Ethics Opinion No. 312
Adopted August 18, 2000
Use of Mandatory Arbitration Clauses in Attorney-Client Contracts.
Lawyer “A” provides a retainer agreement to his client containing a clause that all disputes “arising under the retainer agreement” shall be subject to binding arbitration.
This inquiry raises the question whether a lawyer may permissibly include in a retainer agreement a provision mandating that all disputes arising under the agreement be subject to binding arbitration. We assume that the purpose and intended effect of such a provision would be to compel arbitration of not only fee disputes but also claims of breach of contract, legal malpractice and/or other torts arising from the attorney/client relationship under the agreement. In our opinion, subject to the caveats below and definitive resolution by the Oklahoma Supreme Court of the issue of whether arbitration clauses in an attorney fee agreement are valid under Oklahoma substantive law, nothing in the Rules of Professional Conduct prohibits such an arbitration clause; however, attorneys, after full disclosure, must ensure that they have their client’s informed consent to the mandatory arbitration clause if it was not requested by the client. Further, the attorney and the client cannot agree that any disciplinary complaints or disciplinary proceedings against the attorney will be handled by private arbitration.
The primary function of the Legal Ethics Committee (“the Committee” or the “LEC”) of the Oklahoma Bar Association is to consider inquiries for members of the OBA involving legal ethics and to respond in accordance with the Committee’s rules. When warranted, the LEC will prepare advisory opinions for approval and issuance by the OBA’s Board of Governors. Advisory opinions reflect the application of the Rules of Professional Conduct and any applicable authority known to the LEC, to specific legal issues. The LEC makes every attempt to conduct thorough research in preparation of an advisory opinion. Nevertheless, members should conduct their own research regarding specific ethical issues.
Legal Ethics involve the professional responsibilities and obligations of lawyers. The opinion that follows is intended as a guide to responsible professional behavior. It is not presented as a sole route to legal virtue. Advisory opinions shall only have such force and effect as they are given by the Supreme Court of the State of Oklahoma and shall not be construed as anything other than advisory in nature. The OBA disclaims any liability in connection with the issuance of any of its opinions.
A. Enforceability of Arbitration Clauses; Applicability of Uniform Arbitration Act.
Except for collective bargaining agreements and contracts with reference to insurance, Oklahoma’s Uniform Arbitration Act, 15 O.S. 1991 § 801 et seq., allows parties to enter into a written agreement to arbitrate disputes. Section 802(A) of the Act recognizes that “[s]uch agreements are valid, enforceable and irrevocable, except upon such grounds as exist at law or in equity for the revocation of any contract.” (FN1)
The Oklahoma Supreme Court has upheld the enforceability of voluntary agreements to submit future disputes to arbitration pursuant to the Oklahoma Arbitration Act, finding that “a strong public policy favors arbitration in Oklahoma.” Rollings v. Thermodyne Industries, Inc., 1996 OK 6, 910 P.2d 1030; Shaffer v. Jeffery, 1996 OK 47, 915 P.2d 910, 917. However, under the Oklahoma Act, any allegations of fraud in the inducement of the arbitration clause itself or the underlying contract of which the arbitration agreement is a part must be adjudicated by a district court, rather than decided in arbitration. Shaffer v. Jeffrey, 915 P.2d at 917.(FN2)
The arbitration clause at issue in Shaffer v. Jeffrey was contained in an attorney/client contract. However, because the sole question before the Court was whether the district court had jurisdiction to determine the enforceability of the clause, the Court did not address the propriety of including an arbitration clause in an attorney/client contract. Id., 915 P.2d at 912-913 n. 2 (“The parties do not raise, and we do not address, the propriety of an arbitration clause in an attorney fee agreement, or whether circumstances could exist that would void an arbitration clause in an attorney fee agreement.”)(FN3)
This opinion will analyze the use of mandatory binding arbitration clauses in attorney/client contracts under Oklahoma Rules of Professional Conduct and Oklahoma law.(FN4)
B. Duty of Loyalty to Client; Informed Consent to Arbitration.
Arbitration can be an effective mechanism for resolving disputes between attorneys and their clients; the final comment to Rule 1.5 recommends that lawyers consider submitting to arbitration or mediation of fee disputes. However, great care must be taken to insure that mandatory arbitration clauses in attorney-client agreements comport with all relevant ethics requirements.
