Inquiry:
Can a lawyer put a provision in a retainer agreement requiring that all malpractice claims and fee disputes be submitted to binding arbitration?

Response:
The ABA Standing Committee on Ethics and Professional Responsibility is currently drafting an opinion on this topic.

Several state bar ethics opinions have addressed the topic and arrived at varying conclusions. Most of them state that such provisions are permissible, so long as the client gives his/her fully informed consent. Others require that the client be given the opportunity to consult with independent counsel on the matter. One opinion states that such agreements are inappropriate (See the discussion of Ohio State Bar Association Opinion 96-9 (1996) infra.)

State bar associations have also considered whether such agreements are an attempt to limit liability under Rule 1.8(h) ⁽¹⁾ of their respective state rules. Again, state bar opinions are divided on this issue.

The Professional Ethics Commission of the Maine Bar Board of Overseers of the Bar Opinion 170 (1999) is the most recent state bar opinion on point. This opinion discusses whether a lawyer may include in a fee agreement a provision whereby all malpractice claims would be submitted to binding arbitration. Although the main focus of this opinion is on the issue of whether such agreements are an attempt to limit liability, the opinion states that such agreements are permissible, and that there is no requirement that the client be advised to consult other counsel.

District of Columbia Opinion 211 (1990) states that a lawyer may not insist that a client enter into a fee agreement containing a clause mandating arbitration of fee and malpractice disputes unless the client is represented by another lawyer. The opinion states:

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 legal counsel will cure the problem. How many clients either will see or can afford to see a second lawyer as a condition of entering into an agreement with the first?

. . . .

Accordingly, mandatory arbitration agreements covering all disputes between lawyer and client are not permitted under either our prior Opinions or Rule 1.8(a) unless the client is in fact counseled by another attorney. 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.

District of Columbia Opinion 218 (1992) concludes that mandatory fee arbitration provisions in fee agreements are appropriate so long as the client is advised in writing of the availability of staff of the DC Bar Attorney-Client Fee arbitration Board for counseling, and the client consents in writing.

Michigan Opinions RI-2 (1989) and RI-196 (1994) come to conclusions similar to District of Columbia Opinion 211. Opinion RI-2 states that a clause requiring that any and all claims or disputes arising out of the lawyer's representation be submitted to arbitration is appropriate provided that the client obtains independent counsel. Opinion RI-196, while not expressly modifying Opinion RI-2 considered a similar question but concludes that the client must be given the opportunity to consult with independent counsel.

Ohio State Bar Association Opinion 96-9 (1996) is the only opinion that concludes that mandatory fee and malpractice arbitration provisions are impermissible, stating that a decision as to whether such disputes should be settled by binding arbitration should not be agreed to in advance and should be the client's on a case-by case basis. The opinion surveys the other opinions on point, noting that they permit such agreements if the client is given the opportunity to consult with independent counsel. The Ohio opinion found such a method unacceptable, stating:

Ethics advisory committees in several states permit attorneys to use retainer agreements providing for mandatory arbitration of fee disputes, but impose conditions upon the use. In the District of Columbia, the client, prior to deciding whether to sign an agreement, must be advised in writing of the availability of counseling by the staff of the Attorney-Client Arbitration Board and the client's written consent must to obtained. See District of Columbia Bar, Op. 218 (1991). In Maryland, the client must be advised in the retainer agreement that his or legal rights, including the right to a jury trial, may be affected by the decision to arbitrate fee disputes; and the client must be advised of the right to confer with other counsel about adverse consequences, such as res judicata or collateral estoppel, that may result from the decision to arbitrate. See Maryland State Bar Association, Op. 94-40 (1994).

This Board is not persuaded by these opinions. It is impractical to require a client to seek independent counsel before signing an engagement contract with a lawyer--the client would need to "hire a lawyer to hire a lawyer." It sends the wrong message to the public: Beware, the lawyer you are hiring to protect your interests may be trying to take advantage of you in the engagement contract.

Arizona State Bar Opinion 94-05 (1994) and Pennsylvania Bar Association Opinion 97-140 (1997) found that agreements to limit liability are permissible so long as the lawyer follows the safeguards outlined in the state version of Rule 1.8(a).

California Opinion 1989-116 states that "absent a pre-existing relationship between the parties", there is no prohibition against a client-lawyer retainer agreement requiring arbitration of potential malpractice claims. However, if there is a preexisting client-lawyer relationship, the attorney has an ethical obligation to assure that the client is fully informed and knowingly consents to the terms and consequences of the arbitration agreement.

Hazard and Hodes, in the Law of Lawyering (1993) state as follows:

It seems clear that a retainer agreement may provide for arbitration of disputes - including disputes about the quality of the legal services rendered - that may arise as between lawyer and client, so long as the client is adequately counseled about the possible risks inherent in waiving the right to sue. Such an agreement would not violate Rule 1.8(h), for it merely provides a procedure for resolving disputes, and does not attempt to exonerate the lawyer in advance.

Contractual agreements covering both fee disputes and potential malpractice claims are quite common, and some jurisdictions have required lawyers to submit to arbitration if the client so demands.

Are such provisions an attempt to limit liability?

Maine Bar Opinion 170 (1999) addressed whether an agreement to submit all malpractice claims to binding arbitration was an attempt to limit liability under Maine Rule 3.4(f)(2)(v), which is substantially similar to ABA Model Rule 1.8(h). The opinion concludes that it is not, stating:

Therefore, unless we are to stretch the words of the Rules beyond fair meaning, it cannot be said that an agreement to arbitrate is an agreement to limit liability. Rather, it must be argued that an agreement to arbitrate is an agreement to select a forum within which the unlimited liability of the lawyer will be determined by a person who, although fair and unlimited, may nevertheless on average be less predisposed than a juror to rule against a lawyer qua lawyer, and therefore the odds that the trial will result in a finding of liability are affected...Whatever one thinks of such contentions, the simple fact remains that the Rules themselves do not prohibit agreements that have those effects.

