Alternative Fee Spotlight: The Simplicity Of Fee Caps

“Nature is pleased with simplicity. And nature is no dummy.”
Isaac Newton

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Above all things, clients do not want headaches.  They certainly don’t want headaches from their outside lawyers.  After all, outside lawyers are supposed to fix headaches, not cause them.  So amid an increasingly roiling sea of alternative fee arrangements, the simplest alternatives may stand out as the most appealing to legal departments who engage outside counsel for litigated and non-litigated matters.

And, believe it or not, some legal departments are reticent to  dispense with the hourly fee altogether, fearing that they may well be trading one gamble with outside counsel  for another:  a flat fee, for example, can under the right circumstances be a worse deal for a client than a high hourly rate, i.e., the bad faith or coverage case that is dismissed early, or settled within 60 days.

Enter the hourly fee with caps concept, an arrangement which not only provides simplicity, but allows legal departments to have their cake and eat it too.  Under the arrangement, outside counsel is engaged under a traditional hourly arrangement, but a cap is agreed to and put into place.  The cap can either be a single cap for the entire engagement, or it can be broken down into separate caps  for each phase of a case.  Caps ensure that the legal department has cost control over the matters it refers out to counsel.  It provides some muscle to legal project management, and not merely lip service.

If a legal department sends out a matter which outside counsel gets dismissed at the pleading stage, or resolves within a couple of months, the client gets the benefit of that speed, efficiency, and reduced expense — it pays only the hourly fee for the minimal amount of work.  At the same time, should a matter take a more protracted course, the client still has the cost control and budget certainty which either an overall fee cap, or phased fee caps,  provide.

One caveat:  as with all alternative fee arrangements, both the legal department and outside counsel must have a level of trust and goodwill which allows for adjustment and renegotiation of the fee mid-course, should their be a sufficiently large and unforeseen change in circumstances to warrant doing so.  The adjustments, however, can only be made if the client is agreeable to doing so, and should be the rare exception to the arrangement, rather than the rule.

For more information on how to put fee caps to work for your legal department to reduce costs and fine tune legal project management budgeting, reach me at chaddick@dmclaw.com or 717-731-4800.

 

 

 

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Author: CJ Haddick

C.J. Haddick is a Director with the law firm of Dickie, McCamey, & Chilcote, PC, based in Pittsburgh, Pa. He has advised and represented insurers in insurance coverage and bad faith litigation for more than a quarter of a century, and written and spoken throughout the United States on insurance coverage and bad faith prevention and litigation. He is Managing Director of the firm's Harrisburg, Pa. office. Reach him at chaddick@dmclaw.com or 717-731-4800.

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