Loyalty is an essential element in the lawyer’s relationship to a client. The lawyer’s own interests should not be permitted to have adverse effect on representation of a client. Comment to Rule 1.7. The lawyer’s fiduciary obligations to the client require the lawyer to exercise due care to avoid overreaching or otherwise exploiting the lawyer’s superior knowledge of the legal system to the client’s detriment. See N.Y. Cty. Law. Assn. Comm. Prof. Ethics Op. 723 (July 17, 1997). Rule 1.8(a) sets forth certain guidelines when there is, or may, be a conflict of interest between an attorney and client. While a mandatory arbitration provision does not precisely fit the language of the rule, the first comment to the rule suggests that it should be broadly construed to cover transactions in which the lawyer may have a conflicting interest with his client and has any advantage in dealing with the client. See D.C. Bar Ethics Op. 218 (1991); Phila. Bar Ass’n Op. 88-2 (1988).
The Rules of Professional Conduct underscore that the terms and conditions of a client’s engagement of lawyer should be reasonable and based on informed consent. Rule 1.4(b) requires a lawyer to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” According to the comments that follow Rule 1.8, “all transactions between an attorney and client should be fair and reasonable to the client.” As with any other term or condition of the relationship, a provision requiring arbitration of disputes must be reasonable and based on the consent of the client after full disclosure of the consequences of including such a provision in the agreement. In our view, such consent cannot be knowing without disclosure of the material differences between arbitration and litigation.
1. Waiver of Right to Jury Trial.
One of the primary differences is that an agreement to arbitrate amounts to a waiver of the right to a jury trial. Even outside the context of an attorney-client relationship, a waiver of the right to a jury trial may be unenforceable unless the choice to do so was knowing. See Cole v. State, 1977 OK CR 279, 569 P.2d 470, 472 (“It is well settled that an accused may waive his constitutional right to a trial by jury. Whether or not the accused knowingly waives that right depends, in each case, upon the particular facts and circumstances”; similarly, waiver of right to counsel requires “that the accused have full knowledge or adequate warning concerning this right and a clear intent to exercise it”); Hayes v. State, 1975 OK CR 193, 541 P.2d 210 (trial court should make inquiry of the accused to insure the accused’s waiver is expressly and intelligently made).
The heightened duty of a lawyer to be fair in any relationship with a client increases the burden on the lawyer to make clear that a significant consequence of a binding arbitration clause is that the client will not be free to seek a jury to resolve the dispute.(FN5) The right to a jury trial is not the only material difference between litigation and arbitration that the lawyer should disclose to the client. The comparative costs of litigation versus arbitration (including filing fees, administrative fees, and arbitrator’s fees charged by some arbitration organizations, such as the American Arbitration Association) also should be discussed and fully disclosed. In many cases, arbitration may be faster and less expensive, a factor that may benefit the client in some respects. However, other differences, such as the extent of discovery rights, availability of relief, availability of appellate review on the merits, and the availability of a public forum, may be considered by the client to be less beneficial.
2. Sophistication of Client.
Outside the context of a particular attorney-client relationship, it is impossible to identify the specific facts that must be disclosed in order to make the client’s agreement to an arbitration clause a fair, reasonable and knowing one. However, the sophistication of the client in such matters is a significant consideration in determining the extent of the disclosure required in the circumstances. A corporate client experienced in arbitrations or other legal proceedings may need little explanation of the consequences of an arbitration clause; an inexperienced individual may need detailed information and instruction on the costs, risks and benefits of the procedure.
In some circumstances, the extent of explanation or information that is reasonably necessary to permit an unsophisticated client to make an informed decision regarding arbitration may be analogous to the requirements for dealing with a client under a disability. See Rule 1.14. According to the Comment to Rule 1.14, “[a] normal client lawyer relationship is based on the assumption that the client, when properly advised and assisted, is capable of making decisions about important matters.” If a client is suffering under a disability or perhaps does not have a level of education or training that would enable the client to fully appreciate or understand the issues involved in negotiating an arbitration clause, the attorney should approach the situation cautiously with full, fair and adequate disclosure and discussion. The less sophisticated the client, the greater the duty of the lawyer to make clear in advance the import of an arbitration clause. In all circumstances, the burden is on the lawyer to provide whatever information is needed for the client fully to understand the consequences of the provision mandating arbitration of disputes.
