The Journal of The DuPage County Bar Association

Back Issues > Vol. 18 (2005-06)

Northern’s Exposure
The Ethical and Legal Implications of Nonrefundable Retainers
By Nicholas E. Alexander

One of the most contentious issues in the attorney-client relationship is that of fees. The costs of legal services have been viewed with skepticism throughout the history of the profession,1 and modern views are little changed.2 This tension is usually brought to the fore early in a lawyer’s relationship with a client, in the form of a retainer. The term retainer is "often used loosely in the practice of law to refer to an advanced payment"3 from the client to the lawyer. Retainers serve the purpose of forming a contract wherein, inter alia, the lawyer’s fee arrangement is set forth. Attorneys often include a variety of provisions in their retainers aimed at avoiding future litigation over items therein while also guaranteeing payment. While some of these provisions are merely financial in nature,4 others call into question the attorney’s fiduciary duty to the client,5 and raise the possibility of ethics violations. Retainers that provide for a nonrefundable fee have been treated differently in state courts. While Illinois specifically allows nonrefundable retainers,6 such arrangements raise questions of ethics as well as practicality. Other states have specifically banned such retainers.7 This article considers these two approaches to nonrefundable retainers, assessing the legal, ethical, and practical implications presented by each.

I. The Fiduciary Relationship Created by Retainer Agreements.

An "agreement between an attorney and a client…is, in general, an arm’s length transaction."8 However, an attorney is not permitted to swindle a client under the banner of freedom to contract.9 "While ordinary business contracts are transactions between people who generally stand on equal footing, the relationship between lawyer and client is one of dependence. Clients have a need for representation that normally only lawyers can provide, and lawyers possess expertise that clients lack."10 The relationship established by a retainer between the attorney and client is a special one. "A fiduciary relationship exists as a matter of law between an attorney and his or her client."11 It is incumbent upon the attorney "[to] exercise the utmost good faith and fairness in dealing with the client."12 A fiduciary owes his or her client "the punctilio of an honor the most sensitive."13

Further, the fiduciary relationship that exists between an attorney and his or her client has been held as one of the most sacred in modern society.14 Sir Francis Bacon noted that the "greatest trust between [people] is the trust of giving counsel."15 This fiduciary relationship is the product of "people hiring attorneys to exercise professional judgment on [their] behalf"16 and is "imbued with ultimate trust and confidence."17 "The duty to deal fairly, honestly and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients’ interests over the lawyers’."18 The Illinois Supreme Court’s Rules of Professional Conduct outline the following duties owed by lawyers to their clients: competence;19 diligence;20 communication;21 confidentiality;22 loyalty;23 and safekeeping of property.24

It is this fiduciary relationship between the lawyer and the client that creates special rules pertaining to fee arrangements and retainer agreements. Indeed, "[t]o the public and clients, few features could be more

paramount than the fee."25 Fee agreements between an attorney and his or her client "are a matter of special concern to the courts and are enforceable and affected by lofty principles different from those applicable to commonplace commercial contracts."26

Because the attorney-client relationship is accorded such a high standard, special rules have been drafted to govern the relationship. The first rule that effects the attorney retainer agreement is that an attorney is not allowed to charge unreasonable fees for his or her services.27 "Compensation paid to attorneys for legal services is largely a question of fundamental fairness."28 Rule 1.5(a) lays out eight specific factors to be considered in assessing the reasonableness of a fee,29 while Rule 1.5(b) notes that any fee arrangement should be conveyed to the client "within a reasonable time after commencing representation."30 This provision of the Rules implies that an attorney needs to enter into a retainer agreement with the client prior to (or immediately upon) commencing representation. Indeed, in the Comments to the ABA’s version of the rule, the drafters explained that "[i]n a new client-lawyer relationship…an understanding as to fees and expenses must be promptly established."31 While the ABA’s Rule 1.5 forbids a lawyer from charging fees that are unreasonable, it also places upon the lawyer the duty not to set fees so low as to "induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest."32

In addition to the rule that fees must be reasonable, a second rule prohibits lawyers from entering agreements that raise the possibility of a conflict of interest in the attorney client relationship.33 In Lustig v. Horn,34 the First District held that retainer provisions that anticipate a potential adversarial situation between an attorney and his or her client constitute a conflict of interest and will not be enforced. Rule 1.7 of the Rules of Professional Conduct specifically forbids a lawyer from representing a client when "the representation of that client may be materially limited by … the lawyer’s own interests."35 Thus, an attorney who places his own interests above those of his clients breaches his fiduciary duty. This rule is applicable to the retainer agreement as well as the rest of the relationship, and any contract that confers a benefit on the attorney to the detriment or disadvantage of the client will constitute a conflict of interest.36

