A Drafting Conundrum: Is It Permissible to Include a Provision for Binding Arbitration of a Fee Dispute in a Written Fee Agreement?
The California Arbitration Act (CAA), Code of Civil Procedure Section 1280 et seq., is a comprehensive statutory scheme regulating private arbitration of virtually any civil dispute that parties agree to submit to private arbitration. The statutes set forth procedures for the enforcement of agreements to arbitrate;3 establish rules for the conduct of arbitration proceedings except as the parties otherwise agree;4 describe the circumstances in which arbitrators’ awards may be judicially vacated, corrected, confirmed, and enforced;5 and specify where, when, and how court proceedings relating to arbitration matters shall occur.6
By contrast, California’s Mandatory Fee Arbitration Act (MFAA), Business & Professions Code Section 6200 et seq., constitutes a separate and distinct arbitration scheme. Under the MFAA a client has the option to a nonbinding arbitration of a fee dispute, and such arbitration is mandatory for the attorney if requested by the client.7 The MFAA arbitration is conducted by a local bar association, and it is limited to the fee dispute. The obligation to arbitrate under the MFAA is based on a statutory directive and not the parties’ agreement. Thus, a client may invoke the MFAA and proceed to arbitration despite the absence of any prior agreement to do so.8 Additionally, the arbitration is nonbinding unless the parties agree to make it binding after the dispute has arisen.9
In Kors, a law firm sued its former client to collect unpaid fees.10 The former client moved to compel arbitration pursuant to the arbitration provision in the fee agreement that read as follows: ‘“[a]ny dispute pertaining to the fees owed under this agreement...shall, to the extent permitted by law, be submitted to binding arbitration pursuant to the rules of the Bar Association of San Francisco.’”11 The trial court granted the motion to compel and ordered binding arbitration under the Bar Association of San Francisco’s Rules of Procedure for the arbitration of attorney/client fee disputes. After the arbitrator ruled in its favor, the law firm petitioned the court to confirm the award and the former client moved to vacate the award on the ground that the arbitrator did not comply with the rules of disclosure under the CAA.12
The trial court granted the law firm’s petition to confirm the award, but the court of appeal reversed on the ground that the trial court erred in directing a binding arbitration under the Bar Association of San Francisco (BASF) rules when the BASF rules do not provide for binding arbitrations.13 The court of appeal found that the provision in the fee agreement calling for a “binding arbitration pursuant to the rules of the Bar Association of San Francisco” was unenforceable because a client cannot agree to binding arbitration under the BASF rules before the dispute arises.14 Because the client had waived her right to arbitration under the BASF rules, however, the court of appeal found that the trial court should have ordered arbitration pursuant to the CAA, and its failure to do so erroneously deprived Kors of the right to disclosure required by Section 1281.9 of the CAA.15 Therefore, the court ordered that the arbitration award be vacated.16 Although the court found that all parties shared responsibility for not correcting the trial court on this issue, the brunt of the burden was on the law firm because it drafted the fee agreement with the offending provision that called for “binding” arbitration under the BASF rules.17
After the time and expense of an arbitration, motion work to confirm/challenge the award, and an appeal on the grant/denials of those motions, the parties in the Kors case were back at square one. A clear understanding of the distinction between the CAA and the MFAA with respect to predispute agreements to arbitrate likely would have avoided this procedural quagmire.
Again, the MFAA arbitration is nonbinding, and either party may seek a trial de novo unless the parties agree after a dispute has arisen that the arbitration will be binding.18 The provision that the agreement to binding arbitration under the MFAA can be made only after the dispute has arisen means that attorneys cannot include in their fee agreement a provision for binding arbitration under the MFAA.19
Attorneys may, however, include a provision in their written fee agreement for binding arbitration under the CAA of a fee dispute, and such agreement is binding as long as the client has waived his or her rights under the MFAA (for example, by filing a malpractice lawsuit) or the MFAA arbitration failed to resolve the dispute.20 In that event the dispute would go to binding arbitration under the CAA.21 This result is consistent with the statutory language of both the MFAA and the CAA and the strong public policy in favor of binding arbitration as a means of resolving disputes.22 To avoid confusion, attorneys who include a binding arbitration provision in their written fee agreement should also include a paragraph explaining the client’s right to nonbinding arbitration under the MFAA and that if the client waives that option or if the MFAA arbitration does not resolve the dispute, the fee dispute will proceed to binding arbitration.
In summary, arbitration under the CAA is based on the parties’ agreement to arbitrate, and arbitration under the MFAA is based on a statutory directive where arbitration is voluntary for a client and mandatory for an attorney if initiated by a client.23 Therefore, a written fee agreement may contain a provision for binding arbitration of a fee dispute. It is critical to understand, however, that this arbitration is governed by the CAA and can take place only after a client has either waived his or her right to arbitration under the MFAA, or the MFAA arbitration has been completed and it failed to resolve the dispute.
1 Schatz v. Allen Matkins Leck Gamble & Mallory LLP, 45 Cal. 4th 557, 563 (2009); Powers v. Dickson, Carlson & Campillo, 54 Cal. App. 4th 1102, 1108 (1997).