Wednesday, January 12, 2005

Consulting Contract Pitfalls

I have worked with a number of consultants who, long after the consulting agreement has been signed and after the work has been completed, come to me for help in collecting their fees because the client has failed to pay. One of the biggest hurdles facing consultants in this situation is the amount of attorney fees that can be run up in chasing down the deadbeat client. One way to ameliorate this problem is to include a provision in the consulting agreement that specifies that, in the event of a lawsuit or claim under the agreement, the prevailing party can recover his or her legal fees. This provision may or may not stand up, but it puts the consultant in a much better bargaining position.

These and other considerations are contained in a handy checklist, which can be found here:

Sue the Bastards? Consider the cost first...

So, you’ve been ripped off? The other party to a contract has broken his promise? You have not been paid for all that consulting work you completed? What to do? Why, SUE, of course! Take the bastards to court. Moreover, it’s not about the MONEY, it’s a matter of PRINCIPLE! Right?

Well, it may not be about the money now, but it will be. Even a relatively simple lawsuit gets expensive fast. An average simple case can quickly run up fees of $20,000, and more complex cases cost more, much more. Why is it so expensive? Part of the reason is that most attorneys will not take on a commercial lawsuit on a contingency basis, that is, for a portion of any judgment or settlement recovery. Instead, most commercial attorneys will charge by the hour, win, lose, or draw. And hourly rates these days generally start at around $200, with most lawyers charging more than that. Experienced lawyers will charge a lot more. Therefore, every ten hours of work will cost at least $2,000. If a lawyer has to spend time meeting with you and reviewing documents in order to learn the case, maybe doing a little research, taking “discovery” (that is, getting information from the other side in the form of written questions, document production, and depositions under oath before a stenographer), and going to initial hearings in court, this work can easily take 50, 60 hours or more in a simple case. That’s at least $10,000 right there, for a simple case. Going to trial? Another $5,000 easily to prepare for and participate in a one-day trial, and probably a lot more. And, that does not include expenses. The fee charged by the courts to file a suit is usually over $100, and the transcript from a six-hour deposition can run $500, $800, or more. Need an expert witness? He or she will charge by the hour, too, and probably at a premium.

But, wait a minute . . . if you go to court and win, the other side has to pay your attorney fees, right? Wrong. The loser almost never pays the winner's attorney fees. The award of attorney fees in this country is governed by the “American Rule,” which states that each side pays his or her own legal fees. So, even if you sue and win, you may still lose because legal fees will eat up your recovery. Sometimes contracts contain a provision under which the prevailing party in litigation is entitled to recover attorney fees, but such provisions are not a guarantee, and the court may chose not to award attorney fees for various reasons.

Moreover, it is easier to start a lawsuit than to stop one. If the other side decides to countersue you for some reason (it did not pay your consulting fees because you screwed up the project and actually caused damage to the company, for example), you may not be able to get out of the suit. In many jurisdictions, once the other side has responded to your initial complaint, you cannot simply terminate the action without the approval of the other side or the court. Starting a lawsuit is like boarding a train; you are just a passenger, not the engineer. And, lawsuits often become runaway trains with no one at the controls.

So, what to do? Well, for one thing, consider a lawsuit to be a last resort, not your first response. Sometimes disputes can be resolved by a simple, courteous telephone call. I have been witness to many instances in which one party asked the other, deep into expensive litigation, why didn’t you just call me instead of suing me? Okay, so it’s not usually that simple, but it can’t hurt to try, either. If that does not work, consider getting the other side to agree to mediate the dispute. That is, hire a neutral third party, maybe a retired judge or a lawyer who does not represent either party, to sit down in a conference room and knock heads together. This may take a few days and cost a few hundred or a few thousand dollars, but it will be faster and cheaper than going to court.

Of course, a lawsuit may be your only option. If so, plan carefully. First, if your claim is small (say, under $10,000), look into whether you can file the suit yourself as a collection action in small claims court. Second, consider your choice of counsel. You don’t have to hire the best litigator in town for a simple case. You probably don’t need Johnny Cochran or David Bois or Gerry Spence for your breach of contract action (although I am sure that any of them would be superb in such a case, of course). Don’t call Red Adair to put out a house fire. Ask you friends for a reference, or call your local bar association, which will probably have a lawyer referral service (if you can’t find a bar association, call the clerk of your local court, who can probably give you the number). Third, make sure that you know what the case is going to cost. Have your lawyer give you estimates for what various stages of the litigation will cost (but recognize that these are usually just educated guesses, not firm prices). Budget accordingly. If you are not clear about how much something is likely to cost, get a clarification from your lawyer.

When people have been wronged and tempers are flaring, they want “justice” and they want to stand on “principle,” no matter what the cost. After writing a few checks for $10,00 or $20,000 for legal fees, however, the cost of standing on principle starts to get a bit high. Suddenly, principle becomes less critical. If you have been wronged, pursue your options carefully. If your only viable option is litigation, so be it. Just be sure that you go into it with your eyes, and your wallet, open.