Arbitration Clauses In Law Firm Engagement Agreements: Friend or Foe?

 In Legal Malpractice, Newsletters

Deciding to retain a law firm is an important business decision and typically involves due diligence, including interviews with one or more of the firm’s attorneys and consultation with your peers. At some point in this process, the firm will provide its form of engagement agreement. More likely than not the engagement agreement will contain an arbitration clause providing that in the event of any dispute the parties consent to binding arbitration as the sole mechanism for dispute resolution. A broad arbitration clause like this necessarily covers legal malpractice claims. You may discount the likelihood that any such claim would ever be brought against the firm. After all, the firm is experienced and reputable, otherwise you would not be considering retaining it. Before simply dismissing the possibility that the firm may make a costly mistake, you should consider the pros and cons of arbitrating a legal malpractice claim. On the one hand, arbitration is generally faster and less expensive than civil litigation. On the other hand, arbitration has limited discovery, no jury, and the arbitrator’s decision is subject to an extremely narrow scope of review. This article will explore these and other issues of concern to help you make an informed decision when confronted with an arbitration clause in an engagement agreement.

Background and Enforceability of Arbitration Clauses

Arbitration was originally developed as a useful tool in the realm of labor law, but it has since become a common dispute resolution mechanism in other areas of the law. Accordingly, arbitration clauses are now quite common in commercial contracts, including engagement agreements. Law firms include arbitration clauses in their engagement agreements to address disputes that arise with clients, including fee disputes and legal malpractice claims. As arbitration clauses become more common in engagement agreements, litigation over their enforcement has increased.

A common issue arising in such litigation is whether an attorney must obtain the client’s informed consent by explaining to the client the significance of the arbitration clause.  Although the American Bar Association (“ABA”) issued in 2002 a Formal Opinion regarding the permissible use of arbitration clauses in engagement agreements, judicial opinions on this issue vary from state to state, and some states have upheld arbitration clauses without even reaching the issue of informed consent.[1]  For example, the Georgia Supreme Court recently scrutinized an arbitration clause in an engagement agreement and concluded that it was not unconscionable or void as against public policy and thus enforceable.[2] Although the Court discussed the ABA Formal Opinion, the Court expressly limited its decision to the arbitration clause before the Court. Explaining further, the Court stated that the State Bar of Georgia is the arbiter of whether the ABA Formal Opinion should govern Georgia engagement agreements.[3]

Similarly, other states, including California, Michigan, Pennsylvania, New York, Texas and Wyoming have upheld the enforceability of arbitration clauses in engagement agreements without explicitly requiring the client’s informed consent.[4] In contrast, Florida, Louisiana, Maine, New Jersey, New Mexico and Ohio courts have adopted the ABA Formal Opinion reasoning and held that attorneys must obtain informed consent by explaining the possible advantages and disadvantages of an arbitration clause to prospective clients.[5]

Accordingly, before deciding whether to sign an engagement agreement with an arbitration clause, it is helpful to understand whether the clause will be enforceable. If the engagement agreement is governed by the laws of a state in which arbitration clauses are generally enforceable, irrespective of informed consent, it is incumbent on the prospective client to understand how arbitration will affect their rights and remedies in the event of a dispute. Conversely, if the engagement agreement is subject to the laws of a state that has embraced the ABA’s Formal Opinion informed consent guidelines, and the law firm does not adequately disclose the advantages and disadvantages of arbitration, the clause may be difficult to later enforce. In such instance, agreeing to the clause may be an acceptable risk. In weighing such a risk, prospective clients should also consider that it in the event of a claim, it is likely the law firm that will seek to enforce the arbitration clause, notwithstanding possible defenses to enforcement, which will add to the overall cost of pursuing the claim.

