March 15, 2016
Is the Arbitration Provision in Your Firm’s Fee Agreement Properly Drafted?
Some recent California cases have illustrated the importance of a properly drafted arbitration provision in attorney-client fee agreements, and what is at stake. Typically, arbitration is vastly superior to litigation for law firms to resolve disputes with clients related to representation, including fee disputes. Arbitration is confidential, generally has limited discovery and streamlined procedures, and can lead to a swifter resolution of what are sure to be ugly issues. But if your arbitration provision is not properly drafted, it may not be worth much when you need it. Some minor revisions to your fee agreement may mean the difference between arbitrating and litigating disputes with clients.
One critical inquiry is whether California law or federal law will govern the question of the enforceability of the arbitration provision. Under California law, a challenge to the legality of the entire fee agreement–for example, an allegation that a fee agreement is void because it violates public policy– typically is a question for a court to decide, not an arbitrator. Federal law generally provides that an arbitrator decides the issue of enforceability. That difference matters. If a client wishes to defang your arbitration provision, that client would clearly have a much better chance of doing that by alleging the entire agreement is unenforceable under California law in a California court, as opposed to a confidential arbitration where the arbitrators answer this question by interpreting the Federal Arbitration Act. If your arbitration provision (like most) fails to specify that the FAA governs, if it is silent as to which law governs, or if it defaults to the general California choice of law provision in the fee agreement, your firm may end up litigating disputes with clients that it would much rather arbitrate. Some relatively minor revisions to the arbitration provision, clearly providing that the FAA governs the arbitration provision, may prevent many headaches.