State Bar of Arizona Ethics Opinions
94-05: Retainer Agreement; Arbitration
Retainer agreement may include arbitration clause regarding malpractice claims provided: 1) the clause is fair and reasonable to the client; 2) it fully discloses the advantages and disadvantages of arbitration; 3) the attorney affords the client a reasonable opportunity to seek the advice of independent counsel; and 4) the client consents in writing.
Does a fee agreement prepared by an attorney, which is intended to be entered into between the attorney and his or her client, violate ER 1.8(h) or any other ethical rule if it contains a clause requiring that any claims of attorney malpractice be arbitrated?
ETHICAL RULES INVOLVED
ER 1.8. Conflict of Interest: Prohibited Transactions
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto.
(h) A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement, or settle a claim for such liability with an unrepresented client or former client without first advising that person in writing that independent representation is appropriate in connection therewith.
"As a general principle, all transactions between client and lawyer should be fair and reasonable to the client." Comment to ER 1.8. The committee believes that a transaction establishing and defining the lawyer-client relationship is no exception to this general rule.
The ethical rules give the lawyer and the client substantial latitude in defining their relationship. For example, the lawyer and client may, by agreement, define the objectives or scope of the services the lawyer will provide. Comment to ER 1.2. Similarly, the lawyer and client can agree to a fee for the lawyer's services, so long as the fee is reasonable. ER 1.5(a). By contrast, some subjects presumptively are so fraught with peril for the client that the lawyer may not even suggest that the client agree to them. An illustrative, but not exhaustive, list of such agreements includes provisions requiring the client to surrender the right to terminate the lawyer's services, Comment to ER 1.2, or the right to settle litigation the lawyer may wish to continue, id.
The present inquiry asks whether a retainer agreement between the lawyer and the client requiring arbitration of legal malpractice claims is among the ethically permissible subjects of a lawyer-client agreement. Additionally, assuming that such an agreement is permissible, what precautions must the lawyer take to ensure that the transaction is fair and reasonable to the client?
Arizona public policy, like that of many other states, favors arbitration over civil litigation as a dispute resolution device. See, e.g., Allstate Insurance Company v. Cook, 21 Ariz. App. 313, 315, 519 P.2d 66, 68 (1974); A.R. S. § 12-1501 ("[A] provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.") Moreover, the establishment and maintenance of an arbitration procedure for the resolution of fee disputes by the State Bar of Arizona illustrates that arbitration of claims between lawyer and client poses no intractable ethical dilemma. Indeed, the Comment to ER 1.5 admonishes that "[e]ach lawyer should conscientiously consider submitting to" the State Bar-sponsored fee dispute arbitration procedure. Thus, the question posed by the present inquiry is not whether lawyers and clients should arbitrate their disputes, but whether the lawyer can ask the client prospectively to agree that their disputes must be arbitrated.
The request specifically asks whether ER 1.8(h) is determinative. ER 1.8(h) prohibits the lawyer and client from prospectively agreeing to limit the lawyer's malpractice liability unless such an agreement is permitted by law and the client is represented by independent counsel. At least one ethics· committee has determined that a provision substantially similar to ER 1.8(h) requires the client to obtain the advice of independent counsel before agreeing to mandatory arbitration of malpractice claims. See State Bar of Michigan Standing Comm. on Professional and Judicial Ethics, Op. No. RI-2 (1/28/89) (Michigan Rule of Professional Conduct 1.8 (h) (1)) (ABA/BNA Lawyers' Manual on Professional Conduct, p. 901:4764). This committee respectfully declines to follow the lead of that committee because a mandatory arbitration provision does not limit a lawyer's malpractice liability. Instead, it only prescribes a procedure for resolving such claims. Accord Geoffrey C. Hazard, Jr., & W. William Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct, § 1.8:901, at 280 n.2.1 (2d ed. 1992) (Hazard & Hodes) ("[A]n agreement [requiring mandatory arbitration of malpractice claims] would not violate Rule 1.8(h), for it merely provides a procedure for resolving disputes, and does not attempt to exonerate the lawyer in advance.")
Similarly, ER 1.5 is not significantly instructive in responding to the inquiry.* Following the general principle governing all relations between lawyers and clients, ER1.5 (a) requires that fees charged by the lawyer be reasonable and lists certain criteria by which the reasonableness of fees may be assessed. The rule also imposes procedural requirements for fee agreements, specifically, that the basis of the fee rate must be "communicated" to the client, preferably in writing. ER 1.5(b).
* ER 1.5, "Fees", provides, in relevant part:
(a) A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee including the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.
