Many lawyers include arbitration provisions in their fee agreements looking only at the perceived benefits without considering the risks and ethical requirements. Lawyers often believe that arbitration is a more favorable forum, is more private, and less expensive. In practice, this is not always the case. There are many traps for the unwary, and the potential cost of the perceived benefits may offset the benefit itself.
The Applicable Ethical Rules in Texas
When engaging a new client, lawyers should diligently explain in writing the fee arrangement (hourly, flat, contingent, etc.), how it’s earned, and when payment is due. If a lawyer wants to require disputes about the fee agreement and/or the representation to be subject to binding arbitration, then the lawyer is required to also set forth in writing the terms of that arbitration agreement.
The starting place for analyzing the ethical requirements of any such arbitration agreement is Texas Disciplinary Rule of Professional Conduct 1.08(g), which prohibits a lawyer from prospectively limiting his or her malpractice liability unless the client is independently represented with respect to that agreement. Nonetheless, The Professional Ethics Committee for the State Bar of Texas opined in Opinion 586 that binding arbitration provisions in representation agreements are allowed under TDRCP 1.08(g) subject to certain requirements.
Importantly, an arbitration provision may not include clearly unfair or unreasonable terms and cannot shield the lawyer from liability to which the lawyer would otherwise be exposed. The overarching requirement, however, is that the arbitration agreement must be explained to the client “to the extent reasonably necessary” for the client to make an informed decision, per TDRPC 1.03(b), including “the significant advantages and disadvantages of binding arbitration in an engagement agreement.” This includes a requirement to discuss the differences between arbitration and litigation. For clients not as sophisticated with legal matters, Opinion 586 recommends the following disclosures: (1) the cost and time savings frequently found in arbitration, (2) the waiver of significant rights, such as the right to a jury trial, (3) the possible reduced level of discovery, (4) the relaxed application of the rules of evidence, and (5) the loss of the right to a judicial appeal because arbitration decisions can be challenged only on very limited grounds. Other factors to disclose may include: (1) the privacy of the arbitration process compared to a public trial; (2) the method for selecting arbitrators; and (3) the obligation, if any, of the client to pay some or all of the fees and costs of arbitration, if those expenses could be substantial.
In short, clients should be told what they are getting themselves into if they agree to such a provision – which frankly should be the case with any agreement between a client and his or her attorney. Representation agreements should clearly, and in plain English, explain the terms of the representation such that there is no confusion about what is being agreed upon. There should never be a situation where the lawyer is trying to “pull one over” on his client.
The Texas Supreme Court and Texas intermediate courts have weighed in to affirm the enforceability of arbitration provisions in fee agreements, including when the provision only requires the arbitration of fee disputes (thus excluding malpractice claims from the arbitration agreement). See Royston, Rayzor v. Lopez, 467 S.W.3d 494 (Tex. 2015). However, just because they are ethically permitted and courts have enforced them, that does not mean lawyer-centric arbitration provisions are a good idea, as we explore more below.
Resolving a legal malpractice claim in arbitration can have unintended consequences for the lawyer.
Imagine this scenario:
Lawyer Lim represents a client in a multi-year, highly complex divorce proceeding involving two very high net worth individuals. She obtains what she believes is an exceptional outcome. But her client disagrees and refuses to pay the $80,000 remainder of her fee because he did not get the “value he’d already paid for.” Lawyer Lim sacrificed too much and worked too hard to leave $80,000 on the table.
She files suit to collect her fee and invokes the arbitration provision in her fee agreement, a provision she spent countless hours fine tuning and is quite proud of.
Her client counterclaims[1], accusing Lawyer Lim of malpractice for failing to secure the ranch for him. “No worries,” Lawyer Lim thinks, “I’m in arbitration. The arbitrator will protect me even if, in the end, they split the proverbial baby and only award me $40,000.”
