Enforcing ADR Provisions in Fee Agreements

Attorneys and law practices have been experimenting with strategies to collect unpaid client fees while limiting the risk of malpractice claims. One approach involves the use of alternative dispute resolution (ADR) provisions, including mandatory arbitration clauses, in retainer agreements and engagement letters.

ADR has several advantages over litigation. First, arbitration or mediation of a fee dispute is typically less expensive than litigation. Additionally, the proceedings in arbitration and mediation are confidential and, therefore, do not become matters of public record.1 Thus, a client’s assertion of a malpractice counterclaim in an ADR proceeding as justification for his or her failure to pay the fees at issue will remain out of the public realm. However, attorneys should be aware that their professional malpractice insurance will likely require them to report such a potential claim as a condition of coverage.

In a 2002 Formal Opinion, the American Bar Association ABA) provided ethical guidance for law firm use of mandatory arbitration clauses in retainer agreements.2 The ABA advised: It is ethically permissible to include in a retainer agreement with a client a provision that requires the binding arbitration of fee disputes and malpractice claims provided that (1) the client has been fully apprised of the advantages and disadvantages of arbitration and has been given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement, and (2) the arbitration provision does not insulate the lawyer from liability or limit the liability to which she would otherwise be exposed under common and/or statutory law.

Local Guidelines

Under Colorado’s Uniform Arbitration Act, arbitration clauses are valid and enforceable:

An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except on a ground that exists at law or in equity for revocation of a contract.

Colorado courts have confirmed that a mandatory arbitration clause in an attorney engagement letter is generally enforceable, as well. In Tolliver v. True, the US District Court for the District of Colorado held that an arbitration clause requiring the law firm and the client to submit “any dispute” to arbitration was enforceable and applied to malpractice claims.4 Additionally, the Tolliver court found that a mandatory arbitration clause did not violate the rules barring agreements that prospectively limit the lawyer’s liability to a client for malpractice.5 Indeed, “an agreement to arbitrate does not prospectively limit the lawyer’s liability to a client for malpractice, but rather ‘merely shift[s] determination of the malpractice claim to a different forum.’”6

The Colorado Rules of Professional Conduct encourage attorneys to resolve fee disputes by arbitration or mediation. Specifically, Comment 9 to Colo. RPC 1.5 states, in pertinent part:

If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should conscientiously consider submitting to it.

The CBA offers a fee arbitration program through its Legal Fee Arbitration Committee. Fee arbitration through this program is voluntary, and both the attorney and client must agree to bring their dispute before an arbitrator. Mandatory arbitration clauses, whether referring to the CBA Legal Fee Arbitration Committee or another source, should be clear and unambiguous.

Tips for Drafting an Enforceable Mandatory Arbitration Provision

Enforcement of mandatory arbitration provisions in fee contracts or engagement letters can be complicated. However, attorneys and law practices can take steps to increase the likelihood that a mandatory arbitration clause will be enforced.

1. Include a severability clause.

A good first step is to include a severability clause in retainer agreements and fee contracts that include a mandatory arbitration clause. Then, if the binding arbitration agreement is held to be unenforceable, other protections in the agreement may still remain in effect.7

2. Use a proven arbitration clause.

The likelihood that a mandatory arbitration provision will be enforced can be maximized through use of boilerplate or a judicially tested binding arbitration clause. This way, any challenges to the arbitration provision should turn on whether the arbitration implicates an ethical issue (such as the restriction on attorneys limiting their liability), rather than on whether the provision itself is properly drafted.

3. Provide the ABA’s recommended disclosure.

Although generally not controlling, ABA Formal Opinion 02- 425 is persuasive precedent. It is helpful to ensure that the client has been fully apprised in writing of the advantages and disadvantages of arbitration, and has been given sufficient information to permit an informed decision about whether to agree to the inclusion of the arbitration provision in the agreement. Indeed, such documentation can serve as evidence that the law firm acted in good faith and that the client was fully informed when he or she signed an engagement letter mandating arbitration of fee disputes.

4. Address independent counsel.

Colo. RPC 1.8(h)(2) provides that a lawyer shall not settle a claim or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel in connection therewith.

Because a fee dispute with a client can result in a malpractice claim, an attorney should carefully consider whether withdrawing from representation is the best course of action during a fee dispute. If the attorney chooses to continue to represent the client, the attorney should notify the client of the right to seek independent counsel and provide a reasonable opportunity to do so.

Conclusion

Mandatory arbitration provisions in engagement letters and retainer agreements have several distinct advantages for the attorney. Law firms should consider employing the above tips to increase the likelihood that a mandatory arbitration provision for fee disputes will be enforceable.