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4.1 Arbitration Clauses

There are good reasons to include an arbitration clause in your engagement agreement. But there are dangers as well – especially if you ask your client to agree to arbitrate anything other than a fee dispute. Weigh the benefits and risks before asking your clients to sign one.

Special Scrutiny for Lawyers

Arbitration clauses are widespread in consumer, business and employment contracts as a way to resolve disputes quickly and inexpensively. Courts have generally upheld these clauses if it can be proven that (a) both parties knowingly agreed, and (b) arbitration provides a neutral forum to resolve disputes.

Arbitration clauses are becoming more common in law practices as well. But the fiduciary nature of the attorney-client relationship creates a special situation that requires special scrutiny.

Alta Pro Practice Pointers

  1. Arbitration is safer than suing your client for unpaid fees. More than half of all fee suits prompt a counterclaim for legal malpractice, according to insurance industry sources. Given such exposure, it makes sense to explore other options like arbitration.
  2. Know your state’s rules. Most states allow lawyers to include arbitration clauses in engagement agreements. But there are important caveats. North Carolina, for example, says you can never ask your client to agree not to report you to the State Bar, and you must inform them that the bar has its own fee dispute program. What does your state say? Do some research to find out.
  3. Follow the ABA recommendations. In 2011, the ABA passed a comprehensive Model Rule for Fee Arbitration. read it here
  4. Tailor your clause. Disclose the types of claims it is intended to cover: fee disputes and (possibly) malpractice claims. But be careful: some states require clients to get separate, independent counsel before signing an agreement to arbitrate malpractice claims. And the agreement might jeopardize your liability coverage if you don’t get written approval from your carrier in advance. Consider limiting the agreement to fee disputes and collection controversies.
  5. Tell clients what they need to know. Explain that arbitration is generally quicker, cheaper and less formal than litigation – but, depending on your state, the initial costs might be higher. Let them know they’re waiving their right to a trial, appeal and the rules of civil procedure.
  6. Give them the opportunity to get a second opinion. Advise them of their right to have the engagement agreement reviewed by another lawyer not associated with your firm. It may be awkward to begin the relationship by recommending this, much less asking your client to waive certain rights and remedies. Do it anyway. Some firms try to gloss over this with a single sentence saying “disputes will be resolved by binding arbitration subject to [a specific arbitration standard].” This is unwise. The more detailed your arbitration clause, the more likely it will be enforced.
  7. Have the client sign the arbitration agreement. Even better, make it a separate document. Generally, judges support arbitration agreements when it’s reasonable to do so. Was the client reasonably informed of the agreement’s impact? Did the firm try in good faith to work things out? Are the underlying facts egregious? Arbitration clauses won’t be enforced amid allegations of lawyer misconduct.

The Bottom Line: Before using an arbitration agreement, research your state rules. And remember: your ethical duty is to your client, not to making your life easier.

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