Advantages and Disadvantages of Arbitration

Given the disparity in judicial enforcement of arbitration clauses, it is fair to ask why a law firm would include such a clause in its engagement agreement. Law firms include arbitration clauses in engagement agreements because of the perceived benefits of arbitration over civil litigation. With regard to legal malpractice claims, arbitration can prove to be less time consuming and less expensive because of limitations typically placed on discovery and motions practice, and relaxed evidentiary rules. Moreover, arbitration proceedings are generally confidential, which may protect from disclosure information that is potentially harmful to the law firm’s professional reputation.[6] Further, in claims between an attorney and a client, juries are generally perceived as sympathetic to clients, whereas arbitrators, many of whom are practicing or former attorneys, are generally viewed as being more objective.

From the client’s perspective, the above advantages are more likely viewed as disadvantages. This is in part due to the complexities and substantial burden required to prove legal malpractice. In order to show causation in a legal malpractice case, the client must prove the “case within the case.” In other words, in addition to proving breach of the standard of care, the client must show that, but for the breach of the standard of care, there would have been a more favorable outcome in the underlying case or transaction. Attorneys can make mistakes that do not necessarily rise to the level of malpractice if the result in the underlying matter would have been the same. In addition, there are numerous affirmative defenses to legal malpractice that add an additional layer of complexity to the client’s case, including, among others, judgmental immunity[7] and severance of causation by settlement of the underlying case.[8]

In light of the inherent difficulties in prosecuting a legal malpractice case, arbitration may be a less than ideal forum in which to bring the claim, but a better forum in which to defend any such claim. Below are some the key differences to consider:

  • Arbitration provides for limited discovery that can prevent a claimant from gathering the necessary evidence whereas civil litigation provides fuller access to discovery.

Robust discovery can be critical in legal malpractices cases given the element of causation, which requires proving the underlying case.  Among other things, this may require extensive discovery, including multiple witness and expert witness depositions.  In arbitration, however, the arbitrator frequently possesses broad discretion to limit document discovery and depositions. Indeed, depositions may be denied entirely.

For example, under the American Arbitration Association Commercial Arbitration Rules and Mediation Procedures (“AAA Rules”), the arbitrator may require the parties to exchange documents in their possession on which they intend to rely at the hearing and “no other discovery shall be permitted except as allowed by the arbitrator for good cause shown.”  AAA Rules, R-23 and E-5. Under the JAMS Comprehensive Arbitration Rules & Procedure (“JAMS Rules”), the parties participate in a voluntary informal exchange of documents and information that support their position and may take one deposition of either an opposing party or one individual under the control of the opposing party. JAMS Rules, 17. Similarly, Henning Rules for Arbitration (“Henning Rules”) allow for the tribunal in consultation with the parties to permit written and/or deposition discovery in its discretion as deemed appropriate to allow the parties to prepare for the hearing. Henning Rules, 4.9.

  • Motion practice is subject to the arbitrator’s non-appealable discretion.

Motion practice in arbitration is not of right, but instead committed to the discretion of the arbitrator, which is not subject to appeal. This is in part because extensive motions practice is viewed as time consuming, expensive, and, in the case of dispositive motions, inconsistent with the goal of resolving disputes on the merits at an evidentiary hearing.  According to the AAA Rules, the arbitrator may allow dispositive motions if “the arbitrator determines the moving party has shown that the motion is likely to succeed and to dispose of or narrow the issues in the case.” AAA Rules, R-34.  Similarly, the JAMS Rules provide that the Arbitrator may allow the filing of a Motion for Summary Disposition of a particular claim or issue if all parties agree or if one party requests to file such a motion and “the Arbitrator determines that the requesting Party has shown that the proposed motion is likely to succeed and dispose of or narrow the issues in the case.”  JAMS Rules, 18.  In contrast, the Henning Rules are silent regarding the right to file a dispositive motion. Oftentimes a dispositive motion in such complex matters as legal malpractice cases can serve to at least narrow the issues if they cannot fully dispose of the case.  Such a narrowing of the issues is beneficial and can save time and expense at the hearing phase.

  • In arbitration, there is only one arbitrator (or three if a panel is allowed) who will hear and decide the matter whereas litigation allows for a jury of six to twelve individuals.

