State Bar of Arizona Ethics Opinions
06-07: Communication; Settlement Authority; Fee Agreements; Conflict of Interest
A lawyer may not ethically ask a client to authorize the lawyer to unilaterally decide whether to settle the client’s case if the client disappears or the lawyer is otherwise unable to communicate with the client. A lawyer also may not ask a client for authority to sign drafts or releases necessary to finalize a settlement obtained under such circumstances.
The inquiring attorney wants to include, in his fee agreement, the following provisions granting him the authority to decide whether to settle a case and sign any necessary settlement documents for a client:
INABILITY TO CONTACT CLIENT: There have been occasions when clients have failed to communicate with us concerning their whereabouts. This is a rare situation, but when it happens it puts us in an impossible situation. It means that we cannot effectuate a settlement, because in the absence of a valid power of attorney, the client must approve the settlement. This creates a real problem for both attorney and client, because the delay may cause a loss of a very favorable settlement, or the loss of the claim in its entirety if a statue [sic] of limitations is expiring or a lawsuit is to be dismissed for failure to appear or respond.
LIMITED POWER OF ATTORNEY: To avoid this dilemma, it is our standard practice to obtain a “limited power of attorney” from all of our clients. This limited power of attorney operates as follows: If you do not keep us advised as to where we can contact you, or we are unable to reach or contact you, your signatures(s) on this Agreement authorizes us to act as your attorney-in-fact, and serves as a Special Power of Attorney for the purpose of agreeing to a settlement in our discretion on your behalf, and sign for you any drafts or releases necessary to complete the settlement. We also agree not to settle the case without your authorizing us in advance to do so, unless after diligent efforts we are unable to contact you. In such event we may settle utilizing the Power of Attorney contained in this agreement and will hold your share of recovery in trust for you in accordance with Arizona State Bar requirements. If we settle the case on your behalf, we will hold the funds from settlement in trust until you re-contact us. By signing below you grant us that limited Power of Attorney.
May an attorney ask a client for authority to allow the attorney, if the client disappears or otherwise cannot be contacted, to settle the client’s case and then to sign any drafts or releases necessary to finalize the settlement?
RELEVANT ETHICAL RULES
ER 1.2 Scope of Representation and Allocation of Authority between Client and Lawyer
(a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client’s decisions concerning the objectives of representation and, as required by ER 1.4, shall consult with the client as to the means by which they are to be pursued. A lawyer may take such action on behalf of the client as is impliedly authorized to carry out the representation. A lawyer shall abide by a client’s decision whether to settle a matter. In a criminal case, the lawyer shall abide by the client’s decision, after consultation with the lawyer, as to a plea to be entered, whether to waive jury trial and whether the client will testify.
. . . .
ER 1.4 Communication
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with respect to which the client’s informed consent, as defined in ER 1.0(e), is required by these Rules;
(2) reasonably consult with the client about the means by which the client’s objectives are to be accomplished;
(3) keep the client reasonably informed about the status of the matter;
(4) promptly comply with reasonable requests for information; and
(5) consult with the client about any relevant limitation on the lawyer’s conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.
. . . .
ER 1.8 Conflict of Interest: Current Clients: Specific Rules
. . . .
(i) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:
(1) acquire a lien authorized by law to secure the lawyer’s fee or expenses; and
(2) contract with a client for a reasonable contingent fee in a civil case.
. . . .
RELEVANT ARIZONA ETHICS OPINIONS
Ariz. Ethics Ops. 80-11, 94-02, 01-08
At the onset of representation, the inquiring attorney wishes to obtain the client’s consent to what is essentially a contingency plan: if the client goes missing or otherwise fails to communicate with the attorney, the attorney wants the blanket authority to decide whether to settle the client’s case and then to execute – as the client’s attorney in fact – any drafts or releases necessary to accomplish the settlement. The logical result of the attorney’s proposed fee-agreement language is that if the attorney settles the case for the missing or uncommunicative client, the attorney would use his authority to execute necessary documents and negotiate any settlement check, paying himself his fee and holding the rest in his client-trust account until the client re-establishes communication.
We conclude that an attorney may not ethically obtain such advance blanket authorization because doing so would conflict with an attorney’s obligations under ERs 1.2 and 1.4, and also would result in an impermissible conflict of interest under ER 1.8.
