Despite the Federal Arbitration Act’s (FAA’s) strong national policy favoring the enforceability of arbitration agreements, the judicial terrain for arbitration clauses in attorney-client engagement agreements is uneven. Courts lack consistent requirements for binding arbitration clauses between attorneys and their clients. Before entering into an arbitration agreement, one court may demand that an attorney fully disclose to the client the legal consequences of proceeding with arbitration, while another court may insist that the client first confer with independent counsel. A third court might simply charge a client with knowledge of the agreement that they signed and, in the absence of fraud or duress, enforce the arbitration agreement as written.
Not to be outdone, state ethics committees have issued a variety of directives to lawyers who wish to arbitrate disputes with clients. In many instances, state ethics opinions impose obligations more stringent than the respective state’s substantive law. Perhaps this is less surprising considering the number of ethics rules that come into play. By presenting a binding arbitration provision to a client, a lawyer may prompt the potential conflict of interest risks under Model Rule 1.7(b) that can be defused only by providing sufficient information and disclosure to the client. Setting aside conflict issues, Model Rule 1.4(b) requires a lawyer to sufficiently explain a matter to permit the client to make an informed decision about the representation. For any business transaction between a lawyer and a client, Model Rule 1.8(a) requires (1) terms that are fair, reasonable, and fully disclosed; (2) the lawyer to afford the client a reasonable opportunity to obtain independent counsel; and (3) the lawyer to obtain the client’s informed consent in a writing signed by the client. Although it is generally accepted that establishing an attorney-client relationship is not a “business transaction” within the meaning of Model Rule 1.8(a), a few ethics authorities still look to some or all of Model Rule 1.8(a)’s protections for guidance when evaluating arbitration provisions in lawyers’ engagement agreements.
Based on the array of approaches in this space, lawyers who favor arbitration—especially those engaged in a multijurisdictional practice—must ensure that arbitration clauses intended to bind clients pass both legal and ethical muster. To that end, this article first provides a brief survey of the views held by courts and state ethics committees toward the arbitration of fee disputes, legal malpractice claims, and ethical complaints. It then examines six fundamental subject areas that lawyers must focus on to stay ahead of challenges to the enforcement of their arbitration agreements.
Overview of Arbitration Clauses in Attorney-Client Engagement Agreements
Courts generally acknowledge that there is no per se rule against arbitration provisions in attorney-client engagement agreements. The same holds true for ethics opinions on the subject. In particular, provisions requiring the arbitration of fee disputes have gained broad acceptance. This is attributable to the rise of fee dispute arbitration programs sponsored by state bars, as well as the ABA’s implementation of Model Rules for Fee Arbitration. Driving the point home, comment 9 to Model Rule 1.5 instructs that when “a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should conscientiously consider submitting to it.”
With respect to attorney-client agreements to arbitrate legal malpractice claims, courts and state ethics committees alike agree that there is nothing inherently improper about the practice. The most frequently mentioned obstacle is Model Rule 1.8(h), which prohibits lawyers from prospectively limiting their malpractice liability unless the client is independently represented in making the agreement. In response, most courts and ethics committees take the position that arbitration provisions do not prospectively limit a lawyer’s malpractice liability. The bulk of authority reasons that an arbitration clause does not alter or limit either party’s substantive rights, but merely provides an alternative forum to adjudicate a malpractice claim.
In the realm of attorney-client disputes, the one clearly forbidden subject of arbitration is ethics complaints. An attorney and client cannot agree to arbitrate complaints that might properly be referred to professional authorities, nor may an attorney otherwise restrict a client from filing a disciplinary grievance. This is so because the authority to regulate and discipline an attorney for professional misconduct generally lies with each state’s highest court and disciplinary administrator. Attorneys are obligated to cooperate with their states’ established disciplinary processes and cannot circumvent such authority by agreement with a client.
The Nuts and Bolts of Enforceable Arbitration Clauses
When it comes to the enforceability of arbitration clauses in attorney-client engagement agreements, there is no substitute for reviewing the case law, rules of professional conduct, and ethics opinions in the governing jurisdiction. For a lawyer desiring the most comprehensive defense to a challenge to the legal or ethical propriety of an arbitration agreement with a client, there are six subject areas to appreciate: informed consent, fair and reasonable terms, the role of independent counsel, written consent, clear language and presentation, and waiver.
