LEGAL ETHICS OPINION 1707 ENGAGEMENT AGREEMENT PROVIDING FOR
MANDATORY ARBITRATION OF
MALPRACTICE CLAIMS WITH CLIENT
WAIVING RIGHT TO TRIAL
You have presented a hypothetical situation in which a Virginia
law firm proposes to include in its client engagement agreement a
provision obligating the client to submit any claim of legal
malpractice by the firm's lawyers (excluding disciplinary
complaints to the Virginia State Bar) to binding arbitration by
an arbitrator in accordance with the Commercial Arbitration Rules
of the American Arbitration Association. Arbitration would be
conducted in the city or county where the law firm's office is
located unless otherwise agreed. The arbitrator would have the
discretion to order that the losing party bear the costs of
arbitration, including fees, expenses and reasonable attorney's
fees. You state that the client engagement agreement would
contain the following:
By agreeing to this [binding arbitration]
provision, you waive your rights to a trial
by jury or to a judge. We urge you to seek
the advice of independent counsel of your
choosing before you agree to this provision.
Your inquiry to the committee is whether the requirement of
binding arbitration of claims of legal malpractice as stated
above violates any provision of the Code of Professional
Responsibility. If it does not violate the Code of Professional
Responsibility, what specific disclosures should the attorney
make to the client in order to enable the client to make an
informed decision regarding consent to binding arbitration.
The pertinent Disciplinary Rules are (i) DR 5-101(A), providing
that a lawyer shall not accept employment if his professional
judgment on behalf of his client may be affected by his own
financial, business, property or personal interests except with
the client's consent after full and adequate disclosure, and (ii)
DR 6-102, providing that a lawyer shall not limit his liability
to his client for his own personal malpractice. On December 3,
1984, the Committee opined that it is not ethically improper
under DR 6-102 for a lawyer to include a provision in a client
retainer agreement requiring binding arbitration, or nonbinding
but admissible arbitration, of a malpractice claim against the
lawyer, provided that (1) the client consents after full
disclosure of the effect of the provision, and (2) the client is
advised to seek independent counsel regarding the advisability of
the provision. LEO 638. The committee cited Massachusetts Legal
Ethics Opinion 82-1. In a later opinion, the committee observed
that client retainer agreements requiring binding arbitration of
malpractice claims do not constitute a limitation of liability in
violation of DR 6-102 because they merely identify a procedure
for the determination of liability and do not specifically limit
liability. LEO 1550. See McGuire, Cornwell & Blakey v. Grinder,
765 F. Supp. 1048 (D. Colo. 1991).
LEO 638 did not mention DR 5-104(A), governing business
transactions between a lawyer and a client in which they have
differing interests, and the client expects the lawyer to
exercise professional judgment therein for the client's
protection. In LEO 1586 the committee opined that a client
engagement agreement provision requiring binding arbitration of
fee disputes (but not malpractice claims) is not violative per se
of DR 5-104(A), provided that (1) before entering into the
engagement agreement, the lawyer makes a full and adequate
disclosure to the client of all possible consequences of the
binding arbitration provision, (2) the client gives an informed
consent, and (3) the binding arbitration provision is not
unconscionable, unfair or inequitable when made. The committee
observed that all doubts about the adequacy of disclosure to
obtain informed consent are resolved in the client's favor.
Upon further consideration of LEO 1586, the committee believes
that applying DR 5-104(A) to binding arbitration provisions in
client engagement agreements is problematic. EC 5-3 suggests
that the "business transaction with a client" language of DR 5-
104(A) contemplates transactions in which a lawyer and a client
acquire a co-interest in property or in an enterprise or become
co-investors in a business venture. See ABA/BNA, Lawyers' Manual
on Professional Conduct 51:501-51:508. Hence, the committee
concludes that DR 5-101(A) rather than DR 5-104(A), is applicable
to client engagement agreements requiring binding arbitration of
malpractice claims even though the requirements of disclosure and
consent are fundamentally the same under both DR 5-101(A) and
DR 5-104(A).
Provisions in client engagement agreements requiring binding
arbitration of malpractice claims have received considerable
attention since LEO 638 was issued in 1984. In a recent article,
the Attorneys' Liability Assurance Society reported that the
propriety of such provisions remains questionable, and that the
pertinent ethics opinions are about evenly split on whether they
are permissible. VIII ALAS, Loss Prevention Journal 13, 14
(Sept. 1997). Judicial recognition of such provisions has been
described as giving the lawyer a license to exploit the client.
