CA: Duty to Invoke Arb Clause, or Risk Waiver

Posted on May 12, 2011 by Krishna Shah

Augusta v. Keehn & Assoc., 193 Cal.App.4th 331 (March 4, 2011). 

Facts: August sued his former attorney, Keehn, for legal malpractice in December, 2008. The parties' contract included a provision for binding arbitration, but Augusta did not invoke it until six-seven months after the filing of his Complaint. 

Issue: Did Augusta waive his right to arbitration? 

Ruling: Yes. 

Augusta attempted to argue that Keehn led him to believe the arbitration would occur without any action on his part, but the Court held it was up to Augusta to protect his own rights in the malpractice action. 

Further, the Court placed a great deal of significance on the fact that Augusta had prejudiced Keehn by obtaining discovery from him and then refusing to reciprocate after invoking the binding arbitration provision which did not allow for formal discovery: 

The vice involved here, whether characterized as `unreasonable delay,' `bad faith misconduct,' `gamesmanship' or `unilateral discovery' . . . is that defendants used the discovery processes of the court to gain information about plaintiff's case which defendants could not have gained in arbitration. After obtaining discovery from plaintiff by court processes, defendants then belatedly sought to change the game to arbitration, where plaintiff would not have equivalent discovery rights. . . . Here, the trial court could reasonably find the discovery conducted was not equivalent for both sides and would work an unfair advantage for defendants if arbitration were ordered. These facts support the trial court's finding of waiver.

Accordingly, the Court held that Augusta had waived his right to binding arbitration and must proceed with the litigation. 

Lesson: Clients and lawyers should raise any binding arbitration clause in a timely manner and certainly before either party undertakes formal discovery to avoid waiver. 

 

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Arbitrating Legal Malpractice Claims: OK Clauses in Retainer Agreements

Posted on October 28, 2009 by Krishna Shah

Kamaratos v. Palias, 360 N.J. Super. 76 (App. Div. 2003)

Student Contributor:  Melissa Goldberg

NJ Underlying Commercial Action

Facts: The Plaintiff was a minority shareholder in a corporation and retained Defendant attorney to represent its interests in  a dispute with the majority shareholder. The retainer agreement included an arbitration provision whereby  Plaintiff agreed that any dispute regarding fees would be resolved by binding arbitration between the parties in accordance with the New Jersey Uniform Arbitration Act. As litigation continued, Plaintiff challenged bills submitted by the attorney. Defendant filed an attorney’s lien to recover the unpaid legal fees. Plaintiff filed for fee arbitration  provided by NJ Court Rule 1:20A, but the fee arbitration committee declined  to hear it given the amount in controversy (usually more than $100,000.)  Plaintiff then argued that the retainer clause mandating arbitration of a fee dispute was against public policy and unenforceable.

Issue: Is a mandatory arbitration clause for fee disputes in a retainer agreement  enforceable?

Ruling: Yes. The attorney-client relationship does not inherently mandate a blanket preclusion of the arbitration of fee disputes. However, in the instant case, the arbitration clause was not binding on the Plaintiff, since the court did not believe that the retainer agreements clearly articulated the consequences of an agreement to arbitrate a dispute over legal fees.

Lesson:  In making a decision concerning the enforceability of arbitration clauses in retainer agreements, courts will consider:

  •  the circumstances in which the agreement was made;
  • the parties’ past practices and agreements
  • the extent to which the parties actually negotiated the agreement; and 
  • the client's level of sophistication or experience in retaining and compensating lawyers.

In addition, the prospective effect of an agreement to arbitrate must be clear to the client before it will be held to be binding upon him, e.g.,

  • no right to a jury trial,
  • no right to appeal,
  • the binding nature of the arbitration award.

For an interesting student note see, L.A. Russo, The Consequences of Arbitrating a Legal Malpractice Claim: Rebuilding Faith in the Legal Profession, 35 Hofstra L.Rev. 327 (2006)
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