A law firm may pursue a claim for breach of the implied covenant of good faith and fair dealing against a former client who allegedly rejected two settlement offers in bad faith in order to prevent the firm from obtaining its contingent fee (Dweck Law Firm LLP v. Mann, S.D.N.Y., No. 03 Civ. 8967 (SAS), 5/3/04).

Judge Shira A. Scheindlin rejected the argument that such a claim is incompatible with a client's absolute right to terminate counsel. That right does not free a client to act in bad faith in her dealings with her lawyer, Scheindlin said.

Employment Discrimination Claim.

Cynthia A. Mann retained the Dweck Law Firm on an hourly basis to represent her in pursuing employment discrimination claims against her employer, First Union National Bank. After Mann became concerned about her mounting legal bills, she shifted to a contingent fee arrangement with the firm. The written contingent fee agreement entitled Dweck to one-third of the amount of any recovery.

Dweck's efforts produced two separate settlement offers from First Union: the first for $1,035,000, and the second for $1,350,000. Although Mann initially accepted both offers, she ultimately refused to execute either agreement, and no settlement was ever consummated.

Dweck subsequently sued Mann in federal court alleging that Mann had breached her contract with Dweck by refusing to execute the settlement; however, the court dismissed that claim, concluding that under New York law an attorney working pursuant to a contingent fee arrangement is not entitled to a fee unless the client has received compensation.

Dweck then filed a new complaint alleging that Mann breached the covenant of good faith and fair dealing by rejecting the settlement offers in bad faith. Mann moved to dismiss, but Scheindlin decided that the firm had stated an actionable claim.

Scheindlin refused to grant summary judgment in favor of the firm, however, since Mann disputed that she acted in bad faith.

Implied Covenant of Good Faith.

Under New York law, the court said, every contract contains an implicit covenant of good faith and fair dealing that prohibits a contracting party from deliberately doing anything to prevent the other party from performing under the contract or obtaining the fruits of the agreement. To state a cause of action for breach of that covenant, a plaintiff must allege facts tending to show that the defendant sought to prevent performance of the contract or to withhold its benefits from the plaintiff.

The court found that the firm pleaded sufficient facts to state a claim for breach of the covenant of good faith and fair dealing, by alleging that it entered into a contingent fee agreement with Mann and negotiated satisfactory settlements with her opponent, and that she accepted but then refused to execute the settlement agreements in order to deprive Dweck of the benefits of their fee agreement.

The court decided that Dweck's claim for breach of good faith and fair dealing was not barred by the prior dismissal of the firm's breach of contract claim. The breach of contract claim was rejected, Scheindlin noted, because Mann did not actually recover anything from First National and thus the firm could not show that it fulfilled all of its obligations under the contingent fee agreement.

A claim for breach of the covenant of good faith and fair dealing addresses precisely the type of situation in which a party cannot fulfill its obligations under a contract because of the bad faith actions of the other party, the court said.

Compatible With Client's Rights.

Scheindlin rejected Mann's argument that allowing a firm to sue a client for bad faith rejection of a settlement is incompatible with the right clients always have to terminate their counsel. The court said that cases recognizing that clients have a right to fire their counsel and to refuse settlement offers do not hold that an attorney can never bring an action against a client whose bad faith actions have harmed the attorney.

"[T]he fact that a client has an absolute right to terminate her attorney at any time does not give her free reign to abuse the attorney, or act in bad faith in her dealings with the attorney, during the course of the representation," Scheindlin wrote.

The court was likewise unswayed by Mann's citation to ethics rules that require lawyers to abide by their clients' decisions. "[N]owhere do the ethical rules prohibit attorneys that are harmed by their clients from bringing actions against those clients," Scheindlin declared.

'Rare Case.'

Noting that there appears to be only one reported case--from Alaska--on the issue, the court cautioned that "[i]t will be the rare case, indeed, where an attorney may bring an action against a client as a result of the client's refusal to accept a proposed settlement."

"Where a client refuses a settlement offer because she believes her claim is worth more, and that her attorney has not effectively advocated on her behalf, she is not acting in bad faith," the court said. "If, on the other hand, the client believes the settlement offer is satisfactory, but refuses it because she does not want to forfeit any recovery to her attorney, her actions may constitute bad faith."

Courts should be vigilant to ensure that an attorney's lawsuit against a client for breach of the covenant of good faith and fair dealing is brought in good faith as required by Fed. R. Civ. P. 11 and is not an effort to force the client to accept a settlement offer, Scheindlin said.

Dweck satisfied its good faith pleading obligations, the court said, by alleging, among other things, that Mann said she would accept the settlements if the firm agreed to substantially reduce or eliminate its fee.

Jack S. Dweck and Robert W. Phelan of the Dweck Law Firm, New York, represented their firm. Aegis J. Frumento and Francine N. Nisim of Duane Morris, New York, represented Mann.