By Mary Alice Robbins
Court Looks Back, Not Forward, in Evaluating Fee Agreement
In a decision that changes the standard for determining whether a contract is unconscionable, a divided Texas Supreme Court recently held that a payment-on-termination provision in a Houston firm’s contingent-fee contract is contrary to public policy.
“We hold this provision is unconscionable as a matter of law, and therefore, unenforceable,” Chief Justice Wallace Jefferson wrote for the majority in the court’s 6-3 decision in Hoover Slovacek v. Walton.
But Justice Nathan Hecht dissented, writing that the majority does not actually identify a statute or rule of law that the agreement between firm Hoover Slovacek and its client contravened.
“In fact, the agreement has done no devilry at all,” Hecht wrote in the dissenting opinion, which Justices David Medina and Don Willett joined.
According to the majority opinion, businessman John B. Walton Jr. hired Hoover Slovacek partner Stephen Parrott in June 1995 to recover unpaid royalties from several oil and gas companies operating on Walton’s 32,500-acre ranch in Winkler County. Walton agreed to pay Hoover Slovacek a 28.66 percent contingent fee.
As noted in the June 30 opinion, the engagement letter included a provision that required Walton, if he terminated Hoover Slovacek’s legal representation, immediately to pay the firm the contingent fee’s then-present value. When Walton discharged Parrott in 1997, a $6 million settlement offer was pending, Jefferson wrote in the opinion.
Jefferson noted in the opinion that Walton retained Andrews Kurth in 1998, and that firm settled the outstanding claims for $900,000. By that time, Hoover Slovacek had billed Walton for $1.7 million, based on the $6 million offer that was pending when Walton discharged Parrott, according to the opinion.
When Hoover Slovacek tried to intervene in the settlement proceedings, the 109th District Court in Winkler County severed the firm’s claim, which was tried before a jury, Jefferson wrote in the opinion. After finding that Walton did not discharge Hoover Slovacek for good cause and that the fee was not unconscionable, the jury awarded the firm $900,000.
The 8th Court of Appeals in El Paso reversed and rendered a take-nothing judgment in Walton’s favor in 2004. Justice Susan Larsen, author of the 8th Court’s opinion, wrote that the fee agreement was unconscionable as a matter of law, because it burdened Walton’s right to choose counsel or decide to accept a settlement offer. Justices Ann McClure and David Chew joined Larsen in the decision.
Daniel J. Sheehan, principal in Daniel Sheehan & Associates in Dallas and lead counsel for Walton, says the Supreme Court’s holding in Hoover Slovacek is significant, because it confirms that the high court’s 1969 decision in Mandell & Wright v. Thomas is still the law in Texas with respect to contingent-fee contracts.
“There had been quite a bit of commentary that, given the opportunity, the Texas Supreme Court may overrule Mandell & Wright,” Sheehan says.
The Supreme Court held in Mandell that, if an attorney hired on a contingent-fee basis is discharged without cause, the attorney may seek compensation either in quantum meruit – for the value of his or her work on a case – or in a suit to enforce the contract by collecting the fee from damages the client subsequently recovers. Sheehan says Texas is the only state that permits an attorney working under a contingent-fee contract to recover on the contract if terminated without good cause.
Jefferson wrote in the majority opinion that Hoover Slovacek’s termination-fee provision purported to contract around the Mandell remedies, because it made no distinction between discharges with or without cause; assessed the attorney’s fee as a percentage of the present value of the client’s claim at the time of discharge; and required the client to pay the fee immediately upon discharge.
“This “heads lawyer wins, tails client loses’ provision altered Mandell almost entirely to the client’s detriment,” Jefferson wrote.
Sheehan says it’s also significant that the Supreme Court, citing then-Justice Alberto Gonzales’ concurring and dissenting opinion in 2000′s Lopez v. Munoz, Hockema & Reed, held that in interpreting and enforcing attorney-client fee agreements it’s not enough to say that “a contract is a contract,” because ethical considerations overlay the contractual relationship.
Charles “Skip” Watson, who argued the case for Hoover Slovacek before the Supreme Court, says the court’s decision changes the standard for determining whether a contract is unconscionable from a prospective assessment to one based on hindsight.
Watson, of counsel at Locke Liddell & Sapp in Austin, notes that under Uniform Commercial Code Article 2-302(1) if a court, as a matter of law, finds any clause in a contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract.
University of Houston Law Center professor Robert Shuwerk, an expert in the area of lawyer responsibility, says the Texas Disciplinary Rules of Professional Conduct also have assumed a prospective view of contingent-fee agreements. But the Supreme Court is saying that a court should look at the contingent fee at the time a lawyer is trying to collect the fee to determine if it is fair, he says.
“That can make a big difference,” Shuwerk says. “There may be a lot of second-guessing contingent agreements when the lawyer gets a very good settlement with very little effort,” meaning clients may begin trying to determine if they have a basis for challenging such fee agreements.
Another result of the decision, Watson says, may be that the Supreme Court inadvertently “flipped” the burden of proof for justification when a contract is breached. Historically, it has been a defense plea that justification exists for a breach of contract. But Watson says a footnote in the majority opinion seems to shift the burden of proof to the party trying to enforce the contract, who must show there was not good cause for a termination.
Despite finding the clause unconscionable, the Supreme Court remanded the case to the 109th District Court, where Hoover Slovacek can litigate the issue of whether it was discharged without cause in connection with its claim to recover the contingent fee.
Joe Slovacek, a member of Hoover Slovacek’s management committee, says a jury already considered every issue that the Supreme Court considered and found in the firm’s favor.
Notes Slovacek, “This is a situation where the court doesn’t like the result and enters an opinion that changes the result.”