Should you or shouldn’t you? Whenfaced with a legal malpractice lawsuit froma former client, many lawyers have regretsabout whether they should, or should nothave included a binding arbitration agree-ment in their fee contract. Here is theanswer: There really is no right answer.There are distinct advantages and disad-vantages to being in arbitration and beingin civil court. The decision depends onyour preferences and how you balanceeach pro and con. What follows are a fewthings to consider before making yourdecision, and tips for drafting an arbitra-tion clause if you decide to include it.

A well-drafted arbitration clause willbe enforced

California law expresses a clear pub-lic policy in favor of the enforceability ofarbitration provisions within contracts asa speedy and relatively inexpensivemeans of dispute resolution. (Moncharshv. Heily & Blase (1992) 3 Cal.4th 1, 9.) Tothat end, Code of Civil procedure section1281 states: “A written agreement to submit

to arbitration an existing controversy or acontroversy thereafter arising is valid,enforceable and irrevocable, save uponsuch grounds as exist for the revocation ofany contract.” (Code Civ. Proc., § 1281.)Courts will indulge every intendment togive effect to arbitration clauses. (Moncharshv. Heily & Blase, supra, 3 Cal.4th at 9.) Anattorney may ethically, and without conflictof interest, include in an initial retaineragreement with a client a provision requir-ing the arbitration of both fee disputes andfuture legal malpractice claims. (Powers v.Dickson, Carlson & Campillo (1997) 54Cal.App.4th 1102, 1108-1109; Cal. StateBar Form. Opn. 1989-116.) If you aregoing to include it in your agreement,make sure you check with your E&O insur-ance carrier, as the arbitration clause mayreduce your premium cost.

Specific issues with agreementsto arbitrate fee disputes

Even in a good attorney-client rela-tionship, fee disputes can arise. Whenthey do, lawyers should be aware that

arbitration of disputes relating to attor-ney’s fees and costs are governed byBusiness and Professions Code section6200. That section governs any attorney-client fee disputes and voids any contrac-tual arbitration provisions that are in con-flict with it. (Alternative Systems Inc. v.Carey (1998) 67 Cal.App.4th 1034, 1044;California State Bar Formal Op. 1981-56.)

Business and Professions Code sec-tion 6200 et. seq., also known as theMandatory Fee Arbitration Act, alsorequires that before any lawsuit or otherproceeding can go forward, the lawyermust comply with the non-bindingMandatory Fee Arbitration (“MFA”)notice requirement. Prior to or at thetime of service of summons of your feeaction, the lawyer must give the client apreliminary notice of the right to partici-pate in nonbinding fee arbitration. (Bus.& Prof. Code, § 6201(a).) If the attorneyfails to provide the required notice, the client may stay the action or otherproceeding by filing a request for MFA.

Legal malpractice — Private lawsuits, public lawyersShould you have a binding arbitration clausein your attorney fee agreement?

Karen StromeyerMember, CAALA Board of Governors

Timothy Halloran

November 2015 Issue

See Stromeyer & Halloran, Next Page

If the attorney has sued the client, theclient may submit a request to participatein MFA prior to answering the com-plaint. MFA is completely voluntary forthe client, but if the client commencesnon-binding MFA, it is mandatory for the attorney to participate. (Bus. & Prof.Code, § 6200 (c).) Generally, because theMFA is non-binding, either party mayseek trial de novo of their claims. (Bus. & Prof. Code § 6204(a).)

However, if a client waives non-bind-ing MFA, by failing to formally elect it orfiling an affirmative civil action, or fol-lowing the completion of an MFA, thenany pre-dispute arbitration agreementbetween the client and the attorney willbe enforced as to all disputes, includingfees. (Schatz v. Allen Matkins Leck Gamble& Mallory LLP (2009) 45 Cal.4th 557,574.) Therefore, while no arbitration pro-vision will relieve you of mandatory par-ticipation in MFA, once it is done, anybinding contractual arbitration provisioncan be fully enforced, and the client doesnot have a right to trial de novo in court.

