126 N.J.L.J. 966
October 11, 1990
The issue presented by this inquiry is whether it is ethically permissible for an attorney to charge a nonrefundable retainer "under any circumstances." In considering this question, we have had the benefit not only of the authorities advanced by the inquirer, but also of the report of an Ad Hoc Committee on Nonrefundable Retainers which was established by the State Bar Association for the purpose of developing a response to the inquiry. We conclude, as did the Ad Hoc Committee, that nonrefundable retainers are not unethical per se but are subject always to the overriding precept that any fee arrangement must be reasonable and fair to the client.
The applicable Rules of Professional Conduct do not deal explicitly with the subject of nonrefundable retainer fees. RPC 1.5 provides that "(a) lawyer's fee shall be reasonable," and goes on to enumerate eight factors to be considered in determining reasonableness. Among these are several which are extrinsic to the actual performance of legal work, notably including "the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer." RPC 1.5(a)(2). This factor inferentially supports the view that a retainer may be fully earned, and therefore nonrefundable, when the attorney stands ready to provide the anticipated representation, whether or not it actually materializes. See Conover v. West Jersey Mortgage Co., 96 N.J. Eq. 441, 451 (Ch. 1924). It does not, however, answer the question directly.
RPC 1.16(d) deals with the termination of representation, and requires "refunding of any advance payment of fee that has not been earned." But this Rule does not address the question of whether or under what circumstances a fee may be considered "earned" upon receipt, and thus does not by its terms preclude nonrefundable retainers.
As the inquirer tells us, the available case law on this subject is "scant, conflicting and ambiguous." Our own Supreme Court, however, has had occasion to consider in a disciplinary context whether funds paid by a client to an attorney in anticipation of legal services to be rendered may be deposited in the attorney's business account as his own money, or must be held in the attorney's trust account as funds of the client. In re Stern, 92 N.J. 611 (1983). Noting that the then applicable Disciplinary Rule [DO 9-102(a)] generally required that all funds of clients paid to a lawyer must be deposited in the attorney's trust account, the Court framed the question before it as "whether the retainer fees collected by respondent constituted funds of the client, funds of the attorney, or both within the meaning of DO 9-102(A)." In re Stern, supra, 92 N.J. at 618. In response to that question, the Court observed that "[t]he traditional view in New Jersey was that 'in the absence of an express understanding to the contrary, [a retainer fee] is neither made nor received in payment of services contemplated. ...[It is a fee paid to counsel to make sure that he will represent and render service to his client in a given matter or matters."' Ibid, citing Conover v. West Jersey Mortgage Co., supra, 96 N.J. Eq. 441, 451. Stating that "today's definition is not so clear," the Court looked to the intention of the parties and found that "[u]nder that test, the record is inadequate to determine whether the sums received ... were to be treated as trust funds." In re Stern, supra, 92 N.J. at 618-19. The Court concluded:
In New Jersey it has not been held that a general retainer fee must be deposited in a trust account. DR 9-102(A) does not clearly call for its deposit. We adhere to that view pending our review and action upon the report and recommendations of the Supreme Court Committee on Model Rules of Professional Conduct, and hold that absent an explicit understanding that the retainer fee be separately maintained, a general retainer fee need not be deposited in an attorney's trust account.
Id. at 619.
The Committee on the Model Rules of Professional Conduct, in its report delivered during the month following the Stern decision, responded directly to the Court's statement as follows:
Model Rule 1.15, entitled "Safekeeping Property," defines the obligations of the attorney as to the holding of property of clients or third persons ... .
N.J.L.J. 93, Supp. p. 24 (July 28, 1983).
The Committee's view was adopted by the Court, and present RPC
1.15, "Safekeeping Property," consequently does not require
retainer payments to be deposited in lawyers' trust accounts. The
Court also concurred in the Committee's recommendation concerning
mandatory written communication to clients of the basis or rate of
a fee, and RPC 1.5(b) now so provides with respect to clients whom
an attorney has not regularly represented. The Court did not,
however, adopt the Committee's further suggestion that the
disposition of advance payments be included in such written
communications. Concededly, the Stern case, the response thereto by
the Committee on the Model Rules and the ensuing adoption of RPC's
1.5(b) and 1.15 in their present forms, do not squarely resolve the
issue before us. However, the explicit rejection of the trust fund
approach by both the Court and its Committee, particularly in view
of the Committee's above quoted reference to "the variety of
retainer fee arrangements that have served the interests of both
attorneys and their clients," supports the conclusion that in New
Jersey the disposition of retainer fees may properly be the subject
of fair and informed agreement between the parties to that
relationship. Accordingly, we hold that it is not unethical per se
for an attorney to charge a nonrefundable retainer, provided that
such a fee arrangement is fair and reasonable under the
circumstances of the particular representation. RPC 1.5; see also
American Trial Lawyers Ass'n v. New Jersey Supreme Court, 126 N.J.
Super. 577, 591 (App. Div. 1973)
Finally, we note the Ad Hoc Committee's recommendation that we condition our ruling on nonrefundable retainers upon compliance by the attorney with a specific set of requirements which we believe would be better addressed by appropriate amendments to the Court Rules. Indeed, the Committee goes on to recommend adoption of the same requirements in the form of a new Rule of Civil Practice. We would only observe that we concur fully with the Committee's view that an initially reasonable nonrefundable retainer arrangement may become unreasonable because of subsequent unforseen circumstances, such as the sudden death of a client resulting in an abatement of the action. Clearly the unused portion of even a nonrefundable retainer should be returned if contravening events should render it unconscionable for the attorney to keep it.