R-24

July 22, 2016

SYLLABUS

An agreement purporting to shorten the time within which a client entering into a fee agreement with a lawyer might assert a malpractice claim against the lawyer is rarely ethically permissible; such a provision is ethically impermissible unless the provision is permitted by law, the client is actually independently represented in making the fee agreement, the agreement is a separate document from the fee agreement, and the provision is objectively fair and reasonable in the circumstances.

References: Michigan Rules of Professional Conduct ("MRPC") 1.4; 1.8(a)(1); and 1.8(h); RI-116; RI-354; ABA/BNA Lawyers Manual on Professional Conduct, § 51:1106; Restatement of the Law Governing Lawyers § 126 comment e; MCL 600.5838b.

TEXT

A Michigan law firm asks whether a provision in a fee agreement is ethically permissible. The provision operates to shorten the period of time within which the client may assert a legal malpractice claim against the lawyer.

The law firm also asks whether it would be ethically permissible to include the following language in a fee agreement:

Any claim by you against us will be deemed waived unless an arbitration claim is filed with the American Arbitration Association within six (6) months after the occurrence of the event causing the claim, or within ninety (90) days after our relationship with you is terminated for any reason, whichever is sooner.

It is the opinion of this Committee that an agreement of this nature will rarely be ethically permissible. In order to be permissible, the agreement must be permitted by law, the client must be independently represented in making the fee agreement, and the agreement must be objectively fair and reasonable in the circumstances.

The proposed agreement operates to shorten the time within which the client may assert a claim of legal malpractice. The statute of limitations for legal malpractice claims is two years from the conclusion of the lawyer's representation in the matter for which a claim is being asserted, or within six months after the plaintiff discovers or should have discovered the existence of the claim, whichever is later, as long as the claim is made within six years after the date of the act or omission that is the basis of the claim.1 The proposed agreement requires a client to bring a claim within six months of the occurrence of the event causing the claim or within 90 days from when the relationship ends, whichever is sooner.

The proposed agreement implicates Rule 1.8(a)(1) because it is an agreement to waive a substantive right and not an aspect of the fee agreement itself—e.g., identification of the scope of representation, setting the basis or rate of the fee, or identifying the parties' responsibilities in the course of the representation. In this respect, the proposed agreement is akin to a business transaction, which comes within the scope of Rule 1.8(a)(1). See, e.g., RI-354 (2012) (Rule 1.8(a) applies to a fee agreement provision purporting to grant the lawyer a security interest in client's marital home to secure lawyer's fee).

Rule 1.8(a)(1) prohibits a lawyer from entering into a business transaction with a client unless certain conditions are met:

A lawyer shall not enter into a business transaction with a client . . . unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client.

Thus, Rule 1.8(a)(1) requires that (1) the transaction and terms be fair and reasonable to the client and (2) fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client.

In these circumstances, the proposed agreement shortening the time within which a claim may be filed violates Rule 1.8(a)(1) for several reasons.

First, Rule 1.8(a)(1) requires that the transaction itself be objectively fair and reasonable to the client. Whether a transaction is fair and reasonable to the client depends on whether a disinterested lawyer would advise the client not to enter into the same transaction with another party.2 Except in rare circumstances, a disinterested lawyer would not advise the client to enter into this transaction with another party. The agreement solely benefits the lawyer by shortening the period of time within which the client may assert a claim against the lawyer without providing any corresponding benefit to the client.

Second, the agreement violates Rule 1.8(a)(1) because it is not "transmitted in writing to the client in a manner that can be reasonably understood by the client." The agreement does not disclose what specific options and time limitations are being waived. Therefore, the client does not have information sufficient to make an informed decision regarding the proposed agreement. See also Rule 1.4(b).

Third, because the agreement is an agreement to waive a substantive right and is not an aspect of the fee agreement itself, the "in writing" requirement of Rule 1.8(a)(1) cannot be satisfied by combining the waiver agreement with the fee agreement. In order to be objectively fair and reasonable and reasonably understood by the client in the circumstances, the waiver agreement must be a separate agreement.

The proposed agreement also implicates Rule 1.8(h)(1) because it prospectively limits the lawyer's liability to the client for malpractice. By shortening the time within which a claim may be asserted at the outset of the lawyer-client relationship, the agreement operates to limit the length of time that the lawyer may potentially be liable to the client.

Rule 1.8(h)(1) prohibits such agreements unless they are permitted by law and the client is independently represented:

A lawyer shall not (1) make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement; . . .

The "requirement of independent representation is a formidable hurdle" requiring that the client be actually "represented by independent counsel in making the agreement." ABA/BNA Lawyers' Manual § 51:1106. Merely consulting with another lawyer does not constitute independent representation "in making the agreement," especially if the purportedly independent attorney has been recommended by the contracting attorney. See, e.g., RI-116 (1992) (any advice given by a referring lawyer regarding choice of counsel is inappropriate).3 Nor may an attorney request or imply that the client waive the requirement of independent representation; making such a request, whether directly or indirectly, is incompatible with a critical protection for clients set out in the rule. Except in the case of a sophisticated client, represented by independent counsel, who is able fully to understand the rights being waived and the implications of a waiver and to negotiate terms of a fee agreement more favorable to the client in exchange for the shortened time within which to file a claim against the contracting lawyer, the "objectively fair and reasonable" requirement of Rule 1.8(a) cannot be met.

Consistent with the limits of its jurisdiction, the Committee takes no position on whether such an agreement is "permitted by law." However, with regard to the lawyer's ethical obligations, Rule 1.8(h)(1) appropriately imposes "a formidable hurdle" that holds the lawyer to a very high ethical standard.

CONCLUSION

An agreement purporting to shorten the time within which a client entering into a fee agreement with a lawyer might assert a malpractice claim against the lawyer is rarely ethically permissible; such a provision is ethically impermissible unless the provision is permitted by law, the client is actually independently represented in making the fee agreement, the agreement is a separate document from the fee agreement, and the provision is objectively fair and reasonable in the circumstances.


1 MCL 600.5838b.

2 Restatement of the Law Governing Lawyers § 126, comment e.

3 Any inquiry into whether a client was, in fact, independently represented "in making the agreement" will necessarily consider the nature and extent of the communication between the client and the purportedly independent attorney, the attorney's documentation of that communication, the terms of the fee agreement between the client and the purportedly independent attorney, and the presence or absence of all other indicia of an attorney-client relationship that could lead to malpractice liability by the purportedly independent attorney in the event his or her representation fell below the applicable standard of care.