But Lawyer Lim is in for an unwelcome surprise—under the rules in her arbitration forum, she’s on the hook for the arbitration fees. There’s a $1,700 filing fee, a $500 hearing fee, a $1,500 daily rate per arbitrator for hearings and the arbitrator’s hourly rate for work outside of regular hours.
The arbitration panel sends her an invoice for her deposit—$30,000!
Lawyer Lim demands a defense from her insurer but is surprised to learn that most malpractice polices, including hers, do not cover these costs because they are part of her affirmative claim for relief against the client on the fee claim (she initiated the arbitration) and not considered part of the defense of the malpractice claim against her. Even worse, there is a $10,000 deductible!
That $40,000 worst-case scenario Lawyer Lim had hoped for is gone. Even if she “wins” her fee claim in arbitration, it may actually cost her more than the fee owed.
These facts demonstrate how lawyers can be caught off guard by a host of unknown or unexpected risks when they add arbitration provisions to their fee agreements. Lawyers must carefully consider the benefits and the risks before adding an arbitration provision to their fee agreement.
What are some of the benefits of arbitrating attorney-client disputes?
Commonly recited benefits of arbitration include privacy and confidentiality, subject matter expertise, and saving time. Let’s explore each one.
Privacy and Confidentiality
The confidentiality of an arbitral proceeding derives from its private nature. Only parties, counsel, arbitrators, and witnesses are present. Contrast that with court trials that are open to the public, and, in Texas, nearly all court filings are presumed available to the public. The process to seal most court records or proceedings in Texas state court is onerous and rarely attempted, or successful. In arbitration however, the parties can agree to seal the filings and to otherwise keep the proceedings confidential. For malpractice claims in particular, this level of privacy and confidentiality may be highly desirable. Lawyers are often sensitive to having the fact of a malpractice claim against them, legitimate or not, be something available for public consumption.
Subject Matter Expertise and Power to Choose
Arbitrators usually have special subject matter expertise, which lawyers may consider important. Many lawyers have had the experience of trying to explain complex legal issues to a trial court that either routinely handles other kinds of litigation or simply has a docket so crowded that the court cannot devote the time required. And, in legal malpractice cases, not only does the case involve legal issues unique to claims against lawyers, but the parties will also have to litigate the issues from the underlying legal matter. A decision maker unfamiliar with the law of lawyering can be frustrating to a lawyer litigant who is facing claims against him. In arbitration, the presiding officer(s) have a much less crowded docket and potentially deep experience in litigating or presiding over the claims involved in attorney-client disputes. Depending on the rules of the forum (e.g., American Arbitration Association, Texas Arbitration Act), the hearings can have a single arbitrator or a panel of three, and the parties likely have the right to appoint one or more of the arbitrators. This provides additional peace of mind for the parties—each may get to choose its own subject matter expert to preside.
Time Savings
The less-crowded dockets, expertise, and streamlined discovery and evidentiary rules guide arbitrations to resolution must faster than the courts take to settle disputes. The ADR section of the State Bar of Texas reported that an arbitration proceeding resolves disputes in approximately seven months and contrasted that with the nearly two years it took to resolve disputes in federal courts. But speed to resolution isn’t the only time savings in arbitration. Arbitration awards are final with no, or limited, rights of appeal, which means that in most instances, the dispute is over once the award is final.
Even though these factors can be attractive to litigants, and especially attorneys who benefit from confidential and efficient proceedings, these benefits must be carefully balanced by the risks, which include the potential for substantial unplanned costs, the loss of procedural protections and appellate rights, and the risks associated with adding lawyer-centric provisions into fee agreements.
Benefits should be considered with the potential risks.
As we stated at the beginning of this article, although there are some benefits to attorneys with respect to enforcement of their fee agreements in arbitration, a decision to proceed in that forum must be evaluated with the corresponding downsides.
Unplanned Costs
Lawyer Lim’s predicament above highlights the risk of unplanned costs in arbitration. The rules may place a very low financial burden on the client while forcing the lawyer to bear the majority of the costs, like in Lawyer Lim’s hypothetical. Filing fees in Texas state courts usually run under $500 and filing motions and responses typically require no filings fees. Unlike arbitrators, the parties do not have to pay the trial court judges fees and hourly rates for time spent handling the legal proceedings – either in court or outside of court.