Informed consent. In ABA Formal Opinion 02-425, the ABA’s Standing Committee on Ethics and Professional Responsibility approved provisions in engagement agreements requiring the binding arbitration of fee disputes and malpractice claims, provided that the lawyer fully apprises the client of the advantages and disadvantages of arbitration, as compared to traditional litigation, to allow the client to make a knowledgeable decision about whether to accept the provision. On this point the standing committee has plenty of company.
But in this area of the law, one size does not fit all. The amount of information necessary to enable the client to make an informed decision about a binding arbitration provision often depends on the client’s sophistication, education, and experience. The less experienced a client is, both generally and with respect to legal matters, the greater the lawyer’s duty to clarify in advance the importance of the arbitration clause. For a large corporate client possessing familiarity with arbitration or that frequently employs outside counsel, little to no explanation about the consequences of agreeing to an arbitration clause may suffice. Inexperienced individuals and small business owners, on the other hand, may require detailed information about the risks and benefits of arbitration. And while a lawyer is not obligated to disclose facts or implications already known to a client, “a lawyer who does not personally inform the client . . . assumes the risk that the client . . . is inadequately informed and the consent is invalid.”
For anyone assembling an informed consent checklist for attorney-client arbitration clauses, Hodges v. Reasonover is an excellent starting point. Recognizing that agreements between attorneys and clients are subject to the highest scrutiny, the Hodges court concluded that an attorney’s duties of loyalty and candor required full explanation of the types of disputes covered by the arbitration agreement and the legal rights forfeited when agreeing to arbitration—no matter the client’s level of sophistication. In particular, the Hodges court held that, at a minimum, the lawyer must disclose to the client the following legal effects of an arbitration clause (assuming they are applicable):
- waiver of the right to a jury trial;
- waiver of the right to an appeal;
- waiver of the right to broad discovery under the governing rules of civil procedure;
- arbitration may involve substantial up-front costs compared to litigation;
- explicit disclosure of the nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims;
- the arbitration clause does not impinge upon the client’s right to make a disciplinary complaint to the appropriate authorities; and
- the client has the opportunity to speak with independent counsel before signing the contract.
Consistent with Hodges, several courts have imposed heightened disclosure requirements on lawyers seeking to enforce arbitration provisions against their clients. Likewise, ABA Formal Opinion 02-425 and state ethics opinions have stressed the importance of advising a client in writing about the consequences of binding arbitration, including the waiver of the right to trial by jury; the loss of appeal rights based on the limited grounds available to judicially challenge arbitration decisions; the closed nature of arbitration proceedings compared to a public trial; the availability of relief; the possible reduced level of formal discovery; the relaxed application of evidentiary rules; the comparative costs of litigation versus arbitration (including filing fees, administrative fees, and arbitrator fees charged by some arbitration organizations, such as the American Arbitration Association); the method for selecting arbitrators; the time and cost savings frequently associated with arbitration; and even the possible res judicata and collateral estoppel effects of an arbitration decision.
Not all courts subscribe to the demanding informed consent conditions outlined in Hodges, nor, for that matter, the disclosure requirements commonly identified in state ethics opinions. In Bezio v. Draeger, for example, the First Circuit found no basis to conclude that Maine had adopted the Hodges approach. Although the law firm never discussed with Bezio the consequences of submitting to arbitration, nor suggested that he have the arbitration agreement reviewed independently, the court compelled arbitration because there was no evidence of fraudulent inducement, Bezio signed and initialed the pages of the engagement agreement, he had ample time to review the contract independently, and he had past experience with arbitration provisions.
Bezio is no outlier. Several courts have dismissed informed consent as an essential element to enforce an arbitration clause against a client. Many decisions instead emphasize the client’s level of sophistication and experience when weighing enforceability.
When addressing informed consent arguments, courts are also unmoved by claims that a lawyer failed to explain the arbitration clause’s features in a separate conversation with the client, at least where the written disclosures provided sufficiently detailed information and the client had the opportunity to ask questions about the terms of the engagement letter. Similarly, a client’s failure to read an arbitration clause is not a plausible defense.