II. The Client Discharge Rule

A client is entitled to discharge his or her attorney at any time. The attorney-client relationship is entirely at the will of the client, and no agreement limiting the client’s ability to fire the attorney will be held enforceable. "[T]he client’s right to discharge his attorney at will is not a breach of contract but a term of the contract implied by law because of the special relationship between attorney and client."37 This "client discharge rule" is absolute, and any agreement forged between an attorney and client that abrogates the right in any way will be unenforceable. The rule recognizes that "the relationship between an attorney and client is based on trust and that the client must have confidence in his attorney in order to ensure that the relationship will function properly."38 Some states have held that, where a client discharges his or her lawyer without cause, the attorney is "entitled to full contract fees."39 However, such rules have generally been abandoned, as "[t]o require the client to pay the discharged attorney the full contract fees would make the right to discharge even without cause largely meaningless since the client’s contractual financial responsibility to the discharged attorney would be unchanged."40

Where a client discharges his or her lawyer, the lawyer is limited in the recourse available for breach. Except as provided by agreement, an attorney’s fee is strictly quid pro quo.41 When a client breaches the employment contract (retainer), the attorney is entitled only to relief under principles of quantum meruit.42 A discharged attorney may bring an action for those expenses and fees incurred up to that point in his or her representation of the client. An attorney, however, is not entitled to any incidental or consequential damages resulting from the discharge, such as lost profits.43 Damages are limited to quantum meruit because, were a client to be held liable for damages such as lost future profits, he or she would be dissuaded from exercising the right to discharge the lawyer for any reason:

"[P]ermitting a discharged attorney to recover the reasonable value of services rendered in quantum meruit, a principle inherently designed to prevent unjust enrichment, strikes the delicate balance between the need to deter clients from taking undue advantage of attorneys, on the one hand, and the public policy favoring the right of a client to terminate the attorney-client relationship without inhibition on the other."44

Any such inhibition would be a blatant violation of the client’s right to discharge his or her attorney. It is the absolute nature of the client discharge rule that raises questions about particular provisions common to modern retainers.

III. Nonrefundable Retainers

A nonrefundable retainer may be characterized as an engagement fee.45 Such an "agreement indicates the lawyer’s willingness to represent the client and ensure his or her availability to take on the case."46 This characterization of nonrefundable retainers is similar to the description of general, or traditional, retainers, common in the corporate realm.47 However, the two are distinct from one another, both in their general characteristics and in their ethical implications. While general retainers are usually found to be acceptable (and practical under certain conditions), there is a great deal of debate surrounding the ethical and legal implications of a purely nonrefundable retainer.

A. The New York Rule

In considering the enforceability of nonrefundable retainers, New York has adopted a position that focuses on the protection of the client. Its courts first addressed these contracts in Martin v. Camp.48 There, the Court of Appeals was asked to determine whether a law firm was entitled to the full value of its contract upon being dismissed by the client without cause.49 The court held that an attorney thus discharged only had "the right to recover the reasonable value of the services which he has rendered,"50 explaining that such a holding was "calculated to promote public confidence in the members of an honorable profession whose relation to their clients is personal and confidential."51 Thus, the court reemphasized that quantum meruit was to be the measure of reasonable damages for breach of an employment contract by the client. The court held that nonrefundable fees were only permissible under two conditions: (1) "where the attorney in entering into such a contract has changed his position or incurred expense,"52 and (2) "where an attorney is employed under a general retainer for a fixed period to perform legal services in relation to matters that may arise during the period of the contract."53 Thus, general retainer provisions are an exception to the general rule that lawyers may only collect quantum meruit damages for a client’s breach of a retainer agreement.54

While the Martin court held that attorneys can only collect under quantum meruit after breaches by clients, the New York Court of Appeals took the step to specifically ban nonrefundable retainer agreements in the 1994 case of In re Cooperman.55 In Cooperman, the attorney’s fee agreement for taking on a criminal case stated, "My minimum fee for appearing for [the client] is Fifteen Thousand…Dollars. This fee is not refundable for any reason whatsoever once I file a notice of appearance on [the client’s] behalf."56 In interpreting this provision, the court held that "special nonrefundable retainer fee agreements clash with public policy and transgress provisions of the Code of Professional Responsibility…essentially because theses fee agreements compromise the client’s absolute right to terminate the unique fiduciary attorney-client relationship."57 The court also noted that "[i]f special nonrefundable retainers are allowed to flourish, clients would be relegated to hostage status in an unwanted fiduciary relationship – an utter anomaly."58 Thus, the New York court conclusively held that nonrefundable retainers were a direct assault on the absolute right of the client to discharge his or her attorney and deemed such agreements unenforceable.59

