Why would an attorney include a mandatory arbitration clause in the engagement agreement with a client? The only answer and the obvious answer is that the attorney would see arbitration of a future dispute with his or her client as a more attractive option than litigation. In this sense, the inclusion of the language seems to be inspired solely by the best interest of the attorney – not the client. Moreover, Model Rule 1.8 prevents attorneys from entering into agreements with clients which prospectively limit the liability of the attorney (ie. forget about including language that your liability is limited to the amount of fees paid, etc.). Having said that, there is great debate and a split of authority over the enforceability of arbitration clauses in attorney client fee contracts. South Carolina remains among the many States who are silent on the subject matter. If you are considering whether to include arbitration as a standard clause in your engagement letters, the following are a couple of guideposts for reference:
- The ABA Says Yes – Sort of: “It is permissible under the Model Rules to include in a retainer agreement with a client a provision that requires the binding arbitration of disputes concerning fees and malpractice claims, provided that the client has been fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.” ABA Formal Opinion Number 02-425, [Emphasis Added]. Please note that while the ABA gives its pseudo-blessing, the proviso is significant and the ABA offers no guidance on what constitutes information sufficient to “fully apprize” the client of the advantage and disadvantages. More importantly, what if an important “disadvantage” is omitted – say for example, sharing the cost of a three person arbitration panel! You can appreciate that this is more shifting sand than solid rock.
- The DC Bar Says No – Kind of: In opposing opinions, the DC Bar first concluded that arbitration clauses in fee agreements are permissible (DC Opinion 190), and later reversed itself for the following reason: “In Summary, this Committee has come to the conclusion that it is unrealistic to expect lawyers to provide enough information about arbitration to a prospective client, particularly on a first visit, so that the client can make an informed consent to a mandatory arbitration provision. It is equally unrealistic to conclude that limited disclosure coupled with the advice to seek independent counsel will cure the problem. Therefore, we now conclude that Opinion 190 was incorrect in supposing that adequate disclosures concerning mandatory arbitration could be made to lay clients.” DC Opinion 211. So then, DC astutely recognized that what the ABA said was permissible in providing full disclosure was in all practicality not possible. Nevertheless, they did toss out one additional bone for those inclined: “We see no problem, on the other hand, with proposing mandatory arbitration where a client has actual counsel from another lawyer, who has no conflict of interest, upon whom the client can rely to assess the complexities posed by arbitration.” In short, full disclosure = impossible; separate counsel = permissible.
Again, there is a deep split of authority on the subject matter, but here’s what our scorecard looks like:
- No chance : Just putting an arbitration clause in the fee agreement without disclosure and without separate counsel (especially to an unsophisticated client) seems to have little chance at survival.
- Some chance: If you are brave enough (or foolish enough), it seems permissible to allow the client to make the election between arbitration or litigation ONLY AFTER the client has been provided with full disclosure of the risks and benefits of both. Again, making full disclosure to a lay client appears a dicey proposition at best.
- Gold Standard: If the client is separately represented for purposes of reviewing the engagement letter, it would appear that including the arbitration language is rock solid. However, it is hard to imagine this coming into play outside of the context of a significant engagement on behalf of very sophisticated and well-heeled clients.
Ronnie Richter and Eric Bland