The hallmark of informed consent is communicating adequate information to allow the client to make an educated decision. Hodges provides an inventory of key arbitration issues to address with a client, but the information necessary to reach an informed decision will vary from client to client, depending on the circumstances. Lawyers can, and should, discuss these matters with both prospective and current clients. Still, the best practice is to always include the requisite information in the engagement letter or in an attached addendum. By following these guidelines, a lawyer can deflect efforts to invalidate an arbitration provision based on the lack of informed consent.
Fair and reasonable terms. Beyond considerations of informed consent, business transactions between lawyers and clients must be “fair and reasonable to the client.” Arbitration provisions are no exception. Of course, the formula for creating a term that is so one-sided, unfair, or unconscionable to a client is limited only by a person’s imagination. A better risk management mindset, however, can be fostered by looking at a few more concrete examples.
The classic example of an arbitration provision that might be branded unfair and unreasonable is one that limits a client’s right to recover damages (whether punitive, noneconomic, or actual) in arbitration when the law of the jurisdiction otherwise allows them. In Feacher v. Hanley, for example, the court easily concluded that an arbitration clause in a retainer agreement was invalid under the FAA and Utah state law. Among other shortcomings, the law firm limited its malpractice liability to the fee paid by clients facing imminent home foreclosure, and the clients ultimately lost their home based on the firm’s alleged professional lapses. Absent the client’s independent representation in making the agreement as required by Model Rule 1.8(h)(1), the probable bottom line is that a lawyer may not use an arbitration clause as a shield to avoid liability to which they would otherwise be exposed. Of course, it is doubtful that independent counsel to a client would bless an agreement that deprived the client of key remedies, returning us to the basic point that a lawyer generally cannot rely on an arbitration clause to simply eliminate potential liability.
Moreover, as a general rule, including a forum selection clause in an attorney-client engagement agreement is not considered a prospective limit on liability unless the selected forum has rules expressly limiting liability, or if litigating in that forum would be so unfair as to be a practical limitation on liability. A forum selection clause requiring the client to arbitrate in a remote location, such as a jurisdiction far from the client’s residence or place of business, may push the boundaries of Rule 1.8(h) compliance.
Other clauses to avoid are ones that allow the lawyer to unilaterally select the arbitrator, ban any meaningful discovery, allocate the costs of arbitration on an unequal basis, or impose excessive costs on the client that would effectively foreclose the client’s use of the process.
When it comes to the actual terms of an arbitration agreement, mutuality of obligation is imperative. Courts will heavily scrutinize provisions that effectively prevent a client’s access to the arbitration process, or that cause the process to be fundamentally unfair to the client. Most lawyers will not have any difficulty drafting an arbitration clause that meets the fair and reasonable standard, but it is certainly a factor that should not be overlooked.
The role of independent counsel. As a rule of thumb, clients who are represented by independent counsel should be assumed to have given informed consent to the proposed course of conduct. But in the context of signing an engagement agreement with a lawyer, requiring a client to “hire a lawyer to hire a lawyer” is impractical (and otherwise reflects poorly on the profession). Nevertheless, state ethics authorities have not unanimously agreed on the role of independent counsel when a client is presented with an engagement agreement containing an arbitration provision.
Taking a strict view that attorney-client arbitration clauses implicate Model Rule 1.8(h), some state ethics opinions mandate that the client obtain independent counsel before entering into such an arrangement. A second group of state ethics opinions land at the opposite end of the spectrum and do not obligate a lawyer to even affirmatively advise the client to consult with independent counsel. Most state ethics opinions take the middle ground. Drawing from Model Rule 1.8(a)(2), this third group requires a lawyer to advise the client of the right to confer with separate counsel concerning the consequences of a mandatory arbitration provision, and to further provide the client a reasonable opportunity to seek such counsel. Whether courts follow their states’ ethics opinions is an entirely separate matter.
If practicing in a jurisdiction that does not require a client to obtain the advice of independent counsel before entering into an arbitration agreement with a lawyer, the safest approach is to advise the client of the right to confer with independent counsel. This represents “an additional safeguard of the fairness and reasonableness of the arrangement, and of the client’s informed consent to it.” Absent exigent circumstances, insisting that the client wait 24 to 48 hours before signing and returning the engagement letter will substantially undermine any argument that the client lacked a reasonable opportunity to seek separate counsel.
Consent in writing. Mechanically, it is easy to send an engagement letter to a client detailing the arbitration agreement. In a perfect world, to achieve the client’s agreement to the arbitration provision, a lawyer handling the matter will obtain a signed copy of the engagement letter from the client, or some other writing acknowledged by the client.
