Can a lawyer put a binding arbitration clause in the attorney-client fee contract, and under what condition?

Plain-English summary

A lawyer asked whether a law firm may include an arbitration provision in its employment contract with clients. The Disciplinary Commission concluded that a binding arbitration provision prospectively limits the lawyer's liability to the client for malpractice within the meaning of Rule 1.8(h), so the lawyer may ethically include one only if the client is independently represented by counsel in connection with the negotiation and execution of the contract.

The opinion reasons that the primary purpose of requiring binding arbitration as a condition of representation is to preclude the client from suing the lawyer for malpractice in court before a jury. A client who signs such an agreement gives up rights otherwise guaranteed by the United States Constitution, the Alabama Constitution, and state law, namely the right to have a jury decide whether and to what extent the lawyer committed malpractice and the resulting damages. Because the provision denies the client those adjudicatory rights, the Commission treated it as a limitation on the lawyer's malpractice liability, bringing it within Rule 1.8(h).

The opinion explains that the requirement of independent counsel follows from the conflict of interest the lawyer would otherwise have: the client surrenders significant legal and constitutional rights as a precondition of obtaining the lawyer's services, so the lawyer cannot disinterestedly advise the client about that surrender. Advice must come from an attorney whose interest is not affected by the client's decision, which the opinion calls particularly compelling where the client is relatively uneducated and unsophisticated about legal matters.

In practice

The opinion holds that, under the Alabama rule as it stood at the time, a binding arbitration clause in the attorney-client contract is a prospective limitation on the lawyer's malpractice liability under Rule 1.8(h), permissible only when the client is independently represented in making the agreement. The opinion applies Rule 1.8(h) by treating the loss of a jury trial on malpractice as the limitation the rule targets, and identifies the lawyer's conflict in advising on that surrender as the reason independent counsel is required.

Common questions

Q: Can I put a binding arbitration clause in my fee agreement with a client?

A: Only if the client has independent counsel. The opinion concludes such a clause prospectively limits the lawyer's malpractice liability under Rule 1.8(h), so it is ethical only if the client is independently represented in negotiating and executing the contract.

Q: Why does an arbitration clause count as limiting malpractice liability?

A: The opinion concludes its primary purpose is to keep the client from suing the lawyer for malpractice in court before a jury, so it strips the client of adjudicatory rights guaranteed by the constitutions and state law, which the Commission treats as a limitation on liability under Rule 1.8(h).

Q: Why must the client have a separate lawyer for this?

A: The opinion concludes the lawyer has a conflict of interest in advising a client to surrender these rights as a precondition of the representation, so the advice must come from an attorney whose interest is not affected by the client's decision.

Background and rules framework

The opinion interprets Rule 1.8(h) (conflict of interest: prohibited transactions, Model Rule 1.8), which provides that a lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement. The Commission applies that rule to a binding arbitration clause by characterizing the clause as a limitation on malpractice liability that triggers the independent-representation condition.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8 / Ala. R. Prof. C. 1.8(h) (agreements prospectively limiting malpractice liability; independent representation)

See also

• ABA Ethics Op. 02-425: Arbitration of Fee Disputes and Malpractice Claims
• AL Ethics Op. 2005-02: Billing for Fees, Costs and Expenses

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/2002-04/
• Original PDF: https://www.alabar.org/assets/2019/02/2002-04-1.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

ETHICS OPINION
RO-02-04

QUESTION:

"I want to get an opinion from the Alabama State Bar regarding whether or not a law firm can have an arbitration provision in their employment contract with their client. Please let me know whether or not this is ethical."

ANSWER:

The inclusion of a binding arbitration provision in the employment contract between you and your clients would prospectively limit your liability to your clients for malpractice within the meaning of Rule 1.8(h). Accordingly, you may ethically include a binding arbitration provision in your attorney-client contract only if the client is independently represented by counsel in connection with the negotiation and execution of the contract.

DISCUSSION:

Rule 1.8(h) of the Rules of Professional Conduct provides, in pertinent part, as follows:

"A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement. . .".

Applying the above-quoted Rule to your inquiry, the determinative issue appears to be whether binding arbitration prospectively limits the lawyer's liability to a client for malpractice.

It would appear that the primary purpose to be achieved by requiring binding arbitration as a condition of representation by an attorney is to preclude the client from suing the attorney for malpractice in a court of law and before a jury. Therefore, a client who signs a binding arbitration agreement with an attorney is giving up rights the client is otherwise constitutionally and legally guaranteed, i.e., to have a jury determine whether and to what extent the attorney is guilty of malpractice and, if so, the amount of damages to be awarded the client in compensation therefor. The fact that binding arbitration denies the client adjudicatory rights afforded by the United States Constitution, the Alabama Constitution and state law constitutes, in the opinion of the Disciplinary Commission, a limitation on the lawyer's liability to a client for malpractice. It is, therefore, the opinion of the Commission, that the inclusion of a binding arbitration provision in the employment contract between you and your clients would prospectively limit your liability to your clients for malpractice within the meaning of Rule 1.8(h). Accordingly, you may ethically include a binding arbitration provision in your attorney-client contract only if the client is independently represented by counsel in connection with the negotiation and execution of the contract.

The rationale for the requirement of independent counsel is inexorable. The client must not be placed in a position of surrendering significant legal and constitutional rights without fully comprehending the ramifications thereof. Since the client is surrendering these rights as a precondition of obtaining your services, you would have a conflict of interest in counseling and advising the client with regard thereto. Such counsel and advice must come from an attorney whose interest would not be affected by the client's decision. The requirement of independent counsel is particularly compelling where, as in most instances, the client is relatively uneducated and unsophisticated with regard to legal matters and would be, for the most part, otherwise at the mercy of the attorney who has drafted the employment contract.

LGK/vf

11/01/02