NYCLA Committee on Professional Ethics Opinion 723: Arbitration Clause in Lawyer Engagement Agreement with Client



NYCLA ETHICS OPINION NO. 723 (Issued 7/17/97)












DR 6-102, 2-106, 5-104




A lawyer wishes to provide in a retainer agreement with a client that all disputes arising under the agreement shall be subject to arbitration before the American Arbitration Association or such other arbitral body in New York affiliated with a NY.-based bar association, as the client may elect.




The Code of Professional Responsibility affords substantial flexibility to the lawyer and client in defining the terms and conditions of their relationship. Within certain broad parameters, the parties may agree on the scope and nature of the services to be rendered, the fee to be paid for such services, and the limits to be placed on the lawyer’s obligation to avoid the representation of conflicting interests. See generally DR 2-106; DR 5-105. Such substantial flexibility is conducive to the trust and confidence essential to the relationship. Nevertheless, the lawyer’s fiduciary obligations to the client require that the lawyer exercise due care to avoid overreaching or otherwise exploiting the lawyer’s superior knowledge of the legal system to the client’s detriment.


The present inquiry raises the question whether a lawyer may permissibly include in a retainer agreement a provision mandating that all disputes arising under the agreement be subject to arbitration. We assume that the purpose and intended effect of such a provision would be to compel arbitration of not only fee disputes but also claims of legal malpractice and breach of contract. In our opinion, subject to the caveats below and to definitive resolution of whether New York law allows an award of punitive damages in an arbitration, nothing in the Code of Professional Responsibility prohibits such an arbitration clause outside the context of domestic relations matters, as to which the Code requires a lawyer to submit to arbitration of fee disputes at the client’s election.


We note at the outset that we confine our consideration to the ethical issues that an arbitration clause poses under the Code of Professional Responsibility. We do not address purely legal issues concerning the enforcement of an arbitration clause in a contract for legal services, including whether the courts of this State would regard such a clause to be inconsistent with public policy. Our research has uncovered no such ruling in this State to date. Our survey of New York law instead indicates a strong public policy favoring alternative dispute resolution mechanisms and enforcing the results of such resolutions. See, e.g., Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146, 157 (1995). Indeed, the courts of this State, as well as federal courts here, have established alternative dispute resolution systems to which matters in litigation are referred by consent; the Departmental Disciplinary Committee with jurisdiction in this county has established an alternative dispute resolution mechanism for certain disciplinary complaints deemed to be more appropriately subjects of mediation rather than discipline. Whether the public policy favoring these devices will be applied in the context of an agreement between a lawyer and a client is for the courts, not this committee, to decide.


The possibility of an arbitration clause in a retainer agreement between a lawyer and a client implicates two concerns under the Code of Professional Responsibility.


The first concern is the prohibition on prospectively limiting a lawyer’s liability to a client for services to be rendered. DR 6-102(A) provides in pertinent part that a “lawyer shall not seek, by contract or other means, to limit prospectively the lawyer’s individual liability to a client for malpractice.” The accompanying ethical consideration explains that a “lawyer who handles the affairs of the client properly has no need to attempt to limit liability for professional activities and one who does not handle the affairs of the client properly should not be permitted to do so.” EC 6- 6.


Whether a provision requiring arbitration of all disputes violates this prohibition depends in the first instance on a question of law beyond our jurisdiction to resolve. Specifically, under New York law, the power of an arbitrator to award punitive damages is at best unsettled: the New York Court of Appeals has held that such an award is against public policy, see Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 386 N.Y.S.2d 831 (1976), though more recent cases have begun to erode that ruling when the parties are deemed to have agreed to allow such an award, see, e.g., Hamershlag, Kempner & Co. v. Oestrich, 651 N.Y.S.2d 489 (1st Dep’t 1996). To the extent that New York law denies an arbitrator the power to award punitive damages regardless of any contrary agreement between the parties, then a clause in an engagement letter requiring that all disputes between a lawyer and client, including malpractice claims in which punitive damages might otherwise be sought, would amount to an impermissible contract to limit prospectively the lawyer’s individual liability to a client. To the extent that New York law allows an arbitrator the power to award punitive damages, either because the parties agree or otherwise, then, in our view, an arbitration clause in a retainer agreement applicable to all disputes under the agreement, including malpractice claims, that does not preclude the arbitration panel from awarding punitive damages, does not violate DR 6-102 (A).


In such circumstances, an arbitration clause does not limit a lawyer’s liability for malpractice, or otherwise seek to exonerate the lawyer in advance. The provision instead stipulates merely a procedure for resolving questions of liability and damages. The client remains free to assert the claim, and the lawyer remains exposed to such a claim; only the mechanism for resolving the claim is determined. See G. Hazard & W. Hodes, The Law of Lawyering 280 n.2.1. (1992). Judicial decisions and ethics opinions in other jurisdictions, some rendered under the analogous provisions of the Model Rules of Professional Conduct, agree that an arbitration clause does no violence to the letter or spirit of DR 6-102(A). See, e.g., McGuire, Corwell &Blakey v. Grider, 765 F. Supp. 1048 (D. Colo. 1991); Ariz. Ethics Op. 94-05 (1994); Va. Ethics Op. 638 (1984); but cf Ohio Ethics Op. 96-9 (1996) (while agreeing that arbitration clauses are not prohibited by the Model Rules, the committee discourages them).


