Arbitration Clauses in Attorney-Client Agreements: Some Practical Advice

By Aric J. Garza

Some Practical Advice

It is general knowledge in the legal community that a wide variety of consumer and commercial contracts include alternative dispute resolution (ADR) clauses. Most contain a non-binding mediation provision. Many attorney-client agreements do so as well. In many commercial and consumer transactions, arbitration— the process whereby parties contractually agree to a binding, non-appealable, private adjudication of their disputes using a mutually selected arbitrator—is the default form of ADR if mediation fails to produce a resolution. But arbitration is perceived by many to be an expensive, unfair, and generally inefficient means of adjudicating disputes. It is easy to see why: litigation-type discovery can be limited, arbitrator decisions are binding, and appeals are not permitted. Further, the process of vacating an arbitrator’s award (called “vacatur”) is extremely difficult and quite rare.

Attorneys seem especially reluctant to execute attorney-client agreements that contain arbitration clauses. Many take comfort in the knowledge that, if negotiation and/or mediation fails to yield a settlement agreement, they know the “lay of the land” when it comes to maneuvering courtrooms, judges, motions, hearings, and the like. But COVID-19 and its resulting effects on a variety of non-emergency civil cases—including delayed settings, impact on strategies relating to motion practice, longer wait periods for jury trial settings— have forced attorneys to rethink the means of final adjudication of all types of disputes. Thus, many lawyers tasked with drafting commercial and consumer contracts in general are rethinking dispute resolution clauses with more consideration to quicker, cost-effective ways of adjudicating disputes if mediation fails. It may be time for attorneys to reconsider arbitration clauses in their own agreements with clients for the same reasons.

Attorneys have long used ADR clauses in their client engagement agreements to resolve potential attorney-client disputes, most of which arise out of the performance, interpretation, and/or enforcement of the agreement and include malpractice claims and fee disputes. The typical ADR provision requires the attorney/law firm and client to engage in informal dispute resolution followed by mandatory, non-binding mediation. Many attorneys, though, do not choose binding arbitration as the final means of adjudicating their disputes. Most of the reasons cited—nonfamiliarity with the process, lack of knowledge about the arbitrator, the inability to appeal the decision (award), and the very limited bases upon which to vacate an award—make adjudication by arbitration a not-so-palatable clause to include in a client agreement.

When drafting engagement agreements, many dispute resolution clauses end with mediation and implicitly provide for final adjudication through litigation by judge or jury. However, litigation involving one’s client is an unsavory option, especially because the privilege protecting attorneyclient communications can be waived in the process. Thus, many lawyers are justifiably wary of litigation.

Typically, many consumer and commercial agreements do not contain thoroughly drafted arbitration clauses. In many instances, attorneys merely insert a reference to arbitration as the means of adjudicating the dispute should informal negotiation and/or mediation fail. Otherwise well-crafted, thorough agreements fail to provide for the rules to be used, include cost-shifting provisions, make venue explicit, address arbitrability, and so on.

An attorney who decides to use an arbitration clause in his or her engagement agreements should not make this mistake. A well-crafted and thoroughly detailed provision can address many of the issues attorneys have with arbitration as the means of adjudicating their disputes. With an ADR clause that includes arbitration, the attorney and client can fairly, ethically, and comprehensively adjudicate claims in a cost-effective, expedient and efficient manner. Additionally, despite popular belief to the contrary (many times based on anecdotal evidence), statistical reports and surveys show that parties to arbitration save time and money.

But COVID-19 and its resulting effects on a variety of nonemergency civil cases—including delayed settings, impact on strategies relating to motion practice, longer wait periods for jury trial settings—have forced attorneys to rethink the means of final adjudication of all types of disputes. Thus, many lawyers tasked with drafting commercial and consumer contracts in general are rethinking dispute resolution clauses with more consideration to quicker, cost-effective ways of adjudicating disputes if mediation fails. It may be time for attorneys to reconsider arbitration clauses in their own agreements with clients for the same reasons.

Undeniably, the issues associated with using arbitrations to adjudicate client disputes are vast, complicated, and fraught with ethical challenges. Here are just a few of the complications involved: (1) attorneys often have leverage over clients in negotiating the terms of engagement agreements, especially because persons who seek legal services often have exigent needs; (2) attorneyclient agreements are generally complicated, and clients are relying on the advice of an attorney when entering into an agreement with an attorney; (3) many consumers of legal services lack an understanding of the substantial difference between mediation, arbitration, and litigation; and (4) there is a concern that attorneys may use arbitration clauses to prospectively limit their liability from malpractice.

Binding arbitration clauses are permissible in attorney-client engagement agreements under the Texas Disciplinary Rules of Professional Conduct (TDRPC). Texas Ethics Opinion No. 586 provides that it would not be unfair to a typical client who is willing to agree to arbitration to require the binding arbitration of fee disputes and malpractice claims, “provided that (1) the client is aware of the significant advantages and disadvantages of arbitration and has sufficient information to permit the client to make an informed decision about whether to agree to the arbitration provision, and (2) the arbitration provision does not limit the lawyer’s liability for malpractice.” Opinion 586 cited the Formal Opinion 02-425 (2002) from the American Bar Association Standing Committee on Ethics and Professional Responsibility, which specifies that “arbitration provisions do not prospectively limit a lawyer’s liability, but instead establish a procedure for resolving such claims.”

