interest on the balance due]. The mere
presenting of the bill, if there were nothing more, constituted a
sufficient demand to start interest running.) (quoting
Davison v. Klaess, 280 N.Y. at 258.)