When attorneys work on business actual property or different transactions, they sometimes cost for his or her time by the hour. If the transaction doesn’t shut, the invoice is identical as if it did shut. Shoppers 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—operating up time and authorized charges—till the very finish.

May it make extra sense to have the attorneys agree they’ll receives a commission provided that the deal closes? That might let a shopper keep away from the danger of getting to pay for a transaction that didn’t occur. It may in concept, in fact, give the attorneys an incentive to chop corners and overlook dangers and authorized deficiencies simply to ensure there’s a closing. Alternatively, hourly billing could give the attorneys different unhealthy incentives, corresponding to incentives to be inefficient, overcomplicate transactions, increase spurious points, and never let these points die. Any billing system creates its personal incentives, each good and unhealthy.

In a single current company transaction, a New York legislation agency agreed it might 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.

Certain sufficient, the deal by no means closed. It died in such a manner that it may by no means come again to life. In the midst 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 regarded on the engagement letter. It mentioned authorized charges had 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 an excessive 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 chance that the deal ended up not closing. If the agency priced 10 comparable offers this manner, and 6 of these finally 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 related 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.

In fact, it’s unattainable to foretell the chance of closing for any explicit deal, therefore it’s unattainable to calculate what premium the attorneys ought to cost to compensate for the danger of not getting paid in any respect. In order 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 whether the transaction closes.

In some contexts, although, it could 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 food plan of very related transactions involving very related counterparties and deal constructions—corresponding to a gentle food plan of mid-market acquisitions, mortgage closings, or leases—then the shopper and its counsel would possibly very effectively conform to a reduction for offers that don’t shut and premiums for offers that do.

The low cost doesn’t must be 100%. The premium doesn’t must 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.