Following New York’s lead in Martin v. Camp and In re Cooperman, many states have found simple nonrefundable retainers unenforceable. In a series of articles, Professor Lester Brickman has pointed out that such agreements are not only violative of a lawyer’s fiduciary obligations, but are also unenforceable under basic contract law.60 Professor Brickman points out that nonrefundable retainer provisions are essentially liquidated damage clauses,61 and

[t]o be valid under a liquidated damages analysis, a nonrefundable retainer has to be intended as an estimate of damages, with the lawyer and client [negotiating] the designated amount based on an assessment of the likely consequences to the lawyer should the client terminate the relationship…The lawyer also has to be able to demonstrate that his damages upon breach would be difficult if not impossible to determine.62

Typical nonrefundable retainers fail as liquidated damages provisions for two reasons. First, they entitle the attorney to compensation without regard to the basic requirement of mitigation of damages.63 Second, such retainer provisions serve as in terrorem devices, as nonrefundable retainers are meant to secure payment of fees, not compensate the lawyer for loss in the event of breach.64 Professor Brickman notes that, "[u]nless categorized as sui generis…virtually all nonrefundable retainers fail to meet the test for liquidated damages and therefore are unenforceable penalties."65

B. The Illinois Rule

Despite the ethical and legal problems of nonrefundable retainers cited by the New York courts, several state bar associations have issued opinions stating that such agreements are acceptable.66 The Illinois State Bar Association in 1981 issued an ethics opinion stating "a law firm may use an employment agreement which calls for a non-cancellable and non-refundable retainer as long as the fee is not excessive under…the Illinois Code of Professional Responsibility."67 The drafters pointed to the 1979 Illinois Supreme Court case of In re Kutner68 for support of their opinion. In that case, an attorney charged his client a five thousand dollar flat fee for representation in a criminal proceeding.69 The court found that the lawyer devoted no more than ten hours to the case before it was dismissed70 and censured the attorney for charging what amounted to an hourly rate of five hundred dollars.71 The court, however, made no mention of the nonrefundability of the fees as a basis for its holding, relying instead on the excessiveness of the fees. Thus, the Kutner court left impliedly upheld the use of nonrefundable retainers, but devoted no space to a discussion of their ethical implications.

The courts in Cooperman and Kutner both invalidated nonrefundable retainers, but for different reasons. However, it would seem that, if presented with the facts of either case, both courts would hold the provisions in question invalid. For example, if the Kutner court were presented with the attorney who charged fifteen thousand dollars for one court appearance (such as in Cooperman) it would hold such fees to be excessive and unenforceable.72 Likewise, if the Cooperman court were presented with the facts in Kutner, it would view the nonrefundable retainer as violative of the client discharge rule and invalidate the agreement. Thus, the courts essentially are working toward the same conclusion. Each approach has merit; but each also has disadvantages.

The New York approach, holding all nonrefundable retainers invalid, is attractive simply for its definitive nature. It provides a bright line test upon which both lawyers and clients can rely in entering a contract. It also explicitly accounts for the basic ethical tenets of the client discharge rule. The approach, however, falls short in that it may look at the attorney-client relationship from an overly idealistic point of view. It seems to approach the problem of nonrefundable retainers from an ivory tower, from which all clients appear to suffer at the hands of their unethical lawyers. The New York rule fails to take into account the realities of the legal profession and the fact that lawyers need to make money. It provides no protection for the attorney from dishonest or fickle clients.

The Illinois rule does provide such protection for attorneys. It allows for a lawyer to charge a modest sum to open a file and conduct the early stages of investigation for a case absent the fear of not being paid for the work. The Illinois approach also accounts for the concern embodied in the New York opinions and in the Rules of Professional Conduct that attorneys might take advantage of clients in need by drafting unfair retainer agreements. It accomplishes the goals of the New York rule (namely, preventing an attorney from bilking a client in need) by requiring that any fee charged by reasonable.