Advantages of arbitration over civillitigation

Many attorneys feel that there aresignificant advantages to including abinding arbitration provision in theirlegal services contract. These include:• Privacy. Many attorneys highly valuethat their name or law firm is not beingcalled in open court or being on thedocket as a legal malpractice defendant.This can be incredibly awkward or poten-tially embarrassing if you are appearingin the same court as an advocate, andarbitrations have a much greater level ofprivacy of deposition and other tran-scripts and pleadings.• Avoids risks of a jury that may be sym-pathetic to an unsophisticated client.• Can be less expensive in that discoveryis typically limited.• Can be faster than trial, especially inlight of the recent budgetary issues facedby the courts.• Arbitrators are often more experiencedand comfortable with complicated (andtypically dry) issues of duty, breach, andcausation, as well as the case-within-a-case format present in these cases.

Disadvantages

On balance, there are many practicaldisadvantages to arbitration, particularlyfor your defense counsel: • Some lawyers can find it uncomfortableto arbitrate malpractice claims in front ofarbitrators (who usually also serve asmediators) that they use regularly. • Cases against attorneys are often dis-posed of by demurrer, anti-SLAPP, sum-mary judgment, or other dispositivemotion. Even if permitted, these motionsare rarely successful in arbitration, wherestrict rules of pleading and evidence arerelaxed, increasing the likelihood thatthe matter will require a full-blown arbi-tration proceeding to resolve. • Can be more costly for all partiesbecause arbitrators charge in the neigh-borhood of $5,000 per day, for each dayof the arbitration hearing. While this ismuch more expensive than a court hear-ing, arbitration is unique in that this costis split with the plaintiff. Therefore,unlike a typical civil case, the plaintiff isfacing large costs that are not recoverableunless there is a contractual provision inyour fee agreement awarding prevailingparty fees and costs. This can in manycases serve as an early deterrent to aplaintiff when it is a lower exposure case. • Absent agreement otherwise, discoveryis limited, the Civil Discovery Act of theCode of Civil Procedure, does not apply.The American Arbitration Association(“AAA”), and Judicial Arbitration andMediation Service (“JAMS”) each havetheir own rules and procedures, and any-thing else has to be agreed upon by theparties, usually at the initial conferencewith the arbitrator. • Relaxed rules of evidence and proce-dure mean most anything can be intro-duced to be considered by the arbitrator,and left to the arbitrator’s discretion as tohow much weight it is to be given. • Lack of subpoena power can drasticallyreduce the ability to procure third-partytestimony.• The arbitrator is not bound byCalifornia law. (See Moncharsh v. Heily & Blase, supra, 3 Cal.4th at 10-11.)“Arbitrators, unless specifically requiredto act in conformity with rules of law,

may base their decision upon broad prin-ciples of justice and equity, and in doingso may expressly or impliedly reject aclaim that a party might successfully haveasserted in a judicial action.” (Sapp v.Barenfeld (1949) 34 Cal.2d 515, 523.) • The general rule that, with narrowexceptions, an arbitrator’s decision can-not be reviewed for errors of fact or law. (See Moncharsh v. Heily & Blase, supra, 3 Cal.4th at 10-11.) An award reached byan arbitrator pursuant to a contractualagreement to arbitrate is not subject tojudicial review except on the grounds setforth in sections Code of Civil Proceduresection 1286.2 (to vacate) and section1286.6 (for correction). The existence ofan error of law apparent on the face of theaward that causes substantial injustice doesnot provide grounds for judicial review.Also, it is well settled that arbitrators donot exceed their powers merely becausethey assign an erroneous reason for theirdecision. (O’Malley v. Petroleum MaintenanceCo. (1957) 48 Cal.2d 107, 110, 111.)• No right to appeal an arbitration awardmeans the loss leverage to resolve a mat-ter for less than the award. (Editor’s note:It is possible to include a provision forappellate review of an arbitration awardin an arbitration agreement. (CableConnection, Inc. v. DIRECTV, Inc. (2008)44 Cal.4th 1334, 1356.)• Even if the action goes through arbitra-tion, the award must be confirmed via apetition that is filed in court to create anenforceable judgment. (Code Civ. Proc. §1285). This process deprives the partiesof privacy and confidentiality.