Lawyers should also be aware that their professional liability policy likely does not cover reimbursement for these unplanned expenses of arbitration if the lawyer initiated arbitration as an affirmative claim for relief against the client on the fee claim. Liability policies are generally limited to providing a defense for claims asserted against a lawyer for professional services rendered by the named insured. Most of the time, they do not cover an attorney’s fee claim against the client. That will be on the lawyer’s own dime.
Loss of Procedural Protections and Appellate Rights
The rules of discovery and evidence are relaxed in arbitrations and vary depending on the forum. Generally speaking, the nature and scope of discovery is limited, and the arbitrators are not strictly bound by the rules of evidence. Also, discovery from non-parties is less available in arbitration. In Texas state court or federal district court, a lawyer may be able to obtain summary judgment on the malpractice claims against him – especially if there are strong grounds to argue no causation of damages or other available dispositive defenses like lack of privity or limitations. In arbitration, the arbitrator may be less inclined to grant such a motion, waiting to sort out any defenses at the final hearing or in the final award. Again, the arbitrator may make findings based more in equity, and less so on the law. And if the lawyer does not achieve the desired result, the right to appeal or otherwise contest the final award in arbitration is severely circumscribed.
Trial lawyers also may want to think about how they can reconcile their position on arbitration clauses in their fee agreements with the 7th Amendment right to a jury trial. Query whether it is somewhat disingenuous to insist that the attorney’s fee dispute be resolved in arbitration while at the same time advocating that the client has a right to litigate their legal matter, for which they are seeking representation from you, before a jury. Trial lawyers, as champions of the right to a trial by a jury of one’s peers, might think twice before asking a client to waive that right if there is a dispute between them.
Risks of using lawyer-centric provisions
As stated above, the Texas Supreme Court and Texas intermediate courts have affirmed the enforceability of arbitration provisions in fee agreements, including when the provision requires only the arbitration of fee disputes. See Royston, Rayzor v. Lopez, 467 S.W.3d 494 (Tex. 2015). However, just because courts may enforce lawyer-centric arbitration provisions does not mean that a lawyer can’t find himself in trouble when including one.
For example, when entering fee agreements, lawyers are bound by ethical rules of disclosure, like TDRPC 1.03(b) which requires the lawyer to explain the fee agreement, including any arbitration provision, to the client “to the extent reasonably necessary” for the client to make an informed decision. As we explored above, that duty includes a number of disclosures set out in Opinion 586, and may also include informing the client about the potential costs of, and relaxed rules in, arbitration. And, although arbitration of fee disputes is encouraged, if it looks like the lawyer elevated his interests over the client’s interest, the agreement and the lawyer’s conduct will be heavily scrutinized. Any unconscionable provisions or overreaching will be held against the lawyer. See, Daspit Law Firm, PLLC v. Herman, No. 05-19-00615-CV, 2020 Tex. App. Lexis 6847 (Tex. App.—Dallas Aug. 25, 2020, no pet.). In short, failure to follow the requirements set out Opinion 586 may expose the lawyer to a grievance in addition to a professional liability claim.
What does TLI say?
Before including an arbitration provision in a fee agreement, TLI encourages the lawyer to thoroughly evaluate the pros and cons discussed herein, as well as those discussed in a 2015 TLI article by Jett Hanna. It is also a good idea to consult with firm legal counsel to fully appreciate the risks. Importantly, whether or not you have an arbitration provision in your fee agreement, if you are considering bringing a claim for fees against your client, you should consider the high likelihood that you will be facing a counterclaim for malpractice. Whether or not it is justified, the claim will cost you valuable resources (time, money, good mental health) that may be better spent serving your current clients and attending to your current case load.
[1] Friendly reminder, legal malpractice claims are compulsory counterclaims in disputes over legal fees.