The Illinois approach is not perfect, however. By not providing the same type of bright line test offered by the New York cases, it opens the door for litigation of the reasonableness of fees in the future. In New York a lawyer using a nonrefundable retainer would automatically lose any case brought by a client. Thus, the likelihood of an attorney using such a fee system (and thereby having to defend it in court) is very low under the New York law. Under the Illinois rule, however, an attorney using nonrefundable retainers might be required to establish, in detail, the reasonableness of the upfront fee. Where a client disputes the reasonableness of the retainer fee, an attorney would be forced to justify not only the time spent on the file, but also the basic administrative costs of taking on a new client. It would seem that a definitive prohibition on such fees might be preferable to the time and effort spent in defending each charge arising therefrom. The Illinois rule is also susceptible to uneven application among the state’s court. What is reasonable to one judge may be unreasonable to another. The New York rule allows for no such differences in its approach to nonrefundable retainers.

IV. Conclusion.

It is unlikely that Illinois will follow the lead of the New York in banning the use of nonrefundable retainers. As mentioned above, both approaches will generally lead to the same result. The New York rule also suffers from a general lack of confidence in the ability and likelihood of attorneys behaving ethically. So long as an attorney practicing under the Illinois rule keeps in mind the reasonable requirements set forth in Kutner and the Rules of Professional Conduct, it is unlikely that his or her nonrefundable retainer will be held invalid. Overall, an attorney must act in good faith, with the interests of the client at the fore. As the court in Cooperman noted,

[t]he conduct of attorneys is not measured by how close to the edge of thin ice they skate. The measure of an attorney’s conduct is not how much clarity can be squeezed out of the strict letter of the law, but how much honor can be poured into the generous spirit of lawyer-client relationships. The punctilio of honor the most sensitive must be the prevailing standard.73

1 "The compensation of attorneys has been subject to criticism in books and articles since the fifteenth century." Thomas Hull, A History and Analysis of Retainer Fees, at last visited Sept. 16, 2005) (citing E.W. Ives, The Reputation of the Common Lawyers in English Society, 1450-1550, Univ. of Birmingham Hist. J. 130, 132-33 (1959)).

2 American Bar Association, Public Perceptions of Lawyers: 2002 Consumer Research Findings, available at (last visited De. 27, 2005).

3 Nathan M. Crystal, An introduction to Professional Responsibility 44 (1998).

4 E.g., clauses that provide for the accrual of interest on unpaid fees are generally viewed as enforceable. Illinois State Bar Ass’n Comm. on Prof. Ethics, 87-10 (1987) ("It is professionally proper for an attorney to charge and collect either interest or handling on past due accounts for legal fees.").

5 E.g., clauses that require a client to pay the lawyer’s fees for a suit to collect fees from the client are prohibited because they create a conflict of interest for the attorney. Lustig v. Horn, 315 Ill.App.3d 319, 732 N.E.2d 613 (1st Dist. 2000).

6 In re Kutner, 78 Ill.2d 157, 399 N.E.2d 963 (1979).

7 In re Cooperman, 633 N.E.2d 1069 (N.Y. 1994).

8 In re Silverton, 2004 WL 60709 (Cal. Bar Ct. 2004).

9 Id.

10 Crystal, supra note 3 at 21-22

11 Lustig, 315 Ill.App.3d at 325, 732 N.E.2d at 619.

12 Coughlin v. SeRine, 154 Ill.App.3d 510, 515, 507 N.E.2d 505, 509 (1st Dist. 1987).

13 Meinhard v. Salmon, 164 N.E. 545, 547 (N.Y. 1928).

14 Cooperman, 633 N.E.2d at 1071.

15 Bacon, Of Counsel, in The Essays of Francis Bacon, at 181 (1846) (quoted in Cooperman, 633 N.E.2d at 1071).

16 Cooperman, 633 N.E.2d at 1071.

17 Id.

18 Id.

19 Illinois Rules of Prof. Conduct 1.1 (2005).

20 Illinois Rules of Prof. Conduct 1.3 (2005).

21 Illinois Rules of Prof. Conduct 1.4 (2005).

22 Illinois Rules of Prof. Conduct 1.6 (2005).

23 Illinois Rules of Prof. Conduct 1.7-1.9 (2005).

24 Illinois Rules of Prof. Conduct 1.15 (2005)

25 Id.

26 Id.

27 Illinois Rules of Prof. Conduct 1.5 (2005); ABA Model Rules of Prof. Conduct 1.5 (2004). See also Matter of Brown, 669 N.E.2d 989, 990 (Ind. 1996) (stating that "[a] lawyer’s fee must be reasonable.").