3. Consultation with Independent Counsel
The Comment to Rule 1.8 states that in transactions between an attorney and client, “a review by independent counsel on behalf of the client is often advisable.” We disagree with the opinion of several other bars that a fee agreement containing a clause mandating arbitration of fee and malpractice disputes is unethical per se unless the client first consults with independent counsel concerning the arrangement.(FN6) As stated by the New York County Lawyers’ Association Committee on Professional Ethics in Opinion No. 723 (July 17, 1997), “[T]o compel a client who needs a lawyer to hire another lawyer to assist in the process expresses a skepticism about the efficacy of that standard and the willingness of the bar to be faithful to it that we do not share. If anything, in our view, such a suggestion is more likely to undermine confidence in the legal profession rather than promote it.” See also Ohio Adv. Ethics Op. 96-9 (1996) (“It is impractical to require a client to seek independent counsel before signing an engagement contract with a lawyer — the client would need to ‘hire a lawyer to hire a lawyer.’ It sends the wrong message to the public: Beware, the lawyer you are hiring to protect your interests may be trying to take advantage of you in the engagement contract.”)
We do, however, recommend that a lawyer proposing an arbitration clause in a retainer agreement give the client an opportunity, if the client so chooses, to consult with independent counsel concerning the clause (or any other term or condition of the retainer). “Advising the client of the desirability of consulting with separate counsel is an additional safeguard of the fairness and reasonableness of the arrangement, and the client’s informed consent to it.” N.Y. Cty. Law. Assn. Comm. Prof. Eth. Op. 723 (1997). See, e.g., N.C. Ethics Op. 107 (1991); Maryland Ethics Op. No. 94-40 (1994) (client should be advised of right to confer with other counsel with respect to any adverse consequences that might result from agreeing to mandatory arbitration, including the possible effects of res judicata or collateral estoppel.)
C. Scope of the Arbitration Clause.
The arbitration clause in an attorney-client contract should be simple and straightforward. It should clearly define the types of disputes that are subject to arbitration and clarify that, with the exception of disciplinary proceedings, there are no limitations on the types of relief that may be awarded by the arbitrators.
1. Fee Disputes. As noted above, the comments that follow Rule 1.5 on fees encourage the use of arbitration to resolve fee disputes: “If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer should conscientiously consider submitting to it.”(FN7)
2. Disciplinary Proceedings. According to Rule 1.1 of the Rules Governing Disciplinary Proceedings, the Oklahoma Supreme Court “possesses original and exclusive jurisdiction . . . to discipline for cause, any and all persons licensed to practice law in Oklahoma.” Thus, disciplinary proceedings against the attorney cannot be the subject of an arbitration clause in an attorney-client contract.(FN8) In other words, no agreement to arbitrate may contain a provision prohibiting the client from bringing a disciplinary complaint against the attorney.
3. Malpractice Disputes. An attorney may not include an arbitration clause in an attorney-client contract that limits an attorney’s liability for malpractice. Rule 1.8(h) provides in pertinent part that “[a] lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for the lawyer’s personal malpractice. . . .”
In our opinion, Rule 1.8(h) would prohibit an arbitration clause limiting the attorney’s liability to the client for malpractice by putting caps, for example, on actual damages, punitive damages, costs or attorney fees.(FN9) However, an arbitration clause that merely shifts determination of the malpractice claim to a different forum does not prospectively limit lawyer liability to the client in violation of Rule 1.8(h).(FN10) To the extent that Oklahoma substantive law does not limit an arbitrator’s power to award damages and other remedies, an arbitration clause in a retainer agreement applicable to all disputes other than disciplinary proceedings arising under the agreement, including malpractice claims, does not violate Rule 1.8(h).
A lawyer may ethically include a clause in a retainer agreement requiring that all disputes except disciplinary proceedings arising under the agreement shall be subject to binding arbitration in an appropriate forum authorized to award all relief available in a court of law, provided that the lawyer fully discloses the consequences of the arbitration clause to the client and allows the client the opportunity, should the client so choose, to seek independent counsel regarding the provision.
1. For example, “an agreement to arbitrate is voidable when either the arbitration provision of the agreement or the contract containing that agreement is fraudulently induced.” Shaffer v. Jeffery, 1996 OK 47, 915 P.2d 910, 918.
2. In Shaffer v. Jeffrey, the Oklahoma Supreme Court declined to follow Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-06, 87 S.Ct. 1801, 1805-07, 18 L.Ed.2d 1270 (1967), in which the U.S. Supreme Court, interpreting the Federal Arbitration Act, held that issues relating to the making or enforcement of a contract containing an arbitration clause are to be decided by the arbitrator and not by the court.
3. As the Oklahoma Supreme Court noted in Shaffer v. Jeffrey, 915 P.2d at 913 n. 2, “[o]ne court has determined that in Oklahoma an arbitration clause in an attorney fee agreement could not be voided as a breach of the attorney’s fiduciary duty to the client. McGuire, Cornwell & Blakey v. Grider, 765 F. Supp. 1048 (D. Colo. 1991).”
