A recent decision by a New York court, rejecting a law firm’s breach of contract claim to recover $2.3 million in legal fees from a client highlights both the importance of a detailed written representation agreement and yet another reason to consider adopting flat fees.

According to the New York Law Journal, Kasowitz, Benson, Torres & Friedman were retained in July 2011 by a hedge fund manager and his company to file a discrimination suit against a New York coop for rejecting an application to purchase a new unit. A little more than a year and $3.2 million in legal fees later, the firm withdrew from representation, citing an unpaid balance of $2.3 million in fees.

Subsequently – and in a move that’s often the kiss of death for law firms – Kasowitz sued to recover the unpaid balance from its former client. Notwithstanding that a court referee found that the firm was entitled to the $2.3 million balance, Judge Anil Singh denied Kasowitz’s summary judgment motion to recover the full amount due, citing triable issues, in particular the firm’s compliance with New York’s rules on client engagement agreements.

Specifically, NYCRR §1215 require an attorney engagement agreement to address the scope of legal services to be delivered, attorney’s fees and expenses and billing practices. Here, Judge Singh found that Kasowitz’s fee agreement fell short. It identified only the adversary in the litigation but provided no other detail about the services to be provided. As to billing,

The Kasowitz firm’s engagement letter stated that bills were based on hourly time charges, disbursements were billed separately and bills were rendered monthly. It stated, “We require an initial retainer of $62,500” and “any unused portion of the retainer will be returned to you when the matter is complete.”

And while these stock provisions sound clear and certain to most lawyers, from the Judge’s perspective:

“The client is paying $62,500 as an initial retainer, the ‘unused portion of which shall be returned,'” Singh said, partly citing the engagement letter. “How does that evolve into a bill for over three million dollars?”

Ultimately, Judge Singh concluded that the Kasowitz retainer agreement filed to establish “objective meeting of the minds” required to sustain an enforceable contract, thus precluding a grant of summary judgment. Still, Kasowitz will get a second bite at the apple; Judge Singh ruled that the firm can recover in quantum meruit to the extent that the fair and reasonable value of legal services can be established.

Of course, Kasowitz could have avoided this outcome with a flat fee agreement. A flat fee agreement contains a fixed price for a fixed scope of services and thus, provides the certainty that Judge Singh found absent from Kasowitz’s engagement agreement.

Still, most lawyers resist the flat fee, feeling that they’ll somehow underestimate the scope of work and be left working for the equivalent of pennies per hour. That risk can be mitigated by specifying not just a flat fee, but also a fixed scope of work. But even assuming that lawyers take a bath on flat fees in a couple of cases, how is Kasowitz’s hourly alternative – waiting 3+ years to collect a $2.3 million fee – any better?

For more information on incorporating flat fees into your representation agreements, purchase a copy of  The Art, Science & Ethics of the 21st Century Retainer Agreement.