28 Connelly v. Swick & Shapiro, P.C., 149 A.2d 1264, 1267 (D.C. 2000).

29 Rule 1.5(a) states that

[t]he factors to be considered in determining the reasonableness of a fee include the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that

the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer…performing the services; and (8) whether the fee is fixed or contingent. Id.

30 Id.

31 Id. Comment [2]. It should be noted that retainer agreements are not absolutely required by law prior to commencement of representation.

32 Id. Comment [5]. The Comment gives the example of a lawyer who enters an agreement whereby services "are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required." Such an agreement would potentially violate Rule 1.7 and 1.8 governing conflicts of interest between attorneys and their clients.

33 Illinois Rules of Prof. Conduct 1.7 & 1.8.

34 315 Ill.App.3d 319, 732 N.E.2d 613 (1st Dist. 2000).

35 Illinois Rules of Prof. Conduct 1.8.

36 See generally Lustig, 315 Ill.App.3d 319, 732 N.E.2d 613.

37 LaRocco v. Bakwin, 108 Ill.App.3d 723, 728, 439 N.E.2d 537, 541 (2d Dist. 1982).

38 Rhoades v. Norfolk & Western Railway Co., 78 Ill.2d 217, 228, 399 N.E.2d 969, 974 (1979) (citing Miller v. Solomon, 49 Ill.App.2d 156, 199 N.E.2d 660 (1st Dist. 1964) and Fracasse v. Brent, 494 P.2d 9 (Cal. 1972)).

39 Id.

40 Id.

41 Dierickx v. Wisehart, 195 So.2d 614, 616 (Fla. Dist. Ct. App. 1967) (citing Brickell V. Di Pietro, 12 So.2d 782 (Fla. 1943)).

42 Id.; Slater v. Jacobs, 56 Ill.App.3d 636, 371 N.E.2d 1054 (1st Dist. 1977).

43 See LaRocco, 108 Ill.App.3d 723, 439 N.E.2d 537.

44 In re Cooperman, 633 N.E.2d 1069, 1072 (N.Y. 1994) (citing Demov, Morris, Levin & Shein v. Glantz, 428 N.E.2d 387 (N.Y. 1981) (quotations omitted)).

45 Edward L. Winer, Get Started on the Right Foot: How to Negotiate a Written Retainer Agreement and Keep the Client Content, 11-FALL Fam. Advoc. 6, 7 (1988).

46 Id.

47 Crystal, supra note 3 at 45.

48 114 N.E. 46 (N.Y. 1916).

49 Id. at 47.

50 Id. at 48.

51 Id.

52 Id.

53 Id.

54 The ethics of this exception have been questioned recently due to the close similarity between general retainers and other nonrefundable retainer provisions. See Pamela Kunen, No Leg to Stand On: The General Retainer Exception to the Ban on Nonrefundable Retainers Must Fall, 17 Cardozo L. Rev. 719 (1996).

55 633 N.E.2d 1069 (N.Y. 1994).

56 Id. at 1070.

57 Id. at 1071.

58 Id. at 1072-73.

59 Cooperman, 633 N.E.2d at 1074. The court, however, was careful to note that minimum fee arrangements and general retainers are still enforceable so long as they are "not laden with the nonrefundability impediment of any services." Id. at 1074.

60 See Lester Brickman & Jonathan Klein, The Use of Advance Fee Retainer Agreements in Bankruptcy: Another Special Law for Lawyers?, 43 S.C. L. Rev. 1037 (1992); Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law, 57 Fordham L. Rev. 149 (1988).

61 Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law, 57 Fordham L. Rev. 149, 177 (1988).

62 Id. at 177-78.

63 Id. at 178.

64 Id.

65 Brickman & Klein, supra note 60 at 1068-69.

66 See Brickman & Cunningham, supra note 60 at 150 n. 5 (noting that the state bar associations in Hawaii, Illinois, Maryland, Oregon, South Carolina, and Texas have issued opinions explaining the ethical and legal acceptability of nonrefundable retainers.)

67 Illinois State Bar Ass’n Comm. On Professional Ethics, Op. 722 (1981).

68 78 Ill.2d 157, 399 N.E.2d 963 (1979).

69 Id. at 160-61.

70 Id. at 165.

71 Id. at 166

72 Keep in mind that the Kutner court held $5,000 for representation in a criminal case was unconscionable. Id. The Cooperman court was addressing a $15,000 nonrefundable fee. Cooperman, 633 N.E.2d at 1070.

73 Cooperman, 633 N.E.2d at 1073 (internal quotations omitted).

Nicholas E. Alexander, candidate for J.D., 2007; B.A., Cornell College, 2002.

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