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With disputes on the rise,
it might be a good idea to include
mediation or arbitration
clauses in fee agreements
by Ellen Peck
Attorney-client disputes of all varieties are on the rise. If you would prefer to resolve any dispute with your client in a forum other than the courts, you may wish to add a mediation or arbitration clause to your fee agreement or engagement letter. However, there are a number of changes in the law which affect enforceability of such agreements on ethical grounds.
Mediation offers attorneys and clients an opportunity to resolve disputes in a confidential setting, in creative ways, and is the most flexible for the parties. In most cases, it is less expensive, faster and less stressful than arbitration or litigation. However, since mediation is generally a voluntary and non-binding process, your fee agreement or engagement letter may suggest that client and attorney agree to consensual mediation as a first means of dispute resolution, recognizing that you will probably not be able to compel client mediation involuntarily if it would affect the client's rights to arbitrate a fee dispute. (Business & Professions Code §§6200 et seq.)
For both attorney and client, arbitration permits confidentiality, some flexibility and, in most cases, cost-effectiveness, speed and less stress. Arbitration of client disputes has decided advantages for the attorney:
1. Arbitration of professional liability issues can cut down on the risk of a runaway jury award and offer the likelihood of a more reasonable damage award against the attorney if liability is conceded or found.
2. In fee arbitrations, state or local bar fee arbitrators are precluded from considering any counterclaims or offsets for malpractice or other performance issues in any fee dispute. Thus, an attorney can resolve a fee dispute with a client in the fee arbitration forum while the client must independently initiate a legal malpractice or related claim in another forum.
Enforcement of arbitration clauses
Moncarsh v. Heily & Blase (1992) 3 Cal.4th 1 has held that California has a strong policy favoring arbitration even where the decision causes substantial injustice and is contrary to public policy. Moncarsh and subsequent cases have consistently held that such public policies do not extend to arbitration of issues beyond the scope of the arbitration agreement.
Where the scope of arbitration is in doubt and the case involves an issue in which there is a constitutional right to a jury trial, doubt should be resolved in favor of a trial by jury and against arbitration. (Fireman's Fund Ins. Companies v. Younesi (1996) 48 Cal.App. 4th 451, 458-459.) Lawyers cannot be permitted to create a presumption of arbitrability through all-purpose arbitration clauses in engagement agreements with their clients. (Mayhew v. Benninghoff (1997) __Cal.App.4th __[62 Cal.Rptr.2d 27; 97 DAR 4308, 4310 (April 2, 1997)] rev. filed 4/14/97.)
The remainder of this article discusses the interplay of lawyers' professional obligations upon the validity of arbitration clauses between lawyer and client regarding resolution of their disputes.
1. What professional obligations apply to attorney-client dispute resolution agreements at the outset of the relationship?
Prior to entry into an attorney-client relationship, the attorney owes the prospective client no fiduciary duties except the duty of confidentiality concerning any communication necessary to locating and selecting the attorney. Except where statutes and rules specifically provide otherwise, attorneys may generally negotiate compensation and the structure of the attorney-client relationship with clients in an arm's-length transaction. (Ramirez v. Sturdevant (1994) 21 Cal.App. 4th 904, 913 [26 Cal.Rptr. 554, 558].)
Neither Probate Code, §16004 subd. (c) (regarding the presumption of undue influence) or rule 3-300, Rules of Professional Conduct (regarding the acquisition of adverse interest or entering into a business transaction with a client) apply to a new prospective client with whom the attorney has not formed a relationship.
This is an ideal time for the lawyer to structure lawyer-client dispute resolution mechanisms as part of the terms and conditions of employment, provided that binding fee arbitration is not sought and that the scope of the dispute is crystal clear.
2. What professional obligations apply to attorney-client dispute resolution agreements after an attorney-client relationship has already been established?
Upon entry into an attorney-client relationship, the lawyer's duties to the client alter dramatically. The attorney-client relationship is a fiduciary relationship of the very highest character and binds the attorney to the most conscientious fidelity to the client. (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 189-190 [98 Cal.Rptr. 837]; Clancy v. State Bar (1969) 71 Cal.2d 140, 146-148 [177 Cal.Rptr. 657].)
The essence of a fiduciary or confidential relationship is that the parties do not deal on equal terms, because the person in whom the trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert unique influence over the dependent party. (Barbara A. v. John G. (1983) 145 Cal.App.3d 369, 383 [193 Cal.Rptr. 422].)
State Bar of California Formal Ethics Opinion 1989-116 opined that lawyers must comply with rule 3-300 in modification of existing fee agreement with existing client.