4. This opinion does not address the use of arbitration clauses in fee agreements that may constitute transactions involving interstate commerce (for example, a fee agreement between an Oklahoma attorney and an out-of-state client). The validity and interpretation of arbitration clauses in contracts involving interstate commerce are governed by federal law and the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. See, e.g., Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 838-40, 130 L.Ed.2d 753 (1995); Hart v. Orion Ins. Co. 453 F.2d 1358, 1361 (10th Cir. 1971); Rollings v. Thermodyne Industries, Inc., 1996 OK 6, 910 P.2d at 1041-1042 (J. Opala, concurring). See also note 2, supra.
5. See Phila. Bar Ass’n Ethics Op. 88-2 (1988) (arbitration clause in fee agreement permitted if: “1. The client is advised in writing, in simple direct language, that by agreeing to arbitration the client is waiving the right to trial by jury; 2. The client is advised to seek the advice of independent counsel with regard to the waiver of a jury trial, and is given a reasonable opportunity to seek such advice; and 3. The client consents in writing”); Maryland Ethics Docket No. 94-40 (1994) (a retainer agreement may require fee disputes to be submitted to binding arbitration provided that language is included in agreement advising client that agreement to arbitrate on a mandatory basis may affect the client’s legal rights, including a relinquishment of right to jury trial).
6. See Dist. Col. Ethics Op. 211 (1990); Md. Ethics Op. 90-12 (1990); Mich. Ethics Op. RI-257 (1996).
7. Arbitration of fee disputes is also encouraged on a local and national level. The Procedures and Guidelines of the Oklahoma County Bar Association Fee Grievance and Ethics Committee, which were approved by the Board of Directors of the Oklahoma County Bar Association January 28, 1993, provide for arbitration of fee disputes by a panel of the Committee. The Tulsa County Bar Association also has a Fee Arbitration Committee, which arbitrates fee disputes. In February 1995, the House of Delegates of the American Bar Association approved Model Rules for Fee Arbitration.
8. See Mich. Ethics. Op. RI-257 (1996) (“ethical disputes cannot be resolved by an agreement between the lawyer and client alone”); Ohio Ethics Op. 96-9 (1996) (such agreements “exceed the scope of an attorney’s authority, for the authority to regulate and discipline the legal professional lies within the sole authority of the Supreme Court”; “attempting to thwart the disciplinary process undermines regulation of the legal profession”); N.C. Ethics Op. 107 (1991) (all-inclusive ADR clause with a disclaimer reserving ultimate disposition of ethical issues for the respective state bar organizations is permissible).
9. See Op. No. 489, Los Angeles County Bar Ass’n Prof. Resp. and Ethics Comm. (1997) (“A lawyer may not include in a retainer agreement language which limits a client’s right to recover punitive or non-economic damages in a malpractice action against the lawyer”). The phrase “limitation of liability” is commonly defined as including limitation of liability for certain types of damages. See, e.g., Black’s Law Dictionary (6th Ed.) (defining “limitation of liability acts” as “[s]tate and federal statutes that limit liability for certain types of damages (e.g., pain and suffering) . . .”)
10. See Porter & Clements v. Stone, 935 S.W.2d 217 (Tex. App. — Houst. [1st Dist.] 1996), no writ (holding that arbitration clause in fee agreement applied to legal malpractice and misrepresentation claims, even though only examples of covered disputes expressly stated in agreement were fee-related); McGuire, Cornwell & Blakey v. Grider, 765 F. Supp. 1048, 1051 (D. Colo. 1991); Monahan v. Paine Webber Group, Inc., 724 F. Supp. 224, 227 (S.D.N.Y. 1989). See also Va. Ethics Op. 1707 (1998) (law firm may include provision in retainer agreement calling for binding arbitration of any legal malpractice complaints against its lawyers; client must be advised to seek independent counsel to evaluate the provision); N.Y. Cty. Law. Assn. Comm. Prof. Ethics Op. 723 (1997); Mich. Ethics. Op. RI 257 (1996) (“merely contracting for ADR on issues of professional malpractice does not violate MRPC 1.8(h)”); Calif. State Bar Op. 1989-116 (1989); Va. Ethics Op. 638 (1984). But see Ohio Bd. Com. Griev. Disp. Op. 96-9 (1996) (engagement letter between lawyer and client should not contain language requiring client to prospectively agree to arbitrate legal malpractice disputes. Arbitration of legal malpractice dispute should be voluntary decision made by client after opportunity to consider the facts and circumstances of the dispute and to consult, if desired, with independent counsel).