(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
Although ER 1.5 addresses one fundamental aspect of the contractual relationship between lawyer and client, it does not purport to address all aspects of such agreements, and has no bearing upon how the lawyer and client agree to resolve their disputes. Cf. Philadelphia Bar Assn Professional Guidance Comm., Opinion 88-2, (3/22/88) (ABA/BNA Lawyers' Manual, supra, p. 901:7519) ("Rule 1.5 .... does not address the broad range of issues covered" by a proposed arbitration agreement regarding fee and malpractice disputes.)
The starting point in our analysis is the proposition that arbitration clauses in lawyer retainer agreements are not per se prohibited. See, e.g., Lawrence v. Walzer and Gabrielson, 207 Cal. App. 3d 1501, 1507, 256 Cal. Rptr. 6, 10 (1989) ("[T]here is nothing inherently improper about an arbitration agreement between a lawyer and client which extends to malpractice claims, . . . .") (quoting California State Bar Formal Opinion No. 1977-47); Hazard & Hodes, § 1.8:901, at 280 n.2.1 ("It seems clear that a retainer agreement may provide for arbitration of disputes -- including disputes about the quality of the legal services rendered -- that may arise as between lawyer and client . . . ."). But by agreeing to arbitration, the client waives the right to jury trial, which is a "’substantial right,’ not lightly to be deemed waived." Lawrence, 207 Cal. App. 3d at 1507 , 256 Cal. Rptr. at 9 (citations omitted); accord Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 152, 840 P.2d 1013, 1017 (1992) ( suggesting that the right to a jury trial is a "fundamental" right that must be knowingly, voluntarily and intelligently waived). Even outside the lawyer-client context, there is no valid waiver of trial by jury resulting from an arbitration agreement unless there has been sufficient notification and explanation such that the waiving party can be said to have exercised a "real choice." Lawrence, 207 Cal. App. 3d at 1507, 256 Cal. Rptr. at 9 (citations omitted). The duty to inform the waiving party adequately of the consequences of electing mandatory arbitration is heightened when the parties to the agreement have a lawyer-client relationship. Haynes v. Kuder, 591 A.2d 1286, 1291 (D.C. Ct. App. 1991) (lawyers have a "heightened obligation...to be fair and frank in specifying the terms of the attorney-client relationship").
The question, then, is what must lawyers do to satisfy the heightened obligation of ensuring that arbitration clauses in retainer agreements are fair and reasonable. The committee believes that the ethical rule that provides the most guidance is ER 1.8(a). That rule prohibits the lawyer from entering into a business transaction with a client unless: (1) the transaction is fair and reasonable to the client and is fully disclosed in a writing that can be understood by the client; (2) the client has a reasonable opportunity to seek the advice of independent counsel; and (3) the client consents in writing. The policy underlying the rule is that of ensuring that lawyers will not use their training and expertise to advance their own self-interest in transactions with clients at their clients' expense.
Mandatory arbitration provisions certainly may serve a lawyer's self-interest. Arbitration may be a faster, less expensive and less publicized forum for resolving a malpractice claim than traditional civil litigation. On the other hand, even assuming the arbitration procedure works no substantial limitation of malpractice liability, by agreeing to mandatory arbitration, a client waives important interests, not the least of which is the right to have their disputes with their lawyers resolved by a jury. Given such potential disparity of interests, the lawyer should take the special precautions outlined in ER 1.8(a) to ensure the agreement's fairness. See Philadelphia Bar Assn Professional Guidance Comm., Opinion 88-2 ( 3/22/88), supra; but see District of Columbia Bar Legal Ethics Comm., Opinion 211 (5/15/90) (ABA/BNA Lawyers' Manual, supra, p. 901:2314) (concluding that, because the complex nature of arbitration cannot be adequately disclosed to lay clients, retainer agreements providing for mandatory arbitration of disputes are unethical unless the client is counselled by an independent lawyer).
In summary, a lawyer ethically may ask a client to agree to a retainer agreement clause providing for mandatory arbitration of the client's malpractice claims if the lawyer: (1) ensures that the arbitration clause is fair and reasonable to the client; (2) fully discloses, in writing and in terms that can be understood by the client, the advantages and disadvantages of arbitration, including, for example, the waiver of the right to trial by jury; (3) gives the client a reasonable opportunity to seek the advice of independent counsel; and (4) obtains the client's written consent to the agreement. Nothing in this opinion is intended to address the legal enforceability of such arbitration terms.
Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.
©State Bar of Arizona 1994