But assume that this ideal scenario never occurs. Rather, the client does not object after receiving the engagement letter, or simply says nothing at all. Is the client’s receipt of a unilateral engagement letter disclosing the arbitration provision, without more, sufficient to manifest the client’s consent? The answer is evident if the governing jurisdiction follows the Model Rule 1.8(a)(3) written consent requirement for business transactions or has a statute or rule requiring a client’s written consent to an arbitration clause. Short of such an express requirement, the answer is unclear.
Obtaining informed consent usually requires the client’s affirmative response because generally “a lawyer may not assume consent from a client’s or other person’s silence.” At the same time, consent may be inferred “from the conduct of a client or other person who has reasonably adequate information about the matter.”
Informed consent, reflected in a writing signed by the client, is the standard for entering into business transactions with clients. While an engagement letter that is not signed by the client generally is reliable evidence of the parties’ agreement, inferring or implying consent based on a client’s failure to object to a term is not foolproof. Although there is good reason to believe a court will hold that the client consented to the arrangement, some courts or professional authorities may disagree.
Clear language and presentation. At the risk of stating the obvious, arbitration clauses should be simple and straightforward. Because arbitration is a matter of contract, a client must expressly agree to submit a dispute to arbitration. The clause should clearly define the types of disputes that are subject to arbitration. Courts will construe any uncertainty in favor of the client.
Arbitration clauses that employ phrases such as “arising out of” or “relating to” are very broad, general, and comprehensive, and are presumed to reach all disputes having their origin in the contract. At the same time, some authorities caution that the arbitration clause should not be written so broadly as to require disciplinary matters to be arbitrated.
One final point: the arbitration clause itself should not be buried in engagement documents in some fashion. Although it is unnecessary to highlight the arbitration clause with a special font or typeface, the text of the clause should be the same font and size as the rest of the engagement agreement. The arbitration clause should be placed in a separate paragraph and labeled “arbitration clause” if the format of the engagement agreement is to use numbered paragraphs, or titles or subtitles. Even if font and placement issues are not generally conclusive to questions of enforceability, they are relevant to the underlying analysis and easy for lawyers to accomplish.
Waiver. Finally, as an alternative to attacking the validity of the arbitration agreement itself, clients seeking to avoid arbitration may assert that the lawyer waived the right to arbitration based on litigation conduct or unnecessary delay.
Given the strong federal policy favoring arbitration, a client bears a heavy burden to establish waiver. For most courts, the touchstone of the waiver inquiry is prejudice. No bright-line test carries the day, but lawyers will likely punch the waiver ticket if they participate in numerous pretrial proceedings before moving to compel arbitration, unsuccessfully litigate the merits of the case and then file a motion to arbitrate to try to take a second bite at the apple, engage in discovery that is otherwise unavailable in arbitration, file a motion to arbitrate on the eve of trial, cause the client to incur significant expense in the litigation, or otherwise act in a manner inconsistent with the intent to arbitrate. Delay in seeking arbitration is always relevant, but the sheer length of time between the date the lawyer first participates in the litigation and the date the lawyer seeks to enforce an arbitration clause is not necessarily dispositive as long as nothing meaningful has transpired in the lawsuit.
To avoid inviting a waiver challenge, a lawyer should move to stay the lawsuit and compel arbitration at the outset of the litigation. At the very least, the lawyer should raise arbitration in the answer, and notify the court and opposing counsel of the lawyer’s intent to move to compel arbitration.
Conclusion
Arbitration clauses are a recurring feature in attorney-client engagement agreements. Despite the broad acceptance of arbitration as a form of alternative dispute resolution between attorneys and their clients, courts and state ethics committees hold somewhat divergent views as to what steps a lawyer must carry out to ensure that an arbitration provision will be enforced if later contested by the client. Fortunately, finding a safe harbor for arbitration clauses in the face of varying legal and ethical requirements, or client opposition to the forum, is not a journey without end. Lawyers who provide the client with sufficient information to make an informed decision about arbitration, offer fair and reasonable arbitration terms to the client, recognize the client’s right to seek independent counsel, obtain the client’s consent to arbitration in writing, present a clearly worded arbitration provision to the client in a well-structured engagement agreement, and promptly assert the right to arbitrate should arrive at the desired end point without further delay.