Arbitration Clauses in Retainer Agreements: A Lawyer's License
to Exploit the Client, 1992 Journal of Dispute Resolution 341,
discussing Haynes v. Kuder, 591 A.2d 1286 (D.C. 1991).
Generally speaking, arbitration of malpractice claims would be
more expeditious and efficient and less expensive than
litigation. Those advantages benefit lawyer and client alike.
The lawyer's motive is implicated nonetheless. It has been
suggested that the lawyer's objective in requiring arbitration of
malpractice claims is usually to avoid a jury trial in an effort
to minimize losses and reduce a client's recovery for any legal
malpractice. Lawrence v. Walzer & Gabrielson, 256 Cal. Rptr. 6,
10 at n. 5 (Ct. App. 1989).
The making of a contract between the lawyer and the client,
particularly when it requires the client to forego a right to a
judicial adjudication of legal malpractice claims, harbors
special problems that entail a heightened ethical scrutiny of
fairness and conscionability. An engagement contract between
lawyer and client is not tested by the standards of ordinary
commercial contracts. Heinzman v. Fine, Fine, Legum & Fine, 217
Va. 958, 962 (1977). The lawyer has an influential and superior
position, excepting possibly when the client is a corporation
with in-house counsel. See Spilker v. Hankin, 188 F.2d 35, 39
(D.C. Cir. 1951). The lawyer is dealing in an area in which the
lawyer is an expert, and the client is not. The client
necessarily looks to the lawyer for guidance. See Udall v.
Littell, 366 F.2d 668, 675 (D.C. Cir. 1966); In re Will of Tank,
503 N.Y.S.2d 495, 497 (Civ. Ct. 1986).
It is noted that until an engagement agreement is made, the
lawyer is dealing with a prospective client. Even so, it is
generally recognized, and the committee agrees, that a lawyer's
fiduciary duties extend to preliminary consultation by a
prospective client with a view to engagement. E.g., Westinghouse
Elect. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1316-19 (7th
Cir.), cert. den., 439 U.S. 955 (1978); Nolan v. Foreman, 665
F.2d 738, 739 n. 3, reh'g den., 671 F.2d 1380 (5th Cir. 1982);
Green v. Montgomery County, 784 F. Supp. 841, 845 (N.D. Ala.
1992). But see McGuire, Cornwell & Blakey, 765 F. Supp. 1048,
1051 (D. Colo. 1991). A lawyer's fiduciary duties, it has been
noted, "arise from his status as a member of the legal profession
and are expressed, at least in part, by the applicable rules of
professional conduct." ABA/BNA, supra, 31:101 at 21.
There is no consensus among ethics panels that have addressed
whether it is ethically permissible for a lawyer to include a
provision requiring binding arbitration of malpractice claims in
the client engagement agreement. District of Columbia Bar Legal
Ethics Comm. Op. 211 (1990) stated that an arbitration provision
covering malpractice claims is not ethically permissible unless
the client is represented by independent counsel in entering into
the agreement. Its rationale was that it is unrealistic to
expect lawyers to provide enough information about arbitration in
a first meeting to allow the client to make an informed decision.
Maryland Ethics Opinion 90-12 (1989) stated that the client must
have actually consulted with another lawyer before the client's
consent to binding arbitration of malpractice claims can be
effective. See Michigan Informal Ethics Opinion RI-257 (1996).
Other ethics panels have concluded that it is enough if the
lawyer makes an adequate disclosure to the client of the effect
on the client's rights of a provision requiring arbitration of
malpractice claims and advises the client to consult an
independent lawyer regarding the provision. Arizona Ethics
Opinion 94-05 (1994); Philadelphia Ethics Opinion 88-2 (1988);
see California Formal Ethics Opinion 1989-116. On the other
hand, Ohio Ethics Opinion 96-9 (1996) found it unseemly for a
client to be admonished that the client needed to "hire a lawyer
to hire a lawyer." In the Ohio ethics panel's view, the
admonition to hire another lawyer for advice about a malpractice
arbitration provision in the engagement agreement conveyed a
chilling caveat to the client: the lawyer you are hiring to
protect your interests may be taking advantage of you in the
engagement agreement.