How to do itIf, on balance for you and/or your

firm, the advantages of arbitration out-weigh, here are some things to consider indrafting the provision in your contract:Make the arbitration clause “conspicuous,plain, and clear.” (See Cal. State Bar Form.Opn. 1989-116, fn. 5.) Either set it apartwithin the engagement letter or fee con-tract (through capital letters, bold type,etc.), or set it apart in a separate agree-ment, which is also signed by the client.

Ensure that the client understandsthe clause covers malpractice claims.

By Karen Stomeyer & Timothy Halloran — continued from Previous Page

See Stromeyer & Halloran, Next Page

November 2015 Issue

Obviously it should include the word“malpractice,” and state in simple lan-guage that by signing the agreement thatthe client is agreeing to arbitrate anyclaims regarding the professional servicesrendered.

Have language recommending thatthe client obtain outside legal advicebefore agreeing to the clause.

Ensure the effects of the clause arefully disclosed to the client. For example,the client should understand that theyare waiving trial by jury, broad discovery,and the right to appeal.

Consider any specific conditions youwant to include, for example: • Which ADR provider would you prefer:JAMS? AAA?• How many arbitrators shall comprisethe panel?• Any specific qualifications for the arbi-trator, such as ex-judge? • Where should the venue be?• What type of discovery should beallowed?• What procedural rules should apply?• Should the arbitration be conductedpursuant to the laws of the State ofCalifornia?

Example: Arbitration of fee and malpracticedisputes Client and attorney agree that any

dispute arising out of this agreementor attorney representation will beresolved exclusively by submission tobinding arbitration under the rules ofthe American Arbitration Association.

This includes, but is not limited to, anyclaim or dispute regarding billing/feesor attorney’s performance of servicesincluding for malpractice, negligence,breach of fiduciary duty, breach of con-tract, or the like that you may laterwish to assert against us.Arbitration shall be before a single

neutral arbitrator, selected pursuant tothe rules of the American ArbitrationAssociation, and determined by arbi-tration in San Francisco County.Attorney and Client shall each havethe right to discovery in connectionwith any arbitration proceeding inaccordance with Code of Civil Pro-cedure section 1283.05. In agreeing tothis arbitration provision, Attorney andClient are specifically giving up anyright they may possess to have suchdisputes decided in court or in a trialby jury, and all judicial rights includingthe right to appeal from the decisionof the arbitrator. By signing this agreement, Client

acknowledges that Client has read andunderstands this provision. Clientacknowledges that Client has time toconsider this provision and has beenadvised of the right to consult withindependent counsel prior to accept-ing this agreement for binding arbitra-tion.

Conclusion

Getting sued by your client is nevergood news. If you are in binding arbitra-tion or in court the personal costs to youand your practice will be significant. On

balance, if your practice is one that han-dles mostly lower exposure cases, youmay benefit from the deterrent effect ofthe higher costs of an arbitration pro-ceeding and include a binding arbitra-tion clause in your fee agreements. Onthe other hand, if your practice involvesmostly larger exposure cases it is likelymore beneficial to remain in court whereyour chances of an early dismissal onpleading issues or via motion practice aregreater, although public exposure is alsogreater. As defense attorneys who defendattorneys, we believe in the jury systemand think that the jury usually gets itright.

Karen Stromeyer is a senior associateattorney at Murphy, Pearson, Bradley &Feeney with a practice emphasizing generalcivil litigation including defending lawyersagainst claims of professional liability. Prior tojoining Murphy, Pearson, Bradley & Feeney,she spent several years as an associate at aprominent Plaintiff ’s firm in San Franciscowhere she represented catastrophically injuredindividuals.

Timothy Halloran is a senior partner atMurphy, Pearson, Bradley & Feeney. Anexperienced trial lawyer and civil litigator, hehas tried over 20 legal malpractice cases tojury verdict and is a member of the AmericanBoard of Trial Advocates. He is a CertifiedLegal Malpractice Specialist and currently sits on the State Bar Legal Malpractice LawAdvisory Committee.

By Karen Stomeyer & Timothy Halloran — continued from Previous Page

November 2015 Issue

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