Arbitration Agreements With Clients

The Houston Court of Appeals in Porter & Clements v. Stone recently upheld a binding arbitration agreement between a lawfirm and its client. As a result, a number of our insureds have asked whether they should begin including arbitration agreements in their fee contracts. This article presents some of the considerations that attorneys may wish to weigh before including arbitration agreements in fee contracts.

Although arbitration does not guarantee an outcome more favorable than litigation, arbitration does appear attractive for several reasons. Arbitration should be less costly and more confidential than litigation. Also, many believe that an arbitration panel is less likely to award a big judgment against a professional than a jury. It is true that you do not hear much about "runaway arbitration panels."

Courts in other states that have addressed the validity of binding arbitration agreements between lawyers and clients have focused on whether the client fully understood the consequences of the agreement. Therefore, arbitration agreements are probably more appropriate for sophisticated clients, and not for most personal injury clients.

If a dispute arises between a lawyer and a client, the client can be expected to challenge the validity of a binding arbitration agreement for the same reasons that make arbitration attractive to the lawyer. A court might set aside the arbitration agreement if the lawyer is unable to demonstrate that the client fully understood the effect of the agreement and knowingly waived his right to a jury trial. Some factors that might assist in upholding an arbitration agreement include:

• Whether the agreement specifically outlines the types of actions it encompasses (e.g., negligence, breach of fiduciary duty, fraud, fee disputes, etc.),
• Whether the agreement specifically states that the client is entitled to a jury trial and that the client understands he is agreeing to waive that right,
• Whether the arbitration agreement is somehow highlighted within the fee contract, or even contained in a totally separate document from the fee agreement,
• Whether the agreement advises the client to seek independent counsel (and if the client actually obtained independent counsel), and
• Whether the client was given sufficient time and opportunity to review the agreement and seek independent counsel.

Lawyers need to be aware that an arbitration agreement might come back to haunt them if the agreement is challenged by the client and not upheld by the court. The plaintiff's lawyer in a legal malpractice action might argue in that situation that the defendant lawyer "even tried to deprive his client of his day in court" with the arbitration agreement. Therefore, while a properly drafted arbitration agreement might prove beneficial, it should be used cautiously and only in the appropriate situation with a suitable client.

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