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Ought to legal professionals be paid hourly or primarily based on outcomes? Each strategies have drawbacks.
When legal professionals work on industrial actual property or different transactions, they usually cost for his or her time by the hour. If the transaction doesn’t shut, the invoice is similar as if it did shut. Purchasers who face these payments don’t like them. These payments trigger most ache if the transaction almost closed and the lawyer stored engaged on it—working up time and authorized charges—till the very finish.
Would possibly it make extra sense to have the legal professionals agree they’ll receives a commission provided that the deal closes? That may let a shopper keep away from the danger of getting to pay for a transaction that didn’t occur. It might in concept, in fact, give the legal professionals an incentive to chop corners and overlook dangers and authorized deficiencies simply to verify there’s a closing. Alternatively, hourly billing could give the legal professionals different dangerous incentives, reminiscent of incentives to be inefficient, overcomplicate transactions, elevate spurious points, and never let these points die. Any billing system creates its personal incentives, each good and dangerous.
In a single current company transaction, a New York legislation agency agreed it could gather its authorized charges at closing. The governing engagement letter didn’t set a deadline for the closing. It additionally didn’t say what would occur if the deal by no means closed in any respect.
Positive sufficient, the deal by no means closed. It died in such a manner that it might by no means come again to life. In the middle of doing that, it ran up a number of million {dollars} in authorized charges. The agency sued to gather these unpaid tens of millions. The shopper went again and appeared on the engagement letter. It stated authorized charges have been due at closing. Noting that no closing had ever occurred, the shopper refused to pay. The matter is now in litigation (New York State Supreme Court docket, New York County, Index No. 651428/2023).
From the shopper’s perspective, that kind of association makes a substantial amount of sense. If transactional authorized work is meant to ship worth within the type of a closed transaction, then the worth isn’t realized if the transaction doesn’t shut. The legislation agency shares the danger of effort and time wasted on actions that don’t produce worth.
Did the association make sense from the legislation agency’s perspective? If the agency billed at its common charges however collected nothing if the deal didn’t shut, then the agency was successfully discounting its hourly charges to the extent of the probability that the deal ended up not closing. If the agency priced 10 comparable offers this fashion, and 6 of these ultimately closed, then the agency would have successfully discounted its charges by as much as 40% total.
In response, the agency ought to demand a premium if it agrees to this kind of association and a deal truly closes. For instance, if the agency can reliably predict that six out of 10 comparable offers will shut, then to compensate for the 4 busted offers, the agency ought to cost a 66% premium on the six offers that do shut.
After all, it’s not possible to foretell the probability of closing for any specific deal, therefore it’s not possible to calculate what premium the legal professionals ought to cost to compensate for the danger of not getting paid in any respect. So that they’ll most likely overestimate the premium to compensate for the uncertainty. That dynamic, plus shopper resistance to paying a premium on authorized payments that the shopper already regards as too excessive, could drive the attorney-client billing relationship again to the usage of easy hourly charges with no contingency tied as to if the transaction closes.
In some contexts, although, it might nonetheless make sense to regulate authorized charges primarily based on whether or not a closing happens. For instance, if a legislation agency handles a gentle eating regimen of very comparable transactions involving very comparable counterparties and deal buildings—reminiscent of a gentle eating regimen of mid-market acquisitions, mortgage closings, or leases—then the shopper and its counsel would possibly very nicely comply with a reduction for offers that don’t shut and premiums for offers that do.
The low cost doesn’t have to be 100%. The premium doesn’t have to be so dramatic both. Such an association would assist ease the shopper’s ache for offers that don’t occur. And the legislation agency would share within the satisfaction of offers that do shut.
