Over the course of my career, I have represented numerous plaintiffs in legal malpractice claims against lawyers. Consequently, I have reviewed many attorney-client contracts. Several potential problem areas that I have observed in attorney-client contracts are: 1) termination provisions, 2) non-refundable retainer provisions, 3) consent to settle provisions; and 4) arbitration provisions. Usually, the reason these particular provisions pose a problem is a result of the lawyer’s failure to appreciate his ethical duties to the client, when drafting the contract.
One of the primary considerations when drafting an attorney-client contract should be the ethical obligations owed by an attorney to the client. Attorneyclient contracts are unique because of the special relationship between attorneys and their clients. Attorneys cannot circumvent their ethical obligations by inserting language to the contrary in a contract with the client. The Texas Supreme Court has refused to allow attorneys to contract away their ethical obligations. See, Hoover Slovacek L.L.P. v. Walton 206 S.W.3d 557, 560 (Tex. 2006). “When interpreting and enforcing attorney-client fee agreements, it is ‘not enough to simply say that a contract is a contract. There are ethical considerations overlaying the contractual relationship.’” Id. at 560.
We cannot prevent the client from firing us, regardless of what language we include in our contract. The client has the absolute right to discharge a lawyer “for any reason or no reason at all.” Hoover Slovacek L.L.P. v. Walton, 206 S.W.3d at 562. The inclusion of language in a contract which imposes an undue burden on the client’s ability to change counsel violates public policy and is unconscionable as a matter of law. Hoover Slovacek L.L.P. v. Walton, 206 S.W.3d at 563. The comments to the Rules of Professional Conduct also make it clear that “the client may not be asked to agree … to surrender the right to terminate the lawyer’s services.” Comment 5 to Rule 1.02 to the Texas Disciplinary Rules of Professional Conduct.
We can, however, contractually provide for certain remedies allowed by law in the event we are discharged by the client. These remedies are clear when the attorney is discharged without good cause by the client. When the client discharges an attorney without cause before work has been completed, the attorney may recover on the contract for the amount of his compensation. Mandell & Wright v. Thomas, 441 S.W.2d 841, 847 (Tex. 1969). In the case of a contingency contract, the attorney is entitled to recover either the amount of his contingent fee or he may recover in quantum meruit. Mandell, 441 S.W.2d at 847; Hoover Slovacek L.L.P. v. Walton, 206 S.W.3d at 56. It is less clear what remedies are available to a lawyer discharged for cause. An attorney discharged for cause might be able to recover in quantum meruit for those services performed prior to the time of discharge. Rocha v. Ahmad, 676 S.W.2d 149, 156 (Tex. App. – San Antonio 1984, writ dism’d). On the other hand, there is authority holding that if an attorney materially breaches the contract of employment, he forfeits all right to compensation. Royden v. Ardoin, 331 S.W.2d 206, 209 (Tex. 1960); and Auguston v. Linea Aerea Nacional-Chile S.A. 76 F.3d 658, 662 (5th Cir. 1996).
In drafting such termination provisions, lawyers may not contract around those remedies allowed under Texas law. Hoover Slovacek L.L.P. v. Walton, 202 S.W.3d at 562. By way of example, a lawyer may not provide in a contingent fee contract that, in the event the attorney is discharged before the case is concluded, the client must immediately pay a fee equal to the present value of the attorney’s interest in the client’s claim. This is what happened in Hoover Slovacek L.L.P. v. Walton, and the Texas Supreme Court refused to enforce this provision because it violated public policy. The problems with the termination provision were threefold: “First, it made no distinction between discharges occurring with or without cause. Second, it assessed the attorney’s fee as a percentage of the present value of the client’s claim at the time of discharge, discarding the quantum meruit and contingent fee measurements. Finally, it required [the client] to pay [the attorney] the percentage fee immediately at the time of discharge.” Id. at 562.
When a lawyer’s representation is terminated, Rule 1.15 requires lawyers to “take steps to the extent reasonably practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned.” Rule 1.15 Texas Disciplinary Rules of Professional Conduct. Based upon the rationale set forth in Hoover Slovecek, a lawyer may not contractually alter his ethical duty under Rule 1.15. Thus, you can’t put language in your contract which either enhances the lawyer’s rights or restricts the client’s rights as recognized in Rule 1.15. For example, a lawyer can’t insert language in the contract which gives him the right to withdraw upon 10 days notice to the client, if that would not be considered “reasonable notice” to the client under the circumstances, and would not allow the client time to employ other counsel.
Lawyers can get themselves into a lot of trouble here, unless they appreciate the difference between a true retainer and a prepayment for services. “[A] true retainer ‘is not a payment for services. It is an advance fee to secure a lawyer’s services, and remunerate him for loss of the opportunity to accept other employment.’” Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736, 740 (Tex. App. – Austin, 2007, no pet.). A true retainer is earned when it is received, so it may be non-refundable. Id. at 740. On the other hand, a prepayment for services is not earned until the services have been performed and thus, it is refundable. Id. Courts will scrutinize the language of the contract carefully, considering such factors as whether the attorney’s fees will be billed against the advance payment. Id. If the advance payment is found to be a prepayment for services, and not a true retainer, an attorney cannot make the prepayment nonrefundable merely by designating in the contract that it is a non-refundable retainer.
