Referral Fees – What you should know

[Reprinted with permission from the October 2018 edition of Communiquéby Darcia Senft, General Counsel , Director of Policy and Ethics at the Law Society of Manitoba.]

From time to time, we receive questions about fee referral “pitches” and whether such fees can be paid and received without causing a lawyer to act in breach of the rules set out in the Code of Professional Conduct.

The Code has rules and commentaries that relate to the division of fees and referral fees. Rule 3.6-7 specifically prohibits a lawyer from directly or indirectly sharing, splitting, or dividing his or her fees with any person who is not a lawyer and from giving any financial or other reward for the referral of clients or client matters to any person who is not a lawyer.

From time to time lawyers receive telephone calls or emails from individuals who indicate that they want to help increase the number of new cases that the lawyer takes on. For example, a caller explains that his company will provide contact information to potential clients in whatever practice area or geographic area that the lawyer selects. It is not a directory service but some form of customized referral process that relies upon the company’s technology. When asked how the company makes money from the proposed referral process, the lawyer is told that he will be required to pay a flat fee each month to the company although they will not charge a fee for each referral. The caller is from another jurisdiction and is not a Manitoba lawyer. Under the circumstances, the proposed payment system would amount to a referral scheme that no Manitoba lawyer could participate in without breaching the referenced Code referral fee rules. If you have become involved in this kind of an arrangement, you should revisit it in light of the Code restrictions.

Certain types of referral fee payments are allowed. With the exception of referrals as a result of conflicts, Rule 3.6-6 allows a lawyer who refers a matter to another lawyer because of the expertise and ability of the other lawyer to handle the matter to receive a referral fee but there are a couple of conditions that must be met. First, the fee itself must be reasonable. Second, the client must be informed about it and must consent to its payment. You might wonder what a “reasonable” fee might look like. You might also wonder why the Law Society would even care about a referral fee arrangement where the client consents.

Consider the following situation. A lawyer who does not practise in the area of family law at all meets with one of his long-standing clients who now needs a divorce. The lawyer says he doesn’t practise in that area but can make a referral to a lawyer in another firm who does this work. The lawyer who accepts the domestic retainer agrees to pay 15% of all fees generated back to the lawyer who made the referral. The domestic case may take several years to complete and the client may end up paying in excess of $40,000 to the family law lawyer. Would it be reasonable for the referring lawyer to receive $6,000 in fees simply for making the initial referral? Even if the client purportedly “consents” to the referral fee, at the beginning of a retainer the client would have no idea how much the referring lawyer ultimately will be paid. How could consent, under those circumstances, be described as “informed?” What would the client say if he knew that in order for the domestic lawyer to keep up those anticipated long-term referral payments, she had to charge a higher hourly rate?

Where the Code allows payment of a referral fee from one counsel to another, it stands to reason that the fee must be fully known (i.e. quantifiable) in order for the client to provide informed consent. Before considering any kind of division of fees or fee referral payments, consult the Code and please call us if you have any questions about whether the contemplated arrangement is appropriate having regard to your ethical obligations.

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