UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 01-06
FACTS
An attorney inquires as to the propriety of including an arbitration clause in a fee agreement with a client.
QUESTION
Is it permissible in South Carolina for a lawyer to include an arbitration clause in a fee agreement?
OPINION
South Carolina has no hard and fast rule regarding arbitration clauses in attorney-client fee agreements. Other jurisdictions are split on the matter. The preferable course of action is to make reference in the fee agreement to the Resolution of Fee Disputes Board of the South Carolina Bar.
DISCUSSION
According to Annotated South Carolina Rules of Professional Conduct (2000), Robert M. Wilcox and Nathan M. Crystal, at pages 39-40, South Carolina does not expressly indicate whether a lawyer can include an arbitration clause in a fee agreement. The South Carolina Supreme Court has created a Resolution of Fee Disputes Board under Appellate Court Rule 416, with jurisdiction to hear fee disputes of less than $50,000. The procedural elements (Rule 9) of Rule 416 specify that no application will be accepted from an attorney unless accompanied by the client’s written consent to jurisdiction and consent to be bound by the final decision of the Board. This provision leaves to the client the decision to proceed with third-party fee dispute resolution, as the client can either give or withhold consent. A conservative approach suggests that a mandatory arbitration clause would not be prudent since it is the South Carolina Supreme Court’s clear intention to leave the choice to the client.
Other jurisdictions are split on the issue. New York allows arbitration clauses that not only require fee disputes to be arbitrated, but any dispute arising under the agreement. NYCLA Eth. Op. 723, 1997 WL 419331. The New York committee stated that arbitration clauses are fine as long as they are explained to the client and the client has the opportunity to see other counsel if he desires. Id. (Emphasis added.) On the other side of the continent and at the other end of the spectrum is California’s view, which is that a lawyer and client can only agree to submit to arbitration after the fee dispute arises. CA Eth. Op. 1981-56, 1981 WL 27933. Ohio follows this view as well, declining to follow the Maryland and District of Columbia view that the clauses are permissible if independent counsel is sought. OH Adv. Op. 96-9, 1996 WL 734408.
Pennsylvania seems to follow New York, stating that the clauses are fine because the burden of proof will always be on the lawyer to prove the reasonableness of the clause. PA Eth. Op. 97-140, 1997 WL 671580. The Pennsylvania committee opined that if the lawyer complies with Rule 1.8 (a) which requires full disclosure of the terms of the agreement, then the lawyer may include the clause. Id. Michigan follows the District of Columbia view that the clauses are fine as long as the client obtains independent counsel to obtain advice on the agreement. MI Eth. Op. RI-257, 1996 WL 381513. Connecticut allows them as long as the arbitration clause is written clearly so that the client understands it, and the lawyer must explain the clause to the client and answer any questions the client may have about it. CT Eth. Op. 99-20, 1999 WL 958027.
The basic arguments for allowing an arbitration clause in the fee agreement are that alternative dispute resolution via arbitration is encouraged, the lawyer can explain the clause to the client, the client can obtain independent counsel if he or she chooses, and the burden of proving the reasonableness of the clause is on the lawyer.
The argument against allowing such clauses is mainly that the client should be able to choose the option only after the fee dispute arises. Also, some other ethics committees believe that there may be problems with a lawyer trying to limit liability to the client prospectively.
Both sides of the argument are persuasive and it is hard to tell on which side of the line the South Carolina Supreme Court would fall. The fact that South Carolina has a form of relief already established in the Resolution of Fee Disputes Board tends to show that South Carolina favors letting the client (not the lawyer) choose whether or not to arbitrate (and by what form) and would therefore disfavor mandatory arbitration clauses.
In the opinion of this committee, a lawyer should encourage the use of the Resolution of Fee Disputes Board rather than including a mandatory arbitration clause in the fee agreement. If a lawyer includes a mandatory arbitration clause in a fee agreement, he or she should require that the client seek other counsel.