Binding Arbitration Provisions in Retainer Agreements: Friend or Foe?
by Wendy Gordon Carroll
(County Bar Update, February 2004, Vol. 24, No. 2)

Binding Arbitration Provisions in Retainer Agreements: Friend or Foe?

By Wendy Gordon Carroll, Esq., senior vice president, Aon Direct Insurance Administrators. Carroll recently joined Aon Direct Insurance Administrators but has been with Aon for 14 years. During that time, she was responsible for managing the claims activity of the Attorneys’ Advantage program and the Los Angeles County Bar Association program, as well as other E&O programs.

One hot topic addressed in recent risk management seminars is the inclusion of arbitration provisions in attorney-client retainer agreements. Based on handling legal malpractice claims in California for the last 17 years, I have concluded that the disadvantages of arbitration provisions far outweigh the perceived advantages. This article focuses on the two disputes of arbitration provisions -- fee and legal malpractice -- that arise between attorney and client, and analyzes the advantages and disadvantages of binding arbitration in both contexts, ultimately recommending against including such a provision in retainer agreements.

Binding Arbitration of Fee Disputes

The two most common attorney-client disputes are fee disputes and malpractice claims. Fee disputes are clearly the more straightforward of the two.  Arbitration of disputes relating to attorney fees and costs is governed by the California State Bar regulations and is conducted under approved local bar association rules. California Business and Professions Code Section 6200 governs attorney-client fee disputes and voids any contractual arbitration provisions that are in conflict with it.  (Alternative Systems Inc. v. Carey (1998) 67 Cal. App. 4th 1034, 1044; California State Bar Formal Op. 1981-56) The following rules apply:

-- Binding arbitration provisions for fee disputes are improper if they are entered into before a dispute arises, including at the outset of representation, since a pre-dispute agreement for binding arbitration deprives the client of its statutory right to a trial de novo.  (Bus. & Prof. Code Sec. 6204(a), Alternative Systems, supra, 67 Cal App. 4th at 1043)

-- Subsequent to a dispute over fees, the parties may agree to be bound by the award of arbitrators appointed under the State Bar Rules.  (Bus. & Prof. Code Sec. 6204(a))

-- Pursuant to Business and Professions Code Section 6204, it is permissible for lawyer and client to agree to mandatory arbitration at any time so long as it is not binding.

-- Business and Professions Code Section 6201 (a) provides that an attorney shall forward a written notice to the client, prior to or at the time of service of summons or claim in an action against the client, of the client’s right under the State Bar Act to arbitrate that dispute. If the client invokes its right to arbitrate within 30 days after receipt of such notice, any civil proceeding is stayed until arbitration is concluded.

Binding Arbitration of Legal Malpractice Disputes

Unlike a fee dispute, a provision properly worded requiring binding arbitration of legal malpractice claims and other non-fee disputes, including future malpractice claims, is not ethically improper, and such provisions are enforceable. Business and Professions Code Section 6200(b) 2 expressly excludes legal malpractice claims from its scope. Case law has affirmed that a binding arbitration provision in a retainer agreement is enforceable in a legal malpractice claim. (Powers v. Dickson, Carlson & Campillo (1997) 54 Cal. 4th 1102, 63 Cal. Rptr. 2nd 261)

Notwithstanding the propriety of such arbitration provisions, there are significant reasons why the wisdom of including a provision requiring binding arbitration of the disputes in retainer agreements is questionable. The following are the perceived advantages:

-- It forces the other side to go to arbitration even if they refuse to go.

-- It avoids certain jury risks: the run-away jury; the sympathy verdicts; unsophisticated juries who may not understand complex issues of duty, causation, and damages.

-- It may be less expensive because pleadings and discovery are typically limited.

-- Confidentiality of proceedings is maintained since arbitration is held in private.

-- Arbitrators are more sophisticated, especially retired judges.

-- There is largely no malicious prosecution claim arising out of arbitration proceedings.