Accord, New York County Lawyers' Association opinion 723 (1997):

In such circumstances, an arbitration clause does not limit a lawyer's liability for malpractice, or otherwise seek to exonerate the lawyer in advance. The provision instead stipulates merely a procedure for resolving questions of liability and damages. The client remains free to assert the claim, and the lawyer remains exposed to such a claim; only the mechanism for resolving the claim is determined.

Maryland State Bar Association Opinion 90-12 (1989) took a different view.

[I]n this day and age, there are so many lawyers and non-lawyers who would be quick to argue that juries are more likely to award larger judgments against professionals than would be the case with arbitration panels. In addition, there are significant differences between arbitration proceedings and court proceedings in terms of the admissibility of evidence, appellate review, and other factors, which bear on this issue. Although one might easily and persuasively argue that these factors go to procedural differences rather than remedial ones, nonetheless, the Committee believes that the overall effect of the decision whether to opt for arbitration versus a court or jury trial is sufficiently related to the issue of prospectively limiting a lawyer's liability, so that Rule 1.8(h) must be followed.

In 1992, the ABA adopted the Report of the ABA Commission on Evaluation of Disciplinary Enforcement (McKay Commission), Recommendation 3 of which stated that courts should establish mandatory non-binding arbitration procedures for fee disputes and voluntary arbitration procedures for malpractice claims. In response to the McKay Commission Recommendation, the ABA adopted the Model Rules for Fee Arbitration in 1995. These Rules do not apply to claims of legal malpractice or professional misconduct. ⁽²⁾.

Rule 1(c) of the ABA Model Rules for Fee Arbitration states:

Arbitration Mandatory for Lawyers. Fee arbitration pursuant to these rules is voluntary for clients and mandatory for lawyers if commenced by a client.

The comment to Rule 1(C) states:

The program is voluntary for the client since the lawyer regulatory system has no power to regulate the consumer of legal services. However, nothing in these rules precludes a lawyer and a client from entering into binding arbitration under these rules as permitted by law.

In the recent case of Watts v. Polaczyk 242 Mich. App. 600, 619 N.W.2d 714 (2000), the court held enforceable a retainer agreement which provided that all disputes would be submitted to binding arbitration even though the lawyer did not comply with applicable State Bar of Michigan Ethics Opinions that require lawyers to advise clients to seek independent counsel. ⁽³⁾ However, in In re Godt, 28 S.W.3d 732 (2000) the court held that a binding arbitration clause was unenforceable because the lawyer failed to sign the agreement and the client was not represented by counsel before signing the agreement. The court seemed to suggest, but did not hold that such provision may be void as an attempt to limit liability.

For recent scholarly analysis of binding arbitration provisions in fee agreements, see Clark, The Legal and Ethics Implications of Pre-dispute Agreements Between Attorneys and Clients to Arbitrate Fee Disputes, 84 Iowa L. Rev. 827 (1999) (such agreements are most appropriate when entered into after a dispute has arisen); McMonigle & Weathers, A New Way to Go: Arbitration of Legal Malpractice Claims, 64 Def. Couns. J. 409 (1997); Powers, Ethical Implications of Attorneys Requiring Clients to Submit Malpractice Claims to ADR, 38 S. Tex. L. Rev. 625 (1997); ⁽⁴⁾ and Turian, Drafting Fee Arbitration Provisions 40 No. 8 Prac. Law. 23 (1994).

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Endnotes

¹ Model Rules of Professional Conduct, Rule 1.8(h) states:

(h) A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement, or settle a claim for such liability with an unrepresented client or former client without first advising that person in writing that independent representation is appropriate in connection therewith.

² A copy of the Rules is available in the ABA/BNA Lawyers' Manual on Professional Conduct at page 01:4001. For a recent article on the status of mandatory fee arbitration programs nationally, see Fees: New York Unveils Arbitration Plan for Resolving Attorneys' Fee Disputes, 17 Laws. Man. on Prof Conduct 74 (ABA/BNA 2001).

³ The Michigan Court of Appeals found the following arbitration clause to be enforceable in the Polaczyk case:

Any controversy, dispute, or question arising out of, in connection with, or in relation to this Agreement or its interpretation, performance or nonperformance, or any breach thereof, shall be determined by arbitration conducted in accordance with the then-existing rules of the American Arbitration Association or the Federal Mediation and Conciliation Service and any decision rendered by the Arbitrator shall be final and binding upon the parties; and Judgment upon any arbitration award, including an award of damages, may be entered in any court having jurisdiction thereof. The Arbitrator may not amend, modify, or substitute any of the terms or conditions of this Agreement and his jurisdiction is thereby limited."

⁴ In her article, Professor Powers proposes the following Rule restricting Pre-Dispute ADR Requirements in Attorney-Client Contracts:

An attorney shall not enter into a pre-dispute agreement whereby a dispute with a client must be submitted to arbitration, mediation, or like alternative dispute resolution process, unless:

(1) Representation has not yet commenced;

(2) The attorney reasonably believes that the client's interests will not be prejudiced by the operation of the agreement; and

(3) (a) The client is represented by independent counsel in making the agreement; or

(b) The attorney makes full, written, disclosure of the effect of the agreement (including any waiver of the right to a jury trial, and notice that independent representation is advised), the disclosure is read and signed by the client, and the attorney reasonably believes the client understands the agreement sufficiently to protect his interests in making the agreement.

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Copyright 1995 by the American Bar Association; Peter H. Geraghty

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