Beware the 'Unworthy Client'

Times are hard all over and law firms are all under pressure to boost revenue. You may be tempted to lower your standards for client intake in difficult times. Resist the temptation. About a third of all claims against law firms ' and a much greater percentage of the very largest claims ' result from taking on “unworthy clients.”

What Is an Unworthy Client?

A good working definition is a client who is incompetent, dishonest or financially weak ' sometimes all three. Here is a typical scenario: The client convinces third parties, typically lenders or investors, to give him large sums of money. Ultimately, the money is lost. Sometimes the client disappears or gets indicted. The lenders/investors sue your law firm. Sometimes the client himself, or the receiver or trustee of a bankrupt client, sues the firm as well. Typically, plaintiffs in these cases are not claiming there was any classic “error or omission” in the firm's legal work. The claims typically include aiding and abetting the client's fraud, negligent business advice or liability arising out of some representation or opinion given to the third parties by the law firm on behalf of its client. The refrain I often hear in these cases is: Why did we ever get involved with this client in the first place?

Red Flags

These include: 1) Clients with a prior record of failed business ventures, bankruptcy or other litigation; 2) Clients who have recently switched lawyers, especially if prior counsel has not been fully paid; 3) Clients who are reluctant to sign Engagement Letters and pay appropriate retainers; and 4) Clients who simply have unreasonable goals and expectations.

How Do You Avoid This Problem?

The short answer is to have good new client intake procedures. Many firms now require second partner review or review of new clients by a “new business intake” committee. Here are a few other tips: 1) If your preliminary screening turns up any red flags, conduct a more generalized database search on the prospective client; 2) If the client is switching law firms, get permission to speak with prior counsel and do so. 3) Ask the hard questions; and 4) Apply a common-sense “smell test” to the new matter. In a litigation context, does the client appear to have a viable claim or defense, and one which justifies the actual and opportunity costs of litigating? Does the client appear to have the experience, sophistication and resources to achieve his stated goals? Does the client have reasonable expectations about the outcome of the case, or is he looking for “pie in the sky”?

How Can You Mitigate the Effects of an Unworthy Client?

If you decide, after careful consideration, to take on or continue representing a risky client, there are certain precautions you can take to minimize the firm's exposure:

Carefully limit the scope of your engagement ' in writing.

Get an appropriate retainer and keep it refreshed. Bill regularly and try not to let the client get behind on payment. Avoid giving the client business advice, or vouching for the client's character or solvency to third parties, such as lenders or investors

Conclusion

Follow these simple rules and, while you may not get richer in difficult times, you will become much wiser and possibly avoid a catastrophic claim against your law firm.

Richard Zielinski is a director in the litigation group of Goulston & Storrs. He is a general trial lawyer who frequently defends law firms in professional liability matters. Richard can be reached at [email protected].

Times are hard all over and law firms are all under pressure to boost revenue. You may be tempted to lower your standards for client intake in difficult times. Resist the temptation. About a third of all claims against law firms ' and a much greater percentage of the very largest claims ' result from taking on “unworthy clients.”

What Is an Unworthy Client?

A good working definition is a client who is incompetent, dishonest or financially weak ' sometimes all three. Here is a typical scenario: The client convinces third parties, typically lenders or investors, to give him large sums of money. Ultimately, the money is lost. Sometimes the client disappears or gets indicted. The lenders/investors sue your law firm. Sometimes the client himself, or the receiver or trustee of a bankrupt client, sues the firm as well. Typically, plaintiffs in these cases are not claiming there was any classic “error or omission” in the firm's legal work. The claims typically include aiding and abetting the client's fraud, negligent business advice or liability arising out of some representation or opinion given to the third parties by the law firm on behalf of its client. The refrain I often hear in these cases is: Why did we ever get involved with this client in the first place?

Red Flags

These include: 1) Clients with a prior record of failed business ventures, bankruptcy or other litigation; 2) Clients who have recently switched lawyers, especially if prior counsel has not been fully paid; 3) Clients who are reluctant to sign Engagement Letters and pay appropriate retainers; and 4) Clients who simply have unreasonable goals and expectations.

How Do You Avoid This Problem?

The short answer is to have good new client intake procedures. Many firms now require second partner review or review of new clients by a “new business intake” committee. Here are a few other tips: 1) If your preliminary screening turns up any red flags, conduct a more generalized database search on the prospective client; 2) If the client is switching law firms, get permission to speak with prior counsel and do so. 3) Ask the hard questions; and 4) Apply a common-sense “smell test” to the new matter. In a litigation context, does the client appear to have a viable claim or defense, and one which justifies the actual and opportunity costs of litigating? Does the client appear to have the experience, sophistication and resources to achieve his stated goals? Does the client have reasonable expectations about the outcome of the case, or is he looking for “pie in the sky”?

How Can You Mitigate the Effects of an Unworthy Client?

If you decide, after careful consideration, to take on or continue representing a risky client, there are certain precautions you can take to minimize the firm's exposure:

Carefully limit the scope of your engagement ' in writing.

Get an appropriate retainer and keep it refreshed. Bill regularly and try not to let the client get behind on payment. Avoid giving the client business advice, or vouching for the client's character or solvency to third parties, such as lenders or investors

Conclusion

Follow these simple rules and, while you may not get richer in difficult times, you will become much wiser and possibly avoid a catastrophic claim against your law firm.

Richard Zielinski is a director in the litigation group of Goulston & Storrs. He is a general trial lawyer who frequently defends law firms in professional liability matters. Richard can be reached at [email protected].