Mayhew held that the presumption of undue influence (Prob. Code § 16004, subd. (c)) and the failure to comply with rule 3-300, Rules of Professional Conduct, could invalidate application of an arbitration clause in a new engagement agreement with an existing client:
Benninghoff had been Mayhew's attorney for years on various legal matters. On Jan. 24, 1992, Benning-hoff presented Mayhew with an engagement letter concerning his dissolution of marriage, containing an arbitration clause which provided: "As a material inducement for attorney's execution of this Engagement Agreement, it is agreed that all disputes between attorney and client . . . arising directly, or indirectly, against attorney on account of attorney's representation of client shall be resolved pursuant to binding arbitration before the American Arbitration Association, sitting in Irvine, California."
Mayhew acknowledged this engagement letter and initialed the arbitration clause.
In February 1992, Mayhew entrusted $607,700 to Benninghoff to prudently invest in a business dealing, to achieve a return on the funds and to ensure that the principal sum remain safe and secure from dissipation or loss. Benninghoff deducted $76,000 from the $607,700 for alleged unpaid legal fees for previous representation of his divorce and other legal matters handled on behalf of Mayhew. Mayhew claimed that Benninghoff converted the $76,000, since Mayhew claimed at the time of the alleged conversion that he had paid all of Benninghoff's current billings of $10,601.
After Mayhew demanded the return of the $76,000 from Benninghoff, Mayhew received a new parallel bill which contained substantially higher billings for the same services contained in the initial statement. Benninghoff claimed that his initial lower billing was "reflective of a relationship where I did not bill all the time that I had actually spent" and he had recomputed all the time he had spent pursuant to the legal services.
Mayhew filed a legal action against Benninghoff for conversion, breach of fiduciary duty and imposition of a constructive trust. Benninghoff filed a motion to compel arbitration based upon the clause in the engagement letter. The trial court denied the motion to compel arbitration and Benninghoff appealed.
The Court of Appeal for the Fourth Appellate District observed that the presumption of undue influence applies to any transaction between an attorney and a client and where the attorney is charged with obtaining an advantage from or of the client. (Probate Code § 16004, subd. (c).)
Moreover, Benninghoff did not comply with rule 3-300, Rules of Professional Conduct, which requires disclosures and consent relating to business transactions between attorney and client. Because of the presumption of undue influence and lack of compliance with rule 3-300, Benninghoff cannot rely on the arbitration clause in the engagement letter to require arbitration of disputes arising out of a business transaction whether or not he and the client had an attorney-client relationship concerning other matters.
By contrast, Powers v. Dickson, Carlson & Campillo (Cal.App. 2 Dist. 5-7-97) __Cal.App.4th__(1997 WL 220322, pp. *8-9), held that where a lawyer and client amend an existing legal malpractice arbitration clause in which the amendment is fair and equitable to both parties and not adverse to the client, a lawyer need not advise the client to seek the advice of independent counsel.
CAVEAT: If a court should find that amendments to an existing arbitration provision are adverse to the client, the failure to comply fully with rule 3-300 creates a risk of voiding such amendments.
3. May an attorney ask a client to agree in writing, in advance of a dispute arising, to mandatory fee arbitration for any dispute about fees and costs arising between them? Yes.
Until Jan. 1, 1997, California's fee arbitration statute expressly stated that fee arbitrations were voluntary for the client. Effective Jan. 1, 1997, California Business & Professions Code, §6200 (c), was amended to provide that unless the client has agreed in writing to arbitration of all disputes concerning fees, costs or both, arbitration shall be voluntary for a client.
This amendment thus permits an attorney and client to agree in a fee agreement or engagement letter to mandatory fee arbitration.
4. May an attorney ask a client to agree in writing, in advance of a dispute arising, to binding fee arbitration for any dispute about fees and costs arising between them? Prob-ably not.
Prior to 1997, Business & Profes-sions Code §6204(a) provided that the parties may agree in writing to be bound by the award of the arbitrators but that in the absence of an agreement, the parties were entitled to a trial de novo after arbitration.
Formal Opinion No. 1981-56 of the California State Bar Committee on Professional Responsibility and Conduct opined that the structure of the statutory scheme suggested a legislative intent to permit binding fee arbitration only after a dispute over fees and/or costs occurs and the client has been made fully cognizant of the dual right to arbitrate and judicial review, including a trial de novo. The committee further opined that language requiring binding arbitration might tend to confuse or mislead the client or be an adverse interest acquired by the lawyer pursuant to a predecessor rule 3-300.
Effective Jan. 1, 1997, §6204(a) was amended: "The parties may agree in writing to be bound by the award of the arbitrators at any time after the dispute over fees, costs or both has arisen."
Thus, a fee agreement or engagement letter probably should not contain an agreement to binding arbitration since no dispute would have yet arisen.
5. Does an agreement to arbitrate malpractice claims or other performance issues constitute a prohibited limitation of malpractice liability? No.
Rule 3-400 (A), Rules of Profes-sional Conduct, prohibits a Califor-nia attorney from contracting with a client prospectively limiting the member's liability to the client for the member's professional malpractice.