The Ohio ethics panel advised that provisions requiring
arbitration of malpractice claims should be avoided because they
eliminate the clients' opportunity to make a decision based on
the particular facts and circumstances of a dispute at the time
it arises. Hence, the Ohio ethics panel discouraged such
provisions even though it concluded that they were not per se
unethical as an attempt to limit a lawyer's liability to his
client for personal malpractice.
Based on its prior opinions, as well as the factors considered by
other ethics panels, the committee is of the opinion that a
client engagement agreement providing for binding arbitration of
legal malpractice claims does not constitute a per se violation
of the proscription of DR 6-102 against a lawyer limiting
liability to the client for personal malpractice. The committee
cautions, however, that the ethical propriety of such provisions
is tested by the adequate disclosure and informed consent
requirements of DR 5-101(A) and by the paramount principles of
fairness and conscionability governing contracts between lawyer
and client generally. See Heinzman, supra. Like the fee
agreements addressed in LEO 1606, a determination of the fairness
and conscionability of client engagement agreements requiring
binding arbitration of malpractice claims is subject to the
occurrence of unusual and extraordinary facts and circumstances
not contemplated at the outset of the representation. Their
occurrence may well implicate the adequacy of the disclosures
made to obtain the client's consent in the engagement agreement.
The committee observes that EC 9-6 expresses the aspirational
objective that lawyers conduct themselves in a manner that
reflects credit on the legal profession and inspires the
confidence, respect and trust of clients and of the public. The
aspirational objective is troubling in the context of the
lawyer's admonition that "before signing my client engagement
agreement for me to represent you, you should hire another lawyer
to advise you about the provision requiring you to arbitrate any
malpractice claim against me." The committee cautions,
therefore, that lawyers must exercise utmost care and act
advisedly before including a provision requiring binding
arbitration of legal malpractice claims in client engagement
agreements.
The committee is unable to respond to your second question about
specific disclosures to be made to a client in order to obtain an
informed consent to the binding arbitration provision. The
content of the disclosures, such as waiver of trial by jury or by
the court, discovery, evidentiary rules, arbitrator selection,
scope of award, expense, appellate rights, finality of award,
enforcement of award, etc., cannot be stated in a categorical
fashion and, in addition, may vary from client-to-client based on
the client's sophistication, education, and experience and even
the exigency or the character of the representation sought. The
fundamental ethical imperatives are that the client's consent
must be an informed one, and that the consent sought and given
for binding arbitration is not unfair or unconscionable under the
circumstances.
[DRs 5-101(A), 5-104(A), 6-102; LEOs 638, 1550, 1586, 1606; ECs
5-3, 9-6; ; Mass. Legal Ethics Opinion 82-1; DC Legal Ethics
Comm. Op. 211 (1990); Maryland Ethics Opinion 90-12 (1989); Mich.
Informal Ethics Opinion RI-257 (1996); Ariz. Ethics Opinion 94-05
(1994); Philadelphia Ethics Opinion 88-2 (1988); Calif. Formal
Ethics Opinion 1989-116; Ohio Ethics Opinion 96-9 (1996); ABA/BNA
Lawyers' Manual on Professional Conduct 51:501-51:508 and 31:101
at 21; Arbitration Clauses in Retainer Agreements: A Lawyer's
License to Exploit the Client, 1992 Journal of Dispute Resolution
341; McGuire, Cornwell & Blakey v. Grinder, 765 F.Supp. 1048
(D.Colo. 1991); Lawrence v. Walzer & Gabrielson, 256 Cal. Rptr.
6, 10 at n. 5 (Ct.App. 1989); Heinzman v. Fine, Fine, Legum &
Fine, 217 Va. 958, 962 (1977); Spilker v. Hankin, 188 F.2d 35, 39
(D.C. Cir. 1966); Udall v. Littell, 366 F.2d 668, 675 (D.C. Cir.
1966); In re Will of Tankm 593 N.Y.S.2d 495, 497 (Civ. Ct. 1986);
Westinghouse Elect. Corp. v. Kerr-McGee Corp., 580 F.2d 1311,
1316-19 (7th Cir.), cert. den., 439 U.S. 955 (1978); Nolan v.
Foreman, 665 F.2d 738, 739 n. 3, reh'g den., 671 F.2d 1380 (5th
Cir. 1982); Green v. Montgomery County, 784 F. Supp. 841, 845
(N.D. Ala. 1992);. McGuire, Cornwell & Blakey, 765 F. Supp.
1048, 1051 (D. Colo. 1991)]
Committee Opinion
January 12, 1998
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