Fresno County Bar Association

Arbitration and mediation clauses and their effect on retainer agreements

By Michael J. Pearce

• EDITOR'S NOTE: As the result of a 1998 appellate court decision, binding fee arbitration clauses in attorney retainer agreements entered into before a fee dispute arises are unenforceable in California. Aguilar v. Lerner, a separate case pending before the California Supreme Court, may shed more light on the issue. Pending that decision or any further developments in the law, the State Bar Committee on Mandatory Fee Arbitration offers the following article to assist practitioners who wish to include fee dispute arbitration clauses in their retainer agreements.

It is becoming more common to see, in attorney-client retainer agreements, provisions purporting to obligate the client to arbitrate and/ or mediate fee disputes. But many such provisions are unenforceable because they conflict with Bus. & Prof. Code §§6200 et seq. — the State Bar Mandatory Fee Arbitration statutes.

Arbitration Provisions

Business and Professions Code arbitration provisions

Some retainer agreements contain a provision obligating the client to participate in fee arbitration under the B&P Code. Such provisions are enforceable, under Bus. & Prof. Code §6200(c). This is the only exception to the rule that participation in B&P Code arbitration is voluntary for the client.

Although clients may be compelled, by such retainer agreement provisions, to participate in B&P Code arbitration, they may not be compelled to agree that the arbitration be binding. B&P Code arbitration is non-binding unless the parties agree to the contrary after the dispute arises. Bus. & Prof. Code §6204(a).

Nonetheless, some attorney retainer agreements do, misguidedly, contain a provision stating that the client agrees not only to participate in B&P Code arbitration, but also to be bound by the arbitration award. There is a question whether such provisions are effective to the limited extent of requiring the client to participate in B&P Code arbitration (albeit non-binding) or, rather, are entirely void. The State Bar Mandatory Fee Arbitration Committee takes the latter view, believing that such a provision should be held void in its entirety because it violates Bus. & Prof. Code §6204(a). There is, however, no case law deciding the point.

Private arbitration provisions

Some attorney retainer agreements provide that all disputes be resolved by private arbitration, before the American Arbitration Association, a retired judge, JAMS or some other private ADR provider. Such provisions are unenforceable in California, under the rule of Alternative Systems, Inc. v. Carey, 63 Cal. App. 4th 1034, 79 Cal. Rptr. 2d 567 (1998).

In Alternative Systems, the Court of Appeal held that an attorney may not deprive a client of his right of access to the statutory fee arbitration forum under the B&P Code by means of a provision in a retainer agreement. Alternative Systems involved a signed retainer agreement providing that all disputes between attorney and client be arbitrated before the American Arbitration Association.

The attorney contended that the provision constituted a legitimate waiver of the client's right to statutory arbitration. The court unanimously disagreed and found the provision invalid. It accepted the client's argument that "the public policy and statutory rights manifest in the MFA [Bus. & Prof. Code §§6200 et seq.] are contravened when a client is required to submit, over protest, to binding private arbitration of a fee dispute with his or her attorney." Alternative Systems at 1039, 76 Cal.Rptr.2d at 570.

The court did not hold that the provision was unenforceable merely because it had not been sufficiently explained to the client or because it limited the lawyer's liability. Rather, the court held that the provision was unenforceable per se, because the provisions of Bus. & Prof. Code §§6200 et seq. "pre-empted the AAA arbitration clause in the fee agreement." Id at 1044, 79 Cal. Rptr. 2d at 573.

The court emphasized that the statutory scheme gives a client the right to State Bar arbitration and (if the parties did not elect binding arbitration and the client is dissatisfied with the award) the concomitant right to a trial de novo in court. The court held that neither of these rights can be removed and replaced by private binding arbitration before the fee dispute arises. In support of its opinion, the court cited, among other authorities, the maxim that "a law established for a public reason cannot be contravened by a private agreement." Civil Code §3513.

Mediation Provisions

Business and Professions Code mediation provisions

Several bar association programs provide a mediation service for attorney-client fee disputes under the auspices of the B&P Code mandatory fee arbitration system. Some attorney retainer agreements contain provisions purporting to require the client to participate in such mediation. Such provisions are unenforceable because of Bus. & Prof. Code §§6200(c) which provides that "mediation under this article shall be voluntary for an attorney and a client."

Private mediation provisions

Some retainer agreements — usually the same ones that contain private arbitration provisions — also contain provisions purporting to require the client first to participate in mediation under the auspices of a private ADR provider. While there is no case law directly on point, such a provision would probably be held unenforceable under the rationale of Alternative Systems, because it purports to restrict a client's statutory right to the arbitration remedy created by Bus. & Prof. Code §§6200 et. seq.

Since the legislature provided that a client cannot be forced to participate in the mediation forum created by the B&P Code, it is reasonable to assume that it did not intend to permit lawyers to require clients to participate in private commercial mediation as a prerequisite to exercising their consumer rights to arbitration under the B&P Code.

 

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