State Bar of California Formal Ethics Opinion No. 1989-116 opined that rule 3-400 (A) is not applicable to a provision between client and attorney for arbitration of such disputes. The arbitration provision does not detract from or limit an attorney's duty to use reasonable care nor limit the liability for breach of this duty. It merely selects the forum in which liability will be determined and is consistent with the public policy in support of arbitration.
6. May an attorney ask a client to agree in writing, in advance of a dispute arising, to mandatory binding arbitration for any dispute about legal malpractice, breach of professional duty or other performance issues arising between them? Yes.
State Bar of California Formal Ethics Opinion No. 1989-116 opined that there was no express prohibition against such mandatory, binding provisions.
7. How clear does the concept of the applicability of arbitration to a dispute have to be? Crystal.
Any arbitration agreement must clearly explain the mode and scope of the dispute resolution mechanism. This is true even at the outset of the relationship.
In Lawrence v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501, arising out of a family law matter, a court refused to compel arbitration of a client's legal malpractice claims, holding that the fee agreement was not clear enough to apprise the client that a legal malpractice claim was covered. In that matter, the fee agreement required arbitration of disputes "regarding fees, costs or any other aspect of our attorney-client relationship." The court held that the agreement did not clearly put the client on notice that legal malpractice claims would be arbitrated.
As noted above, after the formation of the attorney-client relationship, lawyers' duties to clients increase. Mayhew, under the facts stated above, held that an arbitration clause in an engagement letter was ambiguous as to what disputes it covered. Mr. Mayhew expected the arbitration clause to extend only to legal representation in the divorce matter, not to the financial investments Benninghoff also was handling.
Moreover, the court held that any ambiguity in the arbitration clause should be construed against the drafter of the agreement, especially when drafted by an attorney.
The court further held that it was the attorney's responsibility to draft a clear and explicit agreement that the arbitration clause extended both to Benninghoff's rendering of legal services and unrelated business dealings and that the attorney should have advised Mayhew in writing of his right to consult an independent lawyer on the arbitration clause.
The court rejected Benninghoff's argument that his ethical responsibilities of full disclosure were lessened because the client was very wealthy, was highly schooled in business affairs, was a sophisticated user of legal services, and was a fully licensed contractor. The court noted that "[n]ot all fools are poor," and it declined to adopt a rule that encourages lawyers to be unscrupulous with even wealthy or sophisticated clients. (Mayhew, supra, 97 D.A.R. at p. 4310.)
8. Does the alleged failure of your client to read an entire agreement containing an arbitration clause require its revocation? Not necessarily.
In Powers (supra, pp. 4-5), a legal malpractice arbitration clause was enforced notwithstanding the clients' assertion that they had not carefully read the entire agreement and did not understand the significance of the arbitration agreement. Noting that the clients negotiated other terms of the agreement, that the agreement was not a "standardized" agreement and that the clients possessed the power to change attorneys at any time, the court refused to hold that the agreement was an adhesion contract.
You can prevent that kind of client dispute by pointing out the arbitration provision, having the client read it or having it read to them, discussing any questions with the client and having the client initial the paragraph in the margin.
9. Does an arbitration agreement need to contain an express waiver of the right to a jury trial to be enforceable? Not necessarily.
State Bar of California Formal Ethics Opinion No. 1989-116 opined that, as a matter of ethics, a lawyer should advise a client that binding arbitration would result in a waiver of a jury trial. Powers (supra, p. 4) rejected a client's claim that the arbitration clause should be revoked since the attorney did not advise that a binding legal malpractice arbitration clause waived the client's right to a jury trial. The court held that advising a client of waiver of a jury trial was not required to enforce the arbitration clause.
Notwithstanding this holding, you can prevent this kind of client challenge to your arbitration provision by adding an advisement of jury trial waiver.
10. Other issues
Some analogies may be drawn from California Code of Civil Procedure §1295, which sets forth the requirements for mandatory arbitration of medical malpractice actions, including that the arbitration provisions be stated in at least 10-point bold red type. (State Bar of Califor-nia Formal Ethics Opinion No. 1989-116.) Although Powers (supra, p. 8) rejected the notion that compliance with §1295 was applicable in the context of enforcing a legal malpractice arbitration provision, printing your arbitration clause in at least 10-point type, in bold face, will foster client understanding and will eliminate this as a potential client challenge to your arbitration provision. A judge, called upon to determine the enforceability of a mandatory legal malpractice arbitration provision, is more likely to enforce it if the provision compares favorably with the legal requirements for a binding medical malpractice arbitration provision.
You can update your current arbitration or other ADR language with existing clients. While the following are not necessarily standards of care or required, they can assist in creating language with a better chance of enforceability:
Notwithstanding what seems to be a minefield of potential problems, with some care, enforceable arbitration can be drafted to ensure that disputes which may arise between you and your client can be resolved in a forum which is more convenient and cost-effective. Be careful out there!
Ellen Peck, former State Bar Court judge and former ethics counsel to the State Bar and the American Bar Association, is a solo practitioner in Malibu.