Recently, I met with a business-owner who was looking to replace the business lawyer with whom he had been working.  He was disappointed that his previous attorney had failed to advise him of certain tax consequences of buying out his business partner.  He wanted to know if I, as his company’s business attorney, would have caught the tax issue.  It was pretty clear this question was of overriding importance and my answer would make the difference between being hired or not.  What to do?

It is true that many areas of law overlap.  A client’s business decisions will often have implications in terms of taxation, estate planning, asset protection, immigration, etc.  Sometimes the implications will be fairly obvious, in which case you can probably count on your lawyer to bring them to your attention.  Sometimes, however, they are not obvious at all.

In the case of our potential client, the tax issue his former attorney failed to advise on was actually rather obscure.  Was it fair or reasonable for the client to expect his attorney to catch it?  Well, that depends.

I. Contracted Legal Services

Up to a certain point in our conversation, the potential client had been talking to me about individual tasks he needed performed —i.e. preparation of a shareholder agreement, asset purchase agreement, employee agreements, etc.  These are typical things a business attorney would do, and the most cost-effective way of getting the work done is to “piecemeal” the assignments.  So, my plan was to provide a quote for the requested services.

Now, what exactly does a client get for his money when paying for legal services on a task-by-task basis?  More importantly, what does the client not get?

A lot of small business owners (and people generally) hate paying legal fees.  They tend to see lawyers as a necessary evil rather than a means to an end.  Don’t worry.  I won’t spend time here trying to convince you of the opposite.

Lawyers are business-people themselves, and they understand clients want to pay as little in legal fees as possible.  Minimizing expenses is always important.  So, how can lawyers accommodate that demand?

One thing we can do is limit the scope of the services.  You want a rock-bottom price?  Okay, then I will do just the work you are requesting and refrain from putting in extra time.  That is fair for both of us and good business practice.  Fine.

Well, you can see where this is going, right?  If you hire the lawyer to prepare an asset purchase agreement, and you want the billing limited to the time it takes to do that specific task, then don’t expect the lawyer to also _

• research all possible tax implications
• anticipate effects on your estate planning
• provide an asset-protection analysis
• advise as to effect on your immgration status or the company’s ability to sponsor foreign worker.
• etc.

It is very hard to have your cake and eat it, too.  If that is what you are expecting, be prepared for disappointment.

II.  In-House Counsel

Let’s face it.  Many of the decisions you make for your business have far-reaching ramifications.  Even a simply task like preparing a contract could involve an indepth review of both your personal circumstances and your company’s affairs.

The ideal scenario, of course, would be to have a lawyer or trusted advisor who is alert to ALL the relevant issues and who will give advice each step of the way.  Well, you can have that.  It’s called “in-house counsel.”

Your company can hire an attorney as an employee who will become familiar with the business and your company’s legal affairs.  Once you do that, and the lawyer has a chance to see the big picture, it is fair to expect him or her to anticipate consequences and provide counsel along the way.  After all, you are the lawyer’s only client.

Even then, though, you should not expect the lawyer to be an expert in every field of law.  We have specialists for a reason.  Nobody can be expected to have detailed knowledge of every area . . . and, if you ever did find someone like that, you would not want to pay the salary he or she would command.

So, the in-house counsel scenario costs the company an additional salary.  In terms of expense, that is a far cry from paying an attorney to simply draft a contract, right?  These are two ends of the spectrum.

Is there, perhaps, anything in between?

III.  General Counsel

Some attorneys offer general counsel services.  In this scenario, the attorney continues to have his outside practice, and you will not be his/her only client.  Usually, general counsel charge a monthly retainer.  That compensation is paid whether or not the lawyer actually has many tasks to perform.  The retainer, presumably, will be less than what the company would pay for in-house counsel, and you can probably expect to get a much more experienced lawyer this way.

In exchange for the monthly payment, general counsel will spend time meeting with management, asking and answering questions, studying the business model, consulting with other experts, proposing ideas and solutions, etc.  The lawyer will act much like in-house counsel, but he/she will not be down the hall or available at any given moment.

The exact terms of the arrangement will have to be negotiated.  In many cases, the general counsel will limit the monthly time-commitment and/or services to be provided.  You may not be able to expect the general counsel will handle a trial, for example, as part of the normal monthly flat fee.

Nonetheless, the general counsel arrangement is one that works well for some small to medium-sized businesses.  In some sense, it gives your company the best of both worlds.

IV. Conclusion

Naturally, I wanted to bring the potential client on-board, so the temptation was there to just tell him what he wanted to hear:  “The other attorney is a jack-ass and you can expect me to be better.”

In reality, that could be true.  I do not actually know what arrangement the company had with the other attorney.  If he was general counsel, then maybe he should have caught the tax issue.  On the other hand, if the client simply gave the attorney tasks on a piecemeal basis and paid a fee commensurate with that kind of service, then the client’s expectations were unreasonable.

I told the potential client the truth . . . and he showed me the door.

Obviously, the client was bitter about the past experience.  It may have cost him a lot of money, and I am sorry that happened.  Ultimately, I do not have enough information to know whether the client was being fair with his former attorney or not, but I do know better than to start off a relationship with unrealistic expectations.

If a company wants general counsel, some attorneys will take on that responsibility and be accountable for all that entails.  If that expense is more than the company wishes to pay, then understand there will be a trade-off.

~ Jeff Harrington, Esq.