Are Arbitration Clauses in Letters of Engagement (LOE) Covering Fee Disputes and Malpractice Enforceable in Kentucky?

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The Problem

The Kentucky Supreme Court authorized legal negligence and fee dispute arbitration under the jurisdiction of the KBA in SCR 3.800 and 3.810. There apparently are no Kentucky Supreme Court decisions, Court of Appeal decisions, or KBA ethics opinions dealing with LOE arbitration clauses covering fee disputes and malpractice claims. Because the KBA arbitration procedures are permissive and not mandatory, they are not exclusive by their terms. Does this leave open the option for Kentucky lawyers to include arbitration clauses in LOEs?

Is There Any Other Authority for LOE Arbitration Clauses?

In KRS 417.050 the Kentucky Legislature authorized arbitration agreements. This, however, does not answer the question because in Kentucky the Supreme Court, not the Legislature, promulgates the rules that govern the practice of law. While not issuing a specific rule on arbitration, the Court in two places in the Rules of Professional Conduct referred to arbitration agreements in a positive context:

SCR 3.130(1.8) Comments (14 & 15)

Limiting Liability and Settling Malpractice Claims

(14) Agreements prospectively limiting a lawyer's liability for malpractice are prohibited unless the client is independently represented in making the agreement because they are likely to undermine competent and diligent representation. Also, many clients are unable to evaluate the desirability of making such an agreement before a dispute has arisen, particularly if they are then represented by the lawyer seeking the agreement. This paragraph does not, however, prohibit a lawyer from entering into an agreement with the client to arbitrate legal malpractice claims, provided such agreements are enforceable and the client is fully informed of the scope and effect of the agreement. ….
(emphasis added)

(15) Agreements settling a claim or a potential claim for malpractice are not prohibited by this Rule. Nevertheless, in view of the danger that a lawyer will take unfair advantage of an unrepresented client or former client, the lawyer must first advise such a person in writing of the appropriateness of independent representation in connection with such a settlement. In addition, the lawyer must give the client or former client a reasonable opportunity to find and consult independent counsel.
(emphasis added)

SCR 3.130(1.15) Comment (2)

(2) Lawyers often receive funds from which the lawyer's fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.
(emphasis added)

Based on the foregoing, and subject to further instructions from the Supreme Court, we cautiously conclude that LOE arbitration clauses are authorized in Kentucky.

What Constitutes an Enforceable LOE Arbitration Agreement?

In the absence of any known Kentucky authority on this question, the recent Louisiana Supreme Court decision, Hodges v. Reasonover (La., No. 2012-CC-0043, 7/2/12) provides a good analysis of the enforceability of arbitration agreements along with minimum disclosures lawyers must make to clients about of the effects of binding arbitration. What follows is a snapshot of the key points of the decision:

  • “ … there is no per se rule against arbitration clauses in attorney-client retainer agreements, provided the clause is fair and reasonable to the client. However, the attorneys’ fiduciary obligation to the client encompasses ethical duties of loyalty and candor, which in turn require attorneys to fully disclose the scope and the terms of the arbitration clause. An attorney must clearly explain the precise types of disputes the arbitration clause is meant to cover and must set forth, in plain language, those legal rights the parties will give up by agreeing to arbitration.”
  • “ … agreements between law firms and clients are held to higher scrutiny than normal commercial contracts because of the fiduciary duties involved. “The relation of attorney and client is more than a contract. It superinduces a trust status of the highest order and devolves upon the attorney the imperative duty of dealing with the client on the basis of the strictest fidelity and honor.”

“At a minimum, the attorney must disclose the following legal effects of binding arbitration, assuming they are applicable:

  • Waiver of the right to a jury trial;
  • Waiver of the right to an appeal;
  • Waiver of the right to broad discovery under the Louisiana Code of Civil Procedure (read Kentucky Rules of Civil Procedure) and/or Federal Rules of Civil Procedure;
  • Arbitration may involve substantial upfront costs compared to litigation;
  • Explicit disclosure of the nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims;
  • The arbitration clause does not impinge upon the client’s right to make a disciplinary complaint to the appropriate authorities;
  • The client has the opportunity to speak with independent counsel before signing the contract.”

“In summary, we find arbitration clauses in attorney-client agreements may be enforceable, provided the contract does not limit the attorney’s substantive liability, is fair and reasonable to the client, and does not impose any undue
procedural barrier to a client seeking relief. However, an attorney must make full and complete disclosure of the potential effects of an arbitration clause ….”

Conclusion

Put Hodges high on your professional reading list. For more on LOE arbitration clauses and lawyer recommended disclosures go to Legal Malpractice, Mallen & Smith, 2012 Ed., §§2:45, 2:46, and 2;47 Alternative Dispute Resolution. If you currently employ arbitration clauses in LOEs, their enforceability may be problematic if the client has not been fully informed of the scope and effect of the agreement as provided in Comment (14) to Rule 1.8 of the Kentucky Rules of Professional Conduct. Risk manage this issue by carefully documenting client disclosures on LOE arbitration clauses.

 


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