What is a Retention Contract?
Retention contracts are simply contracts by which an attorney is retained by a client in connection with a specific matter. Retention agreements can be covering any legal issues, whether that agreement relates to the representation itself, such as the scope of the representation, fees, etc., or to the payment of the attorney’s fees memorandum is prepared setting forth the terms they discussed. Such a document is sometimes referred to as a ‘retainer agreement’. Of course, a retainer contract of this sort is much more than just a fee agreement. It is a retention contract.
A retention contract may encompass all matters that the attorney may perform while the representation continues. In some instances, it will even include issues that arise in the future. For instance, in an estate matter, one can agree to have the lawyer represent them for all matters relating to that estate prior to and after the person’s death, such as drafting a will, managing trusts, and dealing with the administration of the estate once the person is deceased.
There is no formal law requiring retained firms to provide signed contracts . However, there are often times where a contract can be very useful. For instance, if a client was to get upset with a firm or an attorney at a firm, the client can cancel the contract. However, the client will still be responsible for the fees being incurred by the firm at the time not because the client gave permission to go ahead, but just the opposite by opting for the representation to carry on in spite of cancellation of the contract. Retention contracts can protect the firm from being fired in the middle of trial, or in the middle of another type of important proceeding, such as an arbitration.
A retention contract will go a long way towards establishing an attorney/client relationship if the other side questions it. All he needs to do is present a copy of the contract that the client signed. In the bankruptcy context, this is very important, because attorneys that perform bankruptcy work need to be paid in advance. Sometimes, a client may not understand the difference between being paid before work is performed and being charged after work is done.
Retentions: Elements of a Retention Contract
A retention contract must have some essential elements to be enforceable and binding on a company. On the most basic level, a retention contract must have some clear terms regarding how long the retainer is valid, under what conditions payment will be made, what services are included, and what expectations either party has. The retention contract should set out the scope of work to be performed, the reasonable value of that work, and specify the means by which payment will be made for the work that the company must then do. As is typical with all contract agreements, the terms must not violate public policy, and therefore the contract must contain current information and act reasonably in all respects.
From a company’s standpoint, whether or not a retention contract is enforceable is yet to be decided. The services rendered under a retention contract are most likely shareable among all of the company’s stockholders due to the ability to activate such service on behalf of any stockholder who engages its services.
Retention Contracts: Advantages to the Parties
Retention contracts are beneficial in many ways for both employers and employees. They offer employees the advantage of job security, often through severance pay clauses, while ensuring that employers secure the ongoing services of their employees. In this section, we examine some of the most important benefits retention contracts can provide.
Retention contracts create certainty for both employees and employers. Employees are provided an economic motive to remain in their positions for a specified period, thereby providing employers with stability during that time. By ensuring employees understand the terms of their employment, retention contracts can also minimize uncertainty and resulting anxiety within a business.
They can be used as a retention tool to ensure that identified key employees and leaders remain with the organization. These contracts are useful when a company begins to identify gaps in its leadership or where there is a need for specific technical or industry experience. Similarly, they can provide an opportunity for the company to retain specific management or production expertise.
Retention contracts also ensure that an employee is held accountable to the terms of their position. This will often include specifications around their compensation, such as incentive pay, along with outlining the duties and obligations of the employee. This helps to ensure that the employee is performing their role to the standards expected.
Lastly, retention contracts can be favourable for the employer in the deal-structure of a sale. In the event that a company is sold, the retention of key employees will often be critical to ensure continuity of the business and a smooth transition during the sale.
Common Uses and Applications
Across various sectors, companies leverage retention contracts to ensure a consistent relationship with their clients. In the legal sector, attorneys often use retention contracts in conjunction with issues of representation and conflict of interest. By entering into a retention contract that requires that a client keep the services of a particular attorney, an attorney can create an advantage in a particular representation where a conflict could arise, while at the same time, making a certain client unavailable to her competition. Construction companies will use retention contracts in conjunction with pre-construction agreements, which require that a particular contractor will retain a certain subcontractor. By doing so, a contractor guarantees that a subcontractor will be available for a project, while allowing the construction company to bid an even lower price, since it knows exactly who will be carrying out the project in advance.
Further, a retention contract can be an effective tool for consultancies. Particularly, in a market where technology and information, as well as analysis of that information, are king; a consultancy can ensure that it will obtain all of the relevant information it needs in a timely and accurate manner by compelling the client to retain its services. Retention contracts can create stability in industries that rely on particular skill sets or information.
