Should You Include a “Fee Arbitration Clause” in Your Engagement Agreements?

I read an article the other day that said “It is well-recognized that often, when an attorney sues a client for unpaid fees, the client will bring a counterclaim for legal malpractice. Some sources indicate the likelihood of receiving such a counterclaim could be as high as 40%; others place it even higher.” Count Lawyers Mutual in the “even higher” group. We do not keep statistics on this, but anecdotally, we would probably tell you the chances are closer to 100%. In that case, should you consider having your client agree in the engagement agreement to submit fee disputes to binding arbitration to avoid this dilemma?

The North Carolina Rules of Professional Responsibility permit it. RPC 107 holds that “a lawyer and her client may agree to employ alternative dispute resolution procedures to resolve disputes between themselves.” There are a couple of caveats. First, no such agreement can prohibit the client from filing a grievance with the State Bar. Second, the client must be advised of the Fee Dispute Resolution program of the North Carolina State Bar, and if the client requests resolution of the fee dispute through the State Bar program, it is mandatory that you participate in the program before filing other actions to collect the fee.

Why would you want to include a mandatory arbitration clause in your engagement agreement? Well, aside from not being enmeshed in fanciful legal malpractice claim filed in response to your lawsuit to collect your fee, arbitration of the fee dispute will likely be less expensive, quicker and certainly more informal than litigation. These benefits should appeal to the client as well.

If this sounds like a good idea to you, don’t just throw in a fee dispute arbitration clause. Rule 1.4 of the North Carolina Rules of Professional Conduct requires that you inform the client of the risks and benefits of agreeing to the arbitration clause so that the client can make an informed decision whether to do so.   For example, as pointed out above, you should point out that arbitration of the fee dispute will likely be quicker, less expensive and more informal than litigation. You should also point out that arbitration typically results in the client’s loss of significant rights, such as the waiver of a right to a jury trial, the possible waiver of discovery and the loss of the right to appeal. You should point out that the dispute will be decided by an individual arbitrator or a panel of arbitrators, and the parties will be responsible for the fees and costs of the arbitration. If the client agrees, then make sure you have the client sign the engagement agreement.

This sounds like a good idea, you say. How about including an agreement to binding arbitration of a malpractice claim? While RPC 107 would seem to permit it, and ABA Formal Opinion 02-425 specifically approves of it, you should not go there. First, you may not have any interest at all in arbitrating a legal malpractice claim. The benefits and risks may not appeal to you in the least when it comes to a client accusing you of legal malpractice. For example, you would be giving up any right of appeal. Second, Rule 1.8(h) of the North Carolina Rules of Professional Responsibility might require that your client be separately represented before agreeing to arbitrate malpractice claims, and third, and perhaps more important, you might jeopardize your legal malpractice coverage. Your carrier has the right and duty to defend any claim for malpractice, and you are prohibited from assuming any obligation (such as the obligation to arbitrate malpractice claims) without the prior written approval of the insurer. So, confine your exuberance over arbitration clauses to fees disputes only.