News & Insights

December 31, 2014

Enforceability of Arbitration Clauses in Engagement Agreements

This article originally ran in The Legal Intelligencer on December 31, 2014.

 

Often said to be a more cost-effective method for litigating cases, many law firms and attorneys are now including arbitration clauses in their attorney-client contracts and engagement letters. A look at recent cases dealing with the enforceability of arbitration clauses shows that while arbitration itself may be cost-effective and straightforward, litigating the legality or applicability of arbitration clauses can prove time-consuming and expensive. Certain considerations, however, can help reduce that cost and time.

 

Recently, Greenberg Traurig's attempt to enforce an arbitration clause was rejected by an appellate panel in California. The panel ruled Nov. 25 that Greenberg Traurig can't compel arbitration of a $10 million malpractice action brought against it by a group of real estate developers alleging a failed sale of a Downtown Los Angeles building. The appellate panel opined that the arbitration provision "on which Greenberg relies is inapplicable."

 

The malpractice suit claims that Greenberg Traurig negligently drafted a real estate purchase agreement and other related documents. On Aug. 30, Greenberg Traurig moved to compel arbitration on the basis of an arbitration clause contained in a "Conflict Disclosure and Waiver Agreement" signed by the plaintiffs. In addition to arguing that the plaintiffs' claims arise out of or are related to the Conflict Disclosure and Waiver Agreement and/or an alleged conflict of interest, Greenberg Traurig also argued that the arbitration clause is applicable to any type of litigation, including the pending one. Specifically, Greenberg Traurig argued that the parties entered into an "acknowledgement letter" on the same day they entered into the Conflict Disclosure and Waiver Agreement, and as such, both agreements should be read as one document. Greenberg Traurig further argued that the acknowledgment letter—which contains a description of the work to be performed by Greenberg Traurig—serves as a new engagement letter. Accordingly, Greenberg Traurig concluded, the arbitration clause applies to any litigation arising from the work described in the acknowledgment letter, which would encompass more than just a claim for conflict of interest.

 

The appellate court rejected Greenberg's argument and ruled that the arbitration clause applied only to claims arising from or relating to the Conflict Disclosure and Waiver Agreement or arising from any asserted conflict of interest, and not to the type of claims the plaintiffs have chosen to pursue. Notably, the court came to its decision in three months—a fairly short time period for an appellate court to render a decision—but other arbitration cases are not and will not always get resolved as quickly or efficiently.

 

The Greenberg Traurig case dealt with one of many legal issues that can arise in the enforceability of an arbitration clause—the arbitration clause's applicability. Another case dealing with a more fundamental issue—whether mandatory arbitration clauses are enforceable at all is further illustration of how time-consuming and expensive the process can be. In the case of Sanford v. Bracewell & Giuliani, Case No. 2:13-cv-01205, which is currently pending in the Eastern District of Pennsylvania, plaintiffs filed suit against the law firm of Bracewell & Giuliani alleging that the work done by the firm was "inconclusive, incomplete and inadequate." The plaintiffs had hired the firm to recover $12.5 million in proceeds from the sale of a medical waste disposal firm that were deposited with a company and not returned. In March 2013, Bracewell & Giuliani filed a motion to stay the litigation pending arbitration. The question faced by the court was whether a mandatory arbitration clause is permissible in an engagement letter between a client and an attorney. After numerous briefs and hearings, in March 2014—a year after Bracewell & Giuliani's motion to stay—the court upheld the arbitration clause in the engagement letter and ordered the plaintiff to file for arbitration against Bracewell & Giuliani. The court denied the firm's motion to stay as to a second plaintiff on unrelated grounds.

 

So considering the added cost and time that litigating arbitration clauses may require, are they worth it for law firms and attorneys? The answer to that question is a lawyer favorite … it depends. Each law firm and attorney should consider their type of practice, the types of litigation they may face and whether arbitrating potential litigation with clients would be a benefit. Malpractice cases in particular may benefit from arbitration. Indeed, arbitration provides more privacy than a publicly filed lawsuit, more say on who the decision-maker is, less discovery time, and a more streamlined litigation process overall. Of course, there are potential cons to arbitration, including the fact that arbitration decisions are rarely ever appealable.

 

Law firms contemplating including an arbitration provision in attorney-client contracts and engagement agreements should at least consider the following matters: Attorneys and law firms need to decide whether the arbitration clauses included in their agreements be limited to disputes arising out of payment of fees or conflicts of interest, or whether they should cover any and all disputes arising out of the representation, including malpractice claims or claims for breach of fiduciary duty. Attorneys and law firms should also consider whether a template arbitration clause should be included in every contract and engagement letter, or whether they should be used only in specific engagements. In addition, attorneys and law firms should be mindful that courts can apply greater restrictions to arbitration clauses between attorneys and clients. In fact, some jurisdictions bar arbitration clauses governing malpractice claims all together.

 

Nonetheless, if you are in a state that permits such clauses, the arbitration clause is more likely to be enforceable if it is not too one-sided, does not limit the lawyer's liability, and abides by the state's requirements. It may also be necessary for the lawyer to explain the arbitration clause to the client, including rights (such as the right to a jury) that are waived or limited in arbitration and include a provision advising the client to seek outside counsel.

 

One final, but important, consideration for attorneys in deciding whether to include arbitration clauses in their attorney-client contracts and engagement letters is how those provisions may affect their malpractice coverage. Attorneys and law firms should consult with their malpractice insurer to confirm that agreeing in advance to arbitrate claims against the firm or attorneys will not jeopardize coverage.

 

In conclusion, well-thought-out consideration of the pros and cons of arbitrating attorney-client litigation, as well as a fair and clear arbitration provision, may not completely eliminate the costs and time associated with litigating arbitration clauses, but can certainly make your journey from litigation to arbitration easier.

 

The article below is written by Aya Salem, an associate at Conrad O'Brien. Aya focuses her practice on representing lawyers and law firms in civil liability and professional responsibility matters, as well as in the area of white-collar criminal defense, with experience representing professionals, corporate clients, and government employees and agencies in investigations conducted by federal agencies and state regulators, including grand jury investigations.

 

© 2014 ALM Media Properties, LLC.  All rights reserved.

 

Reprinted with permission from the December 31, 2014 issue of The Legal Intelligencer. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

 

Related Attorneys