Law Firm Engagement Letter Arbitration Clauses: A Higher Standard Required?

Should law firms be required to meet heightened standards before they are able to contract with clients to arbitrate malpractice lawsuits? If so, how high should these standards be?

When lawyers and their clients (or clients and their lawyers, if you prefer) use ADR, we typically applaud them for choosing a process that is generally faster, cheaper and more satisfying than can be found in the crowded judicial system. But when lawyers stipulate to arbitration in their engagement letters with their clients, we've heard some judges believe that duties of candor and loyalty may be implicated unless proper disclosures are made.

In 2012, the Louisiana Supreme Court decided the case of Hodges v. Reasonover. In that case, an unhappy client sued his lawyers for malpractice only to have the lawyers move to dismiss the litigation under a clause in the engagement letter that read, “Any dispute, disagreement or controversy of any kind concerning this agreement, the services provided hereunder, or any other dispute of any nature or kind that may arise among us, shall be submitted to arbitration, in New Orleans, Louisiana.” The client objected under a Louisiana Rule of Professional Conduct which read, “A lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.” The trial court found that the client had not been independently represented and denied the motion to dismiss.

On appeal, the Louisiana Court noted a generally favorable attitude toward arbitration, but it put contracts between lawyers and clients on a different level than most contracts because of the fiduciary nature of the relationship. The Court said, “After our careful study, we hold there is no per se rule against arbitration clauses in attorney-client retainer agreements, provided the clause is fair and reasonable to the client. However, the attorneys’ fiduciary obligation to the client encompasses ethical duties of loyalty and candor, which in turn require attorneys to fully disclose the scope and the terms of the arbitration clause.”

In their ruling, the Court enunciated seven requirements for any arbitration clause in an engagement letter between a lawyer and a client.   These requirements were that the client be informed of:

Waiver of the right to a jury trial; Waiver of the right to an appeal; Waiver of the right to broad discovery under the Louisiana Code of Civil Procedure and/or Federal Rules of Civil Procedure; Arbitration may involve substantial upfront costs compared to litigation; Explicit disclosure of the nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims; The arbitration clause does not impinge upon the client's right to make a disciplinary complaint to the appropriate authorities; The client has the opportunity to speak with independent counsel before signing the contract.

That court found that the factors had not been met and they affirmed the decision of the court below.

Now the question is alive again in the Third Circuit in the Eastern District of Pennsylvania.  There, Judge Joel H. Slomsky will rule in the case of Sanford v. Bracewell & Giuliani whether a mandatory arbitration clause is permissible in an engagement letter between a lawyer and a client. The Sanfords had hired the firm of Bracewell & Giuliani to recover more than $12 million in proceeds from the sale of a medical waste disposal firm that were “lost” offshore.  The Sanfords and the law firm parted ways after six months, but the Sanfords alleged that the work done was “inconclusive, incomplete and inadequate.” When they sued, the firm moved to compel arbitration pursuant to an arbitration clause in its engagement letter with the Sanfords.

At a motion hearing, the Sanford’s lawyer and Judge Slomsky agreed that only three (or perhaps four) of the seven factors from Hodges v. Reasonover were present. The defense noted in argument that the ABA only requires that liability not be limited, that the waiver of a right to jury trial is made plain, that there be a suggestion that the client seek outside counsel and that the letter be signed.  In this case, all these factors were met. The defense also argued that a Louisiana state court case isn’t binding on a federal court in Pennsylvania.

The case is under advisement.