There are, however, significant disadvantages:

-- Your malpractice insurance carrier may find binding arbitration provisions of legal malpractice claims impermissible. Many malpractice policies state that the right to invoke binding arbitration shall be at the carrier’s sole discretion. Other malpractice policy provisions require the prior written consent of the carrier before agreeing to arbitration. Therefore, including such a provision without the carrier’s prior written consent could prejudice or invalidate coverage in the event of a dispute. Some of the reasons behind such policy language are noted below. Some carriers have issued advisory opinions setting forth their positions on this issue.

-- It is difficult to foresee before a dispute arises whether arbitration is the most effective forum for the dispute. Thus, it may be more difficult to agree after the fact on parameters for the arbitration proceeding, which may include, for example, procedural rules, selection of arbitrators, and high-low caps on damages. Without the ability to define the scope of arbitration, there could be potential exposure in excess of available insurance limits without any right of appeal on the award.  In addition, the client can successfully compel petition if the attorney later reconsiders using arbitration.

-- Often, legal malpractice cases are eliminated by demurrer, motion on the pleadings, summary judgment, or other summary proceedings. Because arbitration often precludes disposition in this manner, otherwise vulnerable cases will proceed to a full-blown arbitration.

-- Discovery is limited by whatever institutional or statutory scheme applies (e.g., American Arbitration Association, Judicial Arbitration and Mediation Service, California Code of Civil Procedure 1280, or the Federal Arbitration Act , 9 U.S.C. 1). There may be rules that could impact the ability to conduct discovery, jurisdiction issues, and enforcement procedures.

-- Minimizing expense is largely due to the fact that arbitration does not permit extensive discovery. However, restricting discovery has many downsides. For example, the lack of discovery may impede the ability to properly evaluate early settlement, and unexpected results during the arbitration can occur because of inability to procure and/or introduce third-party witness or expert testimony.

-- Significantly, there is largely no right to appeal or vacate an arbitration award. The loss of post-trial motions and appeal rights in arbitration also impacts leverage to resolve a matter for less than the award.

-- Because arbitration lacks formal pleadings, a verbatim record is not usually made, so testimony, rulings, and evidence cannot be established. Further, arbitration often will not operate as collateral estoppel or res judicata.

-- Arbitrators are allowed to exercise much more discretion than a judge or jury and thus may be subject to more outside influences and bias; yet the grounds for setting aside the decision are few.

-- Arbitration can be costly. The fees of one or three panel judges, filing fees, and potential administrative expenses can be significant.

On balance, given that the disadvantages outweigh the advantages, binding arbitration provisions in fee agreements thus should be avoided. That is not to say that attorneys should always avoid arbitration. Under the right circumstances, it may be an effective forum, but one should make that decision only after the dispute has arisen when it is more certain that it can be beneficial and that:

-- Your malpractice carrier agrees in writing to binding arbitration of malpractice claims;

-- The nature of the claims, defenses, and damages exposure is understood; and

-- An agreement can be drafted that is tailored to the dispute, including the selection of arbitrators, procedural rules, and high/low caps.

Once the above factors have been considered, an informed decision can be made as to whether binding arbitration should be pursued. Such a decision is precluded when the retainer agreement mandates binding arbitration.

Postscript to "Binding Arbitration Provisions"

On February 6, 2004, the California Court of Appeal, First Appellate District, Div. Five, certified for publication its decision in Grafton Partners LP v. Superior Court (PricewaterhouseCoopers LLP) (Superior Ct. No. 2002-056106). The Grafton case held that contractual predispute waivers in civil actions are invalid because the California Constitution provides jury trials may only be waived in a manner prescribed by law. The Grafton decision, however, does not appear to impact predispute agreements to arbitrate since the California Arbitration Act provides statutory authorization for predispute jury waivers and thus is authorized by California law and not in conflict with the California Constitution.

The Grafton opinion does not alter the opinion of the author in "Binding Arbitration Provisions in Retainer Agreements: Friend or Foe?"

 

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance, and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association nor Aon and its affiliates assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available to the County Bar Update by Aon Direct Insurance Administrators and the Aon Attorneys’ Advantage Program, part of the LACBA Sponsored Aon Insurance Solutions Program. Aon Direct Insurance Administrators has been the sponsored broker for LACBA’s professional liability program for over 17 years. For information or to contact a representative, visit www.aonsolutions.com.

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