Arbitration and mediation clauses and their effect on retainer agreements
By Michael J. Pearce
| EDITOR'S NOTE: As
the result of a 1998 appellate court decision, binding fee arbitration
clauses in attorney retainer agreements entered into before
a fee dispute arises are unenforceable in California. Aguilar
v. Lerner, a separate case pending before the California Supreme
Court, may shed more light on the issue. Pending that decision
or any further developments in the law, the State Bar Committee
on Mandatory Fee Arbitration offers the following article to
assist practitioners who wish to include fee dispute arbitration
clauses in their retainer agreements.
It is becoming more common to see, in attorney-client retainer agreements,
provisions purporting to obligate the client to arbitrate and/ or mediate fee
disputes. But many such provisions are unenforceable because they conflict with
Bus. & Prof. Code §§6200 et seq. the State Bar
Mandatory Fee Arbitration statutes.
Business and Professions Code arbitration provisions
Some retainer agreements contain a provision obligating the client to participate
in fee arbitration under the B&P Code. Such provisions are enforceable,
under Bus. & Prof. Code §6200(c). This is the only exception to the
rule that participation in B&P Code arbitration is voluntary for the client.
Although clients may be compelled, by such retainer agreement provisions, to
participate in B&P Code arbitration, they may not be compelled to agree
that the arbitration be binding. B&P Code arbitration is non-binding unless
the parties agree to the contrary after the dispute arises. Bus. & Prof.
Nonetheless, some attorney retainer agreements do, misguidedly, contain a provision
stating that the client agrees not only to participate in B&P Code arbitration,
but also to be bound by the arbitration award. There is a question whether such
provisions are effective to the limited extent of requiring the client to participate
in B&P Code arbitration (albeit non-binding) or, rather, are entirely void.
The State Bar Mandatory Fee Arbitration Committee takes the latter view, believing
that such a provision should be held void in its entirety because it violates
Bus. & Prof. Code §6204(a). There is, however, no case law deciding
Private arbitration provisions
Some attorney retainer agreements provide that all disputes be resolved by
private arbitration, before the American Arbitration Association, a retired
judge, JAMS or some other private ADR provider. Such provisions are unenforceable
in California, under the rule of Alternative Systems, Inc. v. Carey,
63 Cal. App. 4th 1034, 79 Cal. Rptr. 2d 567 (1998).
In Alternative Systems, the Court of Appeal held that an attorney
may not deprive a client of his right of access to the statutory fee arbitration
forum under the B&P Code by means of a provision in a retainer agreement.
Alternative Systems involved a signed retainer agreement providing
that all disputes between attorney and client be arbitrated before the American
The attorney contended that the provision constituted a legitimate waiver of
the client's right to statutory arbitration. The court unanimously disagreed
and found the provision invalid. It accepted the client's argument that "the
public policy and statutory rights manifest in the MFA [Bus. & Prof. Code
§§6200 et seq.] are contravened when a client is required to submit,
over protest, to binding private arbitration of a fee dispute with his or her
attorney." Alternative Systems at 1039, 76 Cal.Rptr.2d at 570.
The court did not hold that the provision was unenforceable merely because
it had not been sufficiently explained to the client or because it limited the
lawyer's liability. Rather, the court held that the provision was unenforceable
per se, because the provisions of Bus. & Prof. Code §§6200 et
seq. "pre-empted the AAA arbitration clause in the fee agreement." Id at
1044, 79 Cal. Rptr. 2d at 573.
The court emphasized that the statutory scheme gives a client the right to
State Bar arbitration and (if the parties did not elect binding arbitration
and the client is dissatisfied with the award) the concomitant right to a trial
de novo in court. The court held that neither of these rights can be
removed and replaced by private binding arbitration before the fee dispute arises.
In support of its opinion, the court cited, among other authorities, the maxim
that "a law established for a public reason cannot be contravened by a private
agreement." Civil Code §3513.
Business and Professions Code mediation provisions
Several bar association programs provide a mediation service for attorney-client
fee disputes under the auspices of the B&P Code mandatory fee arbitration
system. Some attorney retainer agreements contain provisions purporting to require
the client to participate in such mediation. Such provisions are unenforceable
because of Bus. & Prof. Code §§6200(c) which provides that "mediation
under this article shall be voluntary for an attorney and a client."
Private mediation provisions
Some retainer agreements usually the same ones that contain private
arbitration provisions also contain provisions purporting to require
the client first to participate in mediation under the auspices of a private
ADR provider. While there is no case law directly on point, such a provision
would probably be held unenforceable under the rationale of Alternative
Systems, because it purports to restrict a client's statutory right to
the arbitration remedy created by Bus. & Prof. Code §§6200 et.
Since the legislature provided that a client cannot be forced to participate
in the mediation forum created by the B&P Code, it is reasonable to assume
that it did not intend to permit lawyers to require clients to participate in
private commercial mediation as a prerequisite to exercising their consumer
rights to arbitration under the B&P Code.
Michael J. Pearce, president-elect of the Long Beach Bar Association,
is chair of the State Bar Committee on Mandatory Fee Arbitration.