Nevertheless, there are material differences between arbitration and litigation in a court of law, and therein lies the second ethical concern that an arbitration requirement occasions. The Code manifests a concern that the terms and conditions of a client’s engagement of a lawyer be reasonable and based on informed consent. See DR 2-106; 5-104; 5-105. As with any other term or condition of the relationship, a provision requiring arbitration of disputes must be reasonable and based on consent of the client after full disclosure of the consequences of the provision for the client.


In our view, such consent cannot be knowing without disclosure of the material differences between arbitration and litigation. Chief among these differences is that an agreement to arbitrate amounts to a waiver of the right to a jury trial. Even outside the context of an attorney-client relationship, a waiver of the right to a jury trial may be unenforceable unless the choice to do so was knowing; the heightened duty of a lawyer to be fair in any relationship with a client can only increase the burden on the lawyer to make clear that a significant consequence of an arbitration clause is that the client will not be free to seek a jury to resolve the dispute.


The right to a jury trial is not the only material difference between litigation and arbitration. Other differences may include, but may not be limited to, the extent of discovery rights, the right to compel production of witnesses and documents, the availability of relief, the availability of appellate review on the merits, the fees and costs payable to the arbitrator, the availability of a public forum, and the like. Arbitration may be faster and less expensive, a factor that may benefit the client in some respects yet also have adverse consequences for the client’s freedom of choice in pursuit of the client’s claim against the lawyer.


Outside the context of a particular attorney-client relationship, it is impossible to identify the specific facts that must be disclosed in order to make the client’s agreement to such a clause a fair, reasonable and knowing one. Doubtless the sophistication of the client in such matters is a significant consideration in determining the extent of the disclosure required in the circumstances. A corporate client experienced in arbitrations may need little explanation of the consequences of an arbitration clause; an individual inexperienced in contested matters may need instruction on the costs and benefits of the procedure, The less sophisticated the client, the greater the duty of the lawyer to make clear in advance the import of an arbitration clause. In all circumstances, the burden is on the lawyer to provide whatever information is needed for the client fully to understand the consequences of the provision mandating arbitration of disputes.


For two reasons, we respectfully disagree with the opinion of the District of Columbia bar, in its opinion 211, that an arbitration agreement is unethical unless the client first consults with independent counsel concerning the arrangement. See also Md. Ethics Op. 90-12 (to the same effect that independent counsel is required); Mich. Inf. Op. RI-257 (1996) (same), First, there are numerous material terms and conditions in an agreement between a lawyer and a client which the Code contemplates will be the subject of negotiation and consultation between the lawyer and client — including the scope of services to be performed, the fee to be charged, and whether and to what extent the lawyer may be free to represent other clients with interests adverse to those of the client — and as to which no obligation to insist on independent counsel is imposed. Instead, the Code requires that the result of these negotiations and consultations be fair and reasonable to the client, and arise from the client’s consent after disclosure of the facts material to the client’s consideration. Second, to compel a client who needs a lawyer to hire another lawyer to assist in the process expresses a skepticism about the efficacy of that standard and the willingness of the bar to be faithful to it that we do not share. If anything, in our view, such a suggestion is more likely to undermine confidence in the legal profession rather than promote it.


At the same time, we have no difficulty with, and we adopt, the view of other ethics committees that a lawyer proposing an arbitration clause in a retainer agreement should give the client an opportunity, if the client so elects, to consult with independent counsel concerning the clause (or any other term and condition of the retainer). E.g., N.C. Ethics Op. 107 (1991). Advising the client of the desirability of consulting with separate counsel is an additional safeguard of the fairness and reasonableness of the arrangement, and of the client’s informed consent to it.


Consistent with the law in this State concerning the enforceability of arbitration provisions, the foregoing assumes that any arbitration clause will be contained in a written agreement signed by the client. It is advisable that the written agreement also set out the disclosures material to the client’s consideration of the clause, and specifically provide that the arbitrator is empowered to award all relief available in a court of law. We also believe that, to constitute a reasonable condition, the arbitration clause must contemplate an established arbitral forum such as (but not limited to) the American Arbitration Association, a bar association, or some other comparable tribunal. We do not believe that it would be consistent with the Code to provide for arbitration before a tribunal the convenience, fairness and impartiality of which are not in keeping with the standards of the AAA and like tribunals.


Finally, nothing in this opinion is intended to apply to retainer agreements in domestic relations matters, as to which the Code and the law in this State impose specific requirements. In particular, DR 2-106(D) provides that in “domestic relations matters to which Part 1400 of the joint rules of the Appellate Divisions is applicable, a lawyer shall resolve fee disputes by arbitration at the election of the client.” This rule makes arbitration of fee disputes in such matters a choice for the client to make, and a lawyer may not override that rule by separate agreement with the client. See 22 N.Y.C.R.R. § 136; McMahon v. Evans, 169 Misc.2d 509, 645 N.Y.S.2d 753 (Sup. Ct Broome Co. 1996).




Outside the context of domestic relations matters, as to which special rules apply, and provided that New York law authorizes an arbitrator to award punitive damages in a malpractice claim submitted to arbitration under an agreement, a lawyer may ethically include a condition in a retainer agreement requiring that all disputes arising under the agreement shall be subject to arbitration in an appropriate forum authorized to award all relief available in a court of law, provided that the lawyer fully discloses the consequences of that condition to the client and allows the client the opportunity, should the client so choose, to seek independent counsel regarding the provision.


July 17, 1997