I. ERs 1.2 and 1.4
Our conclusion based on ERs 1.2 and 1.4 derives from our previous decisions on two separate issues. First, we have previously concluded that a fee agreement that grants the attorney the power to settle a case without the client’s prior informed consent does not comply with ERs 1.2 and 1.4. See Ariz. Ethics Op. 94-02. Second, we also have previously concluded that a lawyer must withdraw from representation if the client disappears or otherwise refuses to communicate with the lawyer, because the client’s lack of communication renders the representation unreasonably difficult. See Ariz. Ethics Ops. 80-11 and 01-08. Thus, if a lawyer cannot communicate with his or her client as required by ER 1.4, the lawyer cannot obtain informed consent to settle as required by ER 1.2. The fact that the lawyer may be worried that the client will disappear does not justify the use of the fee-agreement provisions the inquiring attorney proposes to use.
We first discuss the propriety of a lawyer obtaining from a client authority to settle a case without the client’s prior consent or knowledge.
Ariz. Ethics Op. 94-02, which did not involve a missing client, concluded that a fee agreement that grants the attorney the power to settle a case without the client’s prior informed consent does not comply with ERs 1.2 and 1.4. The fee agreement at issue in Ariz. Ethics Op. 94-02 provided:
[Client] ... does make, constitute and appoint, [Attorney], true and lawful attorney of HIS/HERS and in HIS/HER name, place, and stead, to settle, adjust, file and prosecute by suit in the proper courts, or otherwise dispose of, claims . . . .
We concluded that the provision would not be ethical because “[a] client may not be asked to agree to representation so limited in scope that the client surrenders the right to settle his or her own matter” and because the inquiring attorney “would have an obligation under ER 1.4 to inform the client adequately so that the client could make the decision whether to accept or reject the offer.”
At the time we issued Ariz. Ethics Op. 94-02, ER 1.2(a) and the relevant comment differed slightly from the current versions of the rule and commentary. ER 1.2(a) provided, in pertinent part, that a lawyer “shall abide by a client’s decision whether to accept an offer of settlement of a matter.” The comment to ER 1.2 stated, in part, that “the client may not be asked to agree to representation so limited in scope as to … surrender the right to settle litigation that the lawyer might wish to continue.”
In contrast, the relevant part of ER 1.2(a) now requires a lawyer to “abide by a client’s decision whether to settle a matter.” The comment no longer refers to the client surrendering the right to settle. However, ER 1.2(c) now requires that the scope of representation be reasonable under the circumstances and the client must give informed consent to the limited scope. In addition, the comment now provides:
At the outset of a representation, the client may authorize the lawyer to take specific action on the client’s behalf without further consultation. Absent a material change in circumstances and subject to ER 1.4, a lawyer may rely on such an advance authorization. The client may, however, revoke such authority at any time.
ER 1.2 cmt 3.
While Comment 3 at first glance may appear to authorize the type of provisions the inquiring attorney proposes to use, it does not. Although ER 1.2(a) addresses the general balance of decision-making and responsibility between the client and lawyer, it also cites specific circumstances in civil and criminal law in which the client retains total authority. In a civil case, the lawyer “must abide by the client’s decision whether to settle a matter.” In a criminal case, the lawyer “must abide by the client’s decision … as to a plea to be entered, whether to waive a jury trial and whether the client will testify.” The client must make these specified decisions. ER 1.2 cmt 1. To interpret Comment 3 as allowing the type of provisions the inquiring attorney wishes to use would directly conflict with the rule’s express language. While the comments are “intended as guides to interpretation … the text of each [r]ule is authoritative.” Preamble, Rules of Professional Conduct, Rule 42, Ariz.R.S.Ct.
Despite the changes to ER 1.2(a), we conclude that the result and reasoning of Ariz. Ethics Op. 94-02 are still valid, and preclude a lawyer’s ability to obtain a blanket authorization from a client allowing the lawyer to decide whether to settle the client’s claim. As ER 1.2(a) provides, only the client may make that decision.
If an attorney cannot unilaterally decide for a client whether to settle the client’s case, then it necessarily follows that the attorney must have some communication with the client. As a result, we next turn to the lawyer’s ethical duties when his client is missing or otherwise refuses to communicate.
We have previously opined that because a client’s lack of communication renders a representation unreasonably difficult, a lawyer must withdraw from the representation if the client’s whereabouts are unknown or if the client otherwise refuses to communicate with the lawyer.
Thus, in Ariz. Ethics Op. 80-11, the lawyer’s incarcerated client refused the lawyer’s letter communicating a settlement offer in pending litigation. We specifically concluded that “[i]f the client refuses to communicate with the lawyer, the lawyer has no choice other than to withdraw” from a pending action.