According to the AAA Rules, the parties may agree to the number of arbitrators that hear and determine the matter.  AAA Rules, R-17.  The JAMS Rules provide that the arbitration will be conducted by one neutral unless the parties agree otherwise.  JAMS Rules, 7.  The Henning Rules provide that the arbitration “shall be conducted by the number of arbitrators specified in the Arbitration Agreement or other subsequent stipulation of all parties.”  Henning Rules, 3.  As a claimant in a legal malpractice claim there is a distinct advantage to a jury trial, in that the claimant has the ability to select jurors whom the claimant believes will be sympathetic.  However, from the attorney’s perspective a jury trial is public and may damage the attorney’s hard-earned reputation.  Further, preparing for and attending trial is often more time consuming and expensive than an arbitral hearing.

  • Arbitration awards are subject to a very limited scope of judicial review, whereas in litigation both the final decision and interlocutory decisions may be appealed.

Arbitration awards are notoriously difficult to modify or reverse on appeal. This is by statutory design; appeals are inconsistent with the overall intent of arbitration, which is to provide parties with a decision that is earlier, faster, less formal and less expensive than a trial.   Pursuant to the Federal Arbitration Act, the grounds for appeal include: “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” [9]  The same grounds are available under state arbitration statutes and certain states, including Georgia, provide an additional basis for appeal–manifest disregard of the law–which requires showing (1) the arbitrators knew of a governing legal principle for the case yet refused to apply it or ignored it altogether; and (2) the law ignored was well-defined, explicit and clearly applicable to the case. [10] In practice, these limited grounds for appeal make it exceedingly difficult to modify or reverse an arbitration award.

Legal Malpractice Arbitration – A Recent Case We Handled

Arbitrating a legal malpractice case is materially different than trying one in court.  By way of example, we recently represented a biotechnology claimant in a complex legal malpractice matter against an international law firm.  The case involved multiple experts specializing in accounting, taxation, and finance, dozens of fact witnesses, and a client file with over 100,000 documents. The ability to litigate the case was hindered by adverse and non-appealable rulings which limited discovery on material issues, including a request for production of the client file, portions of which remained in the law firm’s custody and control, and an order denying depositions of any witnesses.

The arbitrator justified denying depositions on the basis that the witnesses could be examined at the evidentiary hearing.  The arbitrator initially denied dispositive motions by explaining that the parties should not be denied entitlement to an evidentiary hearing. However, the arbitrator subsequently reversed course and allowed dispositive motions. Claimant’s motion in opposition to summary disposition was supported with multiple expert witnesses who opined on breach of duty, causation, and damages. The arbitrator granted summary disposition to the respondent law firm without considering the expert testimony, reasoning that claimant had failed to create a disputed issue of fact warranting an evidentiary hearing.  In hindsight, some of these issues could have been mitigated by more aggressive negotiation of the scheduling order by including provisions for discovery and depositions. Had this case been in court, the plaintiff would have among other things, been entitled to obtain the client file, depose witnesses, and would have had the right to appeal a decision granting summary disposition to the law firm.

In sum, it is critical that clients carefully consider and seek independent advice regarding any arbitration provision included in a law firm engagement agreement prior to signing it.  Further, it is also critical legal malpractice claimants facing arbitration enlist the assistance of a law firm which not only has expertise in legal malpractice, but also has experience in trying such cases before an arbitrator.

©2023 Chandler Law, LLC. All Rights Reserved.

[1] See ABA Formal Opinion 02-425 (explaining that it is ethically permissible to include in an engagement letter a provision that requires binding arbitration of fee disputes and malpractice claims provided that (a) the client has been advised of the advantages and disadvantages of arbitration and has been given sufficient information to permit an informed decision about agreeing to the arbitration clause, and (b) that the arbitration clause does not limit the attorney’s liability).

[2] Innovative Images, LLC v. Summerville, 309 Ga. 675, 848 S.E.2d 75 (2020).

[3] Innovative Images, 309 Ga. at 679.