Many presuppose that arbitration is used as a means of limiting liability or binding the hands of a client seeking relief for breach of the agreement. Professional ethics committees and courts have disagreed. Of course, the application of the arbitration clause depends on the basis of the disagreement. Arbitration clauses can and frequently do encompass prospective fee disputes and malpractice claims. Grievances cannot be encompassed due to the quasi-criminal nature of many grievable offenses.

Overall, when drafting an arbitration clause, it is advisable to adequately consider your goals, just as you would when carefully drafting a contract for a client. What are your goals and interests? How do you ensure that the arbitration clause will be interpreted as you intend? How can you ensure that it is enforceable in light of expected actions by parties resisting enforceability? How can it be made to read in a logical and cogent manner, and with regard to the possible array of interpretations by a judge, jury, or arbitrator?

Specifically, the careful drafter of an arbitration clause should consider costs of arbitration, the length of time to get to a final adjudication, the publicity concerning disputes, and enforceability (especially when considering foreign judgments). Additionally, consideration should be given to the choice of law and rules governing the process of adjudication. Many organizations are available to administer the arbitration, including the American Arbitration Association (by far the largest), JAMS, International Institute for Conflict Prevention & Resolution (CPR Institute). If they prefer, the parties may even agree to select an ad hoc (private) arbitrator. It is worth noting that COVID-19 has become a catalyst for arbitrators to develop online/ remote dispute resolution processes, mostly via Zoom.

As far as the mechanics of the arbitration are concerned, attorneys should consider whether to include a provision curtailing or paring down discovery—often the biggest cost in litigation outside of the trial itself. Additionally, in contrast to the familiar American Rule concerning attorney’s fees (sans a statutory or contractual basis for fee-shifting, each party generally pays its own attorney fees), an arbitrator could award attorney’s fees to the prevailing party if such a clause is contained in the arbitration agreement.

Another noteworthy aspect of arbitration is that the parties can include a process by which an arbitrator is chosen. Are you in a dispute with a client concerning a construction matter? It would be best to get an arbitrator with experience in construction matters. Does the dispute concern a trademark or an employment misclassification claim? Arbitrators specialized in one of those areas would likely be able to ascertain the issues and grasp the facts quickly. The parties might even adopt special rules governing specific types of disputes. Much to the surprise of many experienced attorneys, arbitrators do have the authority to provide injunctive relief, if specified in the arbitration clause.

Finally, the expediency of arbitration is especially important because it can contain costs and help the parties get to a final adjudication (and move on with life) quicker than a trial in the era of COVID-19. How? It is easy to insert a provision that the final hearing is to be held within ninety days of the initial preliminary hearing on the matter.

If an attorney wants arbitration as the ultimate means of dispute resolution concerning his or her client, rather than fullout litigation, here are some practical pointers: So, is the inclusion of an arbitration clause to address attorney-client disputes right for your practice? The answer depends on a vast array of issues, many mentioned in this brief article. If you ultimately determine that an arbitration clause is right for you, this article might serve as roadmap to maneuver through the many issues that could arise.

12 PRACTICAL POINTERS

1. Make your ADR clause specific (Will it encompass all disputes or only certain types of disputes?).

2. Include a separate addendum to the client-services agreement, to be signed and dated by the client, that clearly specifies the pros and cons of arbitration, and provides an opportunity for the client to consult with separate counsel.

3. Provide for conditions precedent to the arbitration itself, e.g. informal settlement, followed by nonbinding mediation. These provisions generally give disputes a better chance to be resolved.

4. Clearly and explicitly specify that arbitration effectively serves as a waiver of the client’s right to a jury trial and court-based adjudication.

5. Specify the parameters of the dispute, e.g. “any and all disputes whatsoever that arise in connection with the performance or interpretation of the agreement.”

6. Determine who should decide arbitrability of the dispute itself—the court or the arbitrator. The United States Supreme Court has held that clauses that clearly and unmistakably delegate such authority to the arbitrator are enforceable. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); see also Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. __, 139 S. Ct. 524 (2019).

7. Decide if the arbitration will be ad hoc (arbitrator and rules to be determined if a dispute arises) or whether the arbitration will be administered by an organization such as AAA, JAMS, or another organization.

8. Specify the rules to be used, regardless of whether the arbitration is ad hoc or not.

9. Include provisions regarding cost containment. Notably, consumer arbitrations under the AAA rules do not provide for litigation-type discovery. Instead, the parties are expected to exchange the exhibits they intend to use at the final hearing. Further, motions (including dispositive motions) may only be submitted with leave of the arbitrator.

10. Consider whether the loser pays attorney’s fees and costs or whether the arbitrator has the discretion to determine all relief, including attorney’s fees and costs.

11. Because disputes with claims under $75,000 in controversy can be handled by a single arbitrator, and not a panel of three arbitrators, state in the agreement whether such a threshold is applicable to, and appropriate for, the particular engagement.

12. Finally, regardless of the arbitration clause, understand that many organizations administering arbitrations provide in their rules that if the amount in controversy falls under the jurisdiction of a small claims court, the parties have the right to bypass arbitration altogether. (NOTE: the jurisdictional limits in small claims courts in Texas increased to $20,000 on September 1, 2020.)

Aric J. Garza is an attorney, a mediator, and an arbitrator. He serves on the Employment, Consumer and Commercial Panels of the American Arbitration Association (AAA).