Similarly, in Ariz. Ethics Op. 01-08, the client moved without leaving a forwarding address and without signing a medical release form. No complaint had been filed. We concluded that the client had “rendered the representation unreasonably difficult,” permitting the lawyer to withdraw under ER 1.16(b)(5). We cautioned that the lawyer still must make reasonable efforts to protect the client’s interests upon withdrawal, including unequivocally informing the client of the lawyer’s intent to withdraw and using reasonable diligence to locate the client to inform the client of the withdrawal.
Ariz. Ethics Op. 80-11 is especially pertinent, because that fact pattern involved a pending settlement offer. Nonetheless, despite that pending settlement offer, we advised that the lawyer had no choice but to withdraw.
In the inquiring attorney’s case, the fact that he may be concerned about his clients disappearing or otherwise failing to communicate with him does not justify his contingency plan. If his clients refuse or fail to communicate with him, then he must withdraw from representation.
Taken together, Ariz. Ethics Ops. 94-02, 80-11 and 01-08 show that the provisions the inquiring attorney proposes to use in his fee agreement would not comply with ERs 1.2 and 1.4. If a client disappears, the client has rendered the representation unreasonably difficult and the lawyer obviously cannot communicate a settlement offer to the client for the client’s decision. Because a client may not be asked to surrender his right to settle a matter, the lawyer cannot ask the client to agree to what is essentially a contingency plan granting the attorney the discretion to decide whether to settle a case and then to execute settlement documents.
In addition to violating ERs 1.2 and 1.4, the inquiring attorney’s proposed fee-agreement provisions would result in a conflict of interest under ER 1.8(i), which prohibits an attorney from “acquiring a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client…” See Matter of Lewis, 266 Ga. 61, 463 S.E.2d 862 (1995).
In Lewis, a discipline case in which the attorney was suspended for 18 months, the Georgia Supreme Court dealt with provision in a contingency fee agreement that was only slightly broader than that posed by the inquiring attorney:
The undersigned client further agrees that … Lewis shall have full power and authority to settle, compromise, or take such action as he might deem proper for the best interest of the client, and the client does hereby appoint . . . Lewis as attorney in fact, with full power to execute any and all instruments and documents in behalf of or in the name of said client, which are necessary to settle or make other disposition of said matter, including endorsement of checks or drafts received as proceeds of recovery.
266 Ga. at 61, 463 S.E.2d at 863. The lawyer, relying on this provision, admittedly had settled his client’s case without consulting her.
As to whether the fee agreement could include such a provision, the Georgia court concluded:
A client who enters into a contingent fee contract with an attorney cannot relinquish the right to decide whether to accept a settlement offer. To allow a client to waive that right by general contract creates a conflict of interest that violates an attorney’s fiduciary obligations to a client.
Id. at 62, 463 at 863 (footnote omitted). The court noted that such a waiver “also engenders a situation that violates public policy” as established by its equivalent of ER 1.8(i). Id.
With little discussion, the Georgia court concluded that accepting the lawyer’s argument – that his fee agreement gave him full authority to settle the case without consulting his client – meant that he “would have obtained a proprietary interest for which he may be disciplined.” Id. at 63, 463 S.E.2d at 864.
Comment 16 to ER 1.8 provides some insight, explaining that the prohibition against acquiring a proprietary interest in litigation
has its basis in common law champerty and maintenance and is designed to avoid giving the lawyer too great an interest in the representation. In addition, when the lawyer acquires an ownership interest in the subject of the representation, it will be more difficult for a client to discharge the lawyer if the client so desires.
ER 1.8 cmt 16.
While contracting with a client for a reasonable contingency fee is an exception to that prohibition (see ER 1.8(i)(1)), the attorney, by assuming the total discretion to settle the client’s case, ends up with more than a contingency interest in the litigation. The lawyer assumes the entire interest in the litigation, perhaps no longer primarily concerned with what is best for his client but instead with ensuring that he is compensated for the time and effort he put into the case. Therefore, an attorney would violate ER 1.8(i) by requesting and obtaining from a client a blanket authorization allowing the attorney to unilaterally decide whether to settle a client’s case.
A lawyer may not ethically obtain authority from a client to decide whether to settle the client’s case, and to execute all necessary documents in the client’s name, if the client disappears or the lawyer is otherwise unable to communicate with the client. Such an advance blanket authorization would conflict with an attorney’s obligations under ER 1.2 to abide by the client’s decision about settlement and to communicate with the client under ER 1.4. It also would result in an impermissible conflict of interest under ER 1.8(i) because the lawyer would acquire a proprietary interest in the client’s litigation matter.
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 2006