[4] Desert Outdoor Advertising v. Superior Court, 196 Cal.App.4th 866, 873 (2011) (Arbitration clause in engagement agreement applied to legal malpractice claim and lawyer had no duty to disclose and explain the arbitration clause in the fee agreement); Watts v. Polaczyk, 242 Mich. App. 600, 603 (2000) (Attorney is not required to advise potential client that fee agreement contains arbitration clause because Michigan law presumes one who signs a contract knows and understands its contents); Sanford v. Bracewell, 841 Fed.Appx. 397, 398 (3d Cir. 2021) (Arbitration clause in engagement letter enforceable as the clause appeared prominently and the agreement was uncomplicated); Derfner & Mahler, LLP v. Rhoades, 683 N.Y.S.2d 509 (1999) (Legal malpractice claims do not have to be adjudicated solely by courts, therefore an arbitration clause in a retainer agreement is enforceable so long as it does not violate rules of ethics); Royston, Rayzor, Vickery, & Williams LLP v Lopez, 467 S.W.3d 494, 504-05 (Tex.2015) (“[P]rospective clients who sign attorney-client employment contracts containing arbitration provisions are deemed to know and understand the contracts’ content and are bound by their terms on the same basis as are other contracting parties.”); Inman v. Grimmer, 2021 WY 55 (2021) (Attorney is not required to verbally explain arbitration provision in engagement letter to potential client as it was adequately written to inform her of its scope and effect).

[5] Owens v. Corrigan, 252 So.3d 747 (Fl.Ct.App. 2018) (Arbitration clause in fee agreement unenforceable because it failed to give the required warning language pursuant to the Bar Rules); Hodges v. Reasonover, 103 So.3d 1069, 1077-78 (La.2012) (Arbitration clauses in attorney-client agreements are only enforceable if the attorney makes a “full and complete disclosure of the potential effects of [the] arbitration clause.”); Snow v. Bernstein, Shur, Sawyer & Nelson, 2017 ME 239 (2017) (Attorneys must fully inform a client of the scope and effect of an arbitration clause for malpractice claims in order for arbitration clause to be enforceable); Delaney v. Dickey, 244 N.J. 466, 496 (2020) (For an arbitration provision of a retainer agreement to be enforceable, an attorney must discuss the advantages and disadvantages of such a provision with the client); Castillo v. Arrieta, 368 P.3d 1249, 1257 (N.M. 2016) (Attorney required to “inform his client that arbitration will constitute a waiver of important rights” in order for a broadly worded arbitration clause to be enforceable); Guay v. Lloyd Ward, No. 13CA42, 2014 WL 260514 ( Ct.App.Oh., Jan. 17, 2014) (Arbitration clauses in attorney engagement agreements are unenforceable absent independent consultation from an attorney prior to entering the agreement).

[6]  Although arbitration proceedings are confidential, in order to enforce an arbitration award, it must be reduced to a final judgment in a court of competent jurisdiction, which makes the award a matter of public record.

[7] See, e.g., Hudson v. Windholz, 202 Ga.App. 882, 886 (1992) (“There can be no liability for acts and omissions by an attorney in the conduct of litigation which are based on an honest exercise of professional judgment[.]  Otherwise every losing litigant would be able to sue his attorney if he could find another attorney who was willing to second guess the decisions of the first attorney with the advantage of hindsight. If this were permitted, the original trial would become a ‘play within a play’ at the malpractice trial.”) (quoting Woodruff v. Tomlin, 616 F.2d 924, 930 (6th Cir.1980) (cleaned up).

[8] See, e.g., Jim Tidwell Ford Inc. v. Bashuk, 335 Ga. App. 668, 670 (2016) (“In a case where a plaintiff’s pending claims remain viable despite the attorney’s alleged negligence, the plaintiff severs proximate causation by settling the case, an act which makes it impossible for his lawsuit to terminate in his favor.”) (internal citation omitted).

[9] 9 U.S.C. § 10 (a) (1)-(4).

[10] Adventure Motorsports Reinsurance, Ltd. v. Interstate National Dealer Services, 313 Ga. 19, 26 (2021).

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