Negotiating and Drafting Retention Contracts
Retention contracts are a critical component of an overall retention policy. The drafting and negotiation strategies surrounding retention contracts should mirror the basic principles we have outlined above. In addition, however, there may be some unique drafting tips to keep in mind that are specific to retention contracts.
A common tactic in the negotiation of most retention contracts is to insert a clause allowing the company or the underwriter to alter the document with only prior consent. In effect, the ability to "write into" the document is one of the most powerful. For that reason, it should be viewed in the same manner as other restrictions on the company’s ability to amend the contract. The company, absent a contractual modification, may not be able to alter the language of the plan without first obtaining the approval of the plan administrator. Some may argue that a company should not be restricted in its ability to alter a retention contract, because the company has to pay the retention itself. While this argument may carry some weight, it is not uncommon to avoid this provision when negotiating retention contracts. After all , the company may not be the sole party with an interest in the retention program.
Two areas where there may be some additional "risk premium" associated with a retention contract are the proposed law applicable to bonuses, and the uncertainty surrounding whether the potential need to disclose names of staff members holding a retention would invalidate the tax deductibility of the bonus. On the former issue, whether the proposed law requiring that a retention contract be effective for at least six months is enforced—even if it is enacted—remains an open question. However, the application of the proposed requirement seems fairly straightforward to a retention that is intended to benefit an employee for a period of at least six months. The latter issue is much less settled, and, as a result, may carry more risk.
Retention contracts are generally designed to vest on the earliest of (a) a specified date, (b) the change in control date, and (c) termination of employment. This type of formula avoids the problem that many retention contracts face, i.e., the employee does not actually provide any services in the years leading up to the change in ownership. It also prevents some of the retention contracts from running afoul of Section 162(m). This example is somewhat simplified, but it generally captures the flexibility that can be included in retention contracts.
Issues and Risks to Avoid When Using Retention Contracts
A common issue to avoid in retention contracts is unclear terms. Sometimes language is employed that seems clear to the person writing the contract, but the person signing the agreement comes away from the negotiation with a different interpretation. In general, it’s good practice to have a definition section at the beginning of a contract and then to set out the specific defined terms as they apply throughout the document. While we all know that "costs" would not be limited to just what is spent on the case alone, but could also include things like travel expenses and photocopies, it is useful to spell this out clearly. Terms like "case expenses" or "disbursements" are not always understood in the same way by both parties, so be specific.
More basic pitfalls involve unintentionally creating additional work at the front end of the litigation p. For example, suppose you have a fee agreement that calls for straight hourly rates with expense reimbursement as part of the compensation. However, it is unclear if this covers the associate attorneys or just the named partner’s time. This will obviously cause some friction during the course of your case when your client receives his or her first statement and sees that a substantial amount has been charged by someone other than the partner. Even more likely is the situation where it is not clear whether certain items are reimbursable or not. For example, you may assume as the attorney that a trip to the courthouse is part of the cost of litigating a case and you factor this into your budget. However, your client balks at paying for courthouses visits because, according to the contract, they fall under the category of "incidental costs." Such confusion can be avoided by putting down in clear terms exactly what will be reimbursed and how.
Every retention contract is different and will be of particular use to different attorneys and firms, but all should have clearly laid out terms. Avoiding pitfalls by spelling out common misunderstandings between the parties will go a long way towards making the contract effective and enforceable.
Legal Implications and Enforceability
The legal enforceability of an attorney’s fee retention contract was challenged by the Florida Supreme Court in its 2006 decision in Florida Bar v. Piper, 972 So.2d 187 (Fla. 2007). In Piper, the court adopted the sanction recommended by a referee based on violations committed by a lawyer in setting his fee. While an attorney may contract at will with clients for performance of legal services, such contract may not be enforceable if it violates public policy. In Piper, an attorney contracted with a client for a non-contingent fee noting that the fee would be fixed, even if the work done was more than was anticipated . Failure to disclose all material facts, misrepresentation and unilaterally changing the terms of the contract, even with the client’s consent, are discussed by the Piper court as a basis for upholding the referee’s recommendation of a significant sanction against the subject lawyer. Given the privacy rights of clients, it is important to keep the terms of retention contracts confidential. Contracts can be protected from disclosure until proceedings are initiated for which disclosure is permitted or required under Florida Statute 119.0701(2)(a) and (b). Further, the contract can be protected under Rule Regulating the Florida Bar 5-1.1(g) and (h). Florida Statute 669.211 requires that contracts be signed by all parties or their duly authorized agents. The execution requirement may be satisfied by execution in counterparts or by electronic means.