Consent to Settle Provisions
I’ve seen numerous contracts which purport to give the attorney authority to settle the case. This language, however, runs afoul of Rule 1.02, and the comments thereto. One Texas case has held that a provision which authorizes the attorney to settle the client’s case, without any further consultation with the client, violates Rule 1.02 and is unenforceable. Sanes v. Clark 25 S.W. 3d 800, 805 (Tex. App. Waco, 2000, pet. denied). Rule 1.02 requires a lawyer to abide by a client’s decision regarding whether to accept an offer of settlement, except as otherwise authorized by law. Comment 3 to this rule states that a “lawyer should consult with the client concerning any such proposal, and generally it is for the client to decide whether or not to accept it.” There are certain exceptions to this rule, such as in class actions, and a few other limited circumstances; however, the point is that a lawyer may not contractually circumvent this ethical obligation to consult with the client about a settlement offer and abide by the client’s decision, by inserting language to the contrary in a contract with the client. This is made crystal clear by comment 5 to Rule 1.02, which says “the client may not be asked to agree to surrender … the right to settle or continue litigation that the lawyer might wish to handle differently.”
The use of arbitration clauses in attorney-client contracts appears to be gaining in popularity in recent years. Certainly, I have noticed more of these provisions recently, than I have in the past. In any event, there is nothing wrong “per se” with including an arbitration provision in a contract with the client. Both the American Bar Association Standing Committee on Ethics and Professional Responsibility and the Texas State Bar Professional Ethics Committee have issued formal opinions concluding that it is permissible for an attorney to include a binding arbitration provision in a fee agreement with a client. Further, Texas courts have recognized that such agreements are enforceable. See, In re Hartigan, 107 S.W. 3d 684, 689 (Tex. App. – San Antonio 2003, pet. denied).
However, it is important to note that there are limitations on the use of these clauses. Arbitration provisions may not be used to insulate or limit a lawyer’s liability, to which he might otherwise be exposed under common or statutory law, unless the client is independently represented by counsel in making the agreement. In re Hartigan, 107 S.W. 3d at 689. Thus, for example, you can’t include language that would prevent the client from recovering punitive damages from the lawyer (unless the client is represented by separate counsel). This would be in violation of Rule 1.08 (g), which prohibits a lawyer from making an agreement that prospectively limits his liability to a client for malpractice, unless permitted by law and the client is independently represented in making the agreement.
Additionally, the arbitration agreement must be fair and reasonable to the client. This requirement is based upon Comment 2 to Rule 1.08, which states that “[a]s a general principle, all transactions between client and lawyer should be fair and reasonable to the client.” In essence, this means that “the lawyer should not attempt to include clearly unfair terms in the [arbitration] agreement, such as providing for the selection of the arbitrator solely by the lawyer, requiring arbitration in a remote location, or imposing excessive costs that would effectively foreclose the client’s use of arbitration.” Opinion No. 586, The Professional Ethics Committee for the State Bar of Texas (October 2008).
Most importantly, in order for an arbitration agreement to be effective, the lawyer must adequately disclose to the client the differences between litigation and arbitration, and explain the significant advantages and disadvantages of both. Opinion No. 586, The Professional Ethics Committee for the State Bar of Texas (October 2008). This requirement is based upon Rule 1.03(b), which provides that “[a] lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” The client’s level of sophistication, education, and experience will determine how much information needs to be disclosed. Generally speaking, the more sophisticated the client, the less the amount of information that needs to be disclosed. In some cases of highly sophisticated clients (such as a company with in-house counsel), no disclosure at all may be necessary. On the other hand, in cases where clients have little or no legal experience, more detailed disclosure is required regarding the advantages and disadvantages of arbitration versus litigation. Examples of some information which may need to be disclosed include the following: (1) the relative costs involved with arbitration [there is a common misconception, even among lawyers, that arbitration is less expensive; however, arbitration costs can be significantly higher than litigation, especially if more than 1 arbitrator is used]; (2) the client’s obligation, if any, to pay for arbitration costs; (3) the relative time savings involved with arbitration; (4) waiver of the client’s right to a jury trial [ironically, many lawyers who claim to fight for this invaluable right don’t have a problem forcing their own client to give up this same right by including an arbitration clause in their contract]; (5) reduced amount of discovery in arbitration; (6) relaxed application of rules of evidence in arbitration; (7) loss of right to appeal an arbitration award (based upon the extremely narrow scope of appellate review); and (8) privacy of arbitration proceeding versus open/public nature of litigation. See, Opinion 586.
Pursuant to the Texas Arbitration Act, if the claim is one for personal injury, the party must be represented by an attorney, and the party’s attorney must sign the agreement, in order for the arbitration clause to be enforceable. However, there is a split of authority regarding whether legal malpractice constitutes a personal injury, and thus whether the client must be represented by separate counsel. Compare In re Godt, 28 S.W.3d 732, 738-39 (Tex. App.-Corpus Christi 2000, orig. proc.) (legal malpractice claim is a personal injury claim) with Taylor v. Wilson, 180 S.W.3d 627, 629-31 (Tex. App.-Houston [14th Dist.] 2005, pet. denied), Miller v. Brewer, 118 S.W.3d 896, 898-99 (Tex. App.-Amarillo 2003, no pet.). and In re Hartigan, 107 S.W.3d 684, 689-91 (Tex. App.-San Antonio 2003, pet. denied) (each holding that a legal malpractice claim is not a personal injury claim). Although there are more cases holding that a legal malpractice claim is not a personal injury claim, this is still an area where attorneys should exercise caution.
As attorneys, we should become more familiar with the Rules of Professional Conduct and keep these rules in mind when drafting attorney-client contracts. The Texas Supreme Court has made it clear that we cannot contractually circumvent our ethical duties to our clients. We should all find time to review our attorney-client contracts and make sure that they comply with our ethical duties, thus avoiding problems down the road.