Should retainer agreements include fee arbitration clauses?

Should retainer agreements include fee arbitration clauses?

Canadian in-house counsel often enjoy trusting relationships with their external counsel. When the two enter into a retainer agreement, neither party is generally worried the deal will end in a litigious fracas.

“We negotiate upfront . . . we clarify what has to be done,” says Maria Tesla, vice president and general counsel for Cannon Canada Inc. “We try to get a budget upfront. Nothing should be a surprise.”

But if something does turn out to be a surprise and the relationship goes awry, say, due to a fee dispute or something more nefarious, the damage may show up in more places than just the litigation tab. Going to court is going public, and for most companies, that’s not ideal.

“Most companies who have internal counsel retaining external counsel would certainly not want any dispute becoming public — either the fact that there’s a dispute and then whatever the dispute relates to,” says Michael Hassell of Hassell Arbitration in Toronto.

“The amount of confidential information in [an] invoice or a retainer agreement is fairly extreme and could be prejudicial, especially in the context of proprietary information or litigation,” he adds. “Nobody wants to have their lawyers’ invoice put out there for the other side to find.”

Hassell says that’s why in-house counsel should “drive the bus” when it comes to including arbitration clauses in their retainer agreement with their external counsel.

“We haven’t seen a great deal of interest for external counsel to add such clauses because they don’t want to generally create too many forums for clients to challenge or question their fees,” Hassell says.
“But the relationship between in-house counsel and external counsel is a fairly mature one with sophisticated parties, and it will have to be in-house counsel driving the need for arbitration clauses.
There’s a whole lot more at stake for in-house counsel in terms of things becoming public.”

If the dispute is about fees, for example, dockets become part of the public record, says Renato Pontello, legal counsel to Solantro Semiconductor Corp., adding that some external counsel provide a lot of detail about the work that’s been done in those dockets. 

“It may simply say, ‘One-hour discussion concerning hostile takeover,’ whereas others would say, ‘We discussed the relative advantages and risks involved in you being taken over by XYZ,’” Pontello says. “The latter could be best kept between the parties. Depending on the situation, it could put one party or another at a disadvantage because they may not want to use that information in an open court,” he adds.

“From in-house counsel perspective, by keeping the information confidential, it allows solicitor-client privilege to be maintained,” Pontello adds.

Going to an open court to sue former counsel also mars a company’s reputation among other law firms, Pontello continues. “No one really wants to make it publicly known that they’re suing a former legal representative, a firm,” he says. “It’s just bad public relations because if there is a falling-out with the firm, then in-house counsel will be trying to find another firm, and if it’s a well-known fact that they turned around and sued and wrote that account, then other firms might be reluctant to take [them] on.

“From a PR perspective, it’s best dealt with behind closed doors.”

Wording matters
Including arbitration clauses in retainer agreements is much more common south of the border. Malcolm Mercer, partner at McCarthy Tétrault LLP, says his firm has had American clients who proposed including such clauses in retainers. Those clients sought to arbitrate outside of Canada, something to which his firm couldn’t agree.

“We pushed back forcefully in respect to that because we think it’s inappropriate to be judged with respect to Canadian legal work other than in the Canadian legal context,” Mercer says. “I would not have difficulty with arbitration by someone who is competent to judge legal work in Canada, but I’d have real concern about somebody outside of Canada judging Canadian legal standards and maybe legal ethics issues.”

Part of the reason why arbitration clauses are so rare in Canada is because most disagreements with in-house counsel are generally negotiated and resolved around a table, Mercer says.

“With respect to fee disputes, arbitration could be very attractive, but it’s a very rare case where you end up with a fee dispute with a client where in-house counsel is involved and you don’t sort it out,” he says.

American case law suggests that whenever lawyers and clients enter into retainer agreements that include arbitration clauses, there tends to be a lot of hang-up on how it is to be interpreted. The wording of the clause is critical, Pontello says.

“It can be written very narrowly, so it’s just a one-way clause — it’s unilateral; all it allows the parties to do is to deal with whether or not the fees are justified, were they reasonably directly incurred, and are they fair in the circumstances,” he says. “On the other hand, the client may not want to pay the fee because they believe the law firm was negligent, or worse, there may have been a fraud or misrepresentation.”

Pontello says that if the arbitration clause is written too narrowly, the arbitrator might say he or she does not have jurisdiction to deal with counterclaims and those claims require a separate hearing.

“That kind of defeats the purpose,” he says. “You’re paying for two dispute proceedings and they’re related. The arbitrator may lack proper context to make a decision. If the arbitrator decides not to deal with the negligence claim, then the negligence claim needs to be dealt with in the court and the judge may not be able to hear evidence with regards to whether the fee was written down and so on,” he continues.

“If I were a client, I’d ensure that the arbitration clause allows the arbitration of all disputes arising from the representation and it might even say, ‘Without limitation, reasonableness of fees, negligence, gross negligence, fraud, misrepresentation, etc.”

Little appetite in Canada
Despite acknowledging the efficiencies and cost-saving benefits of arbitration, several Canadian in-house counsel say they’ve so far seen little need for including such a clause. 

After flipping through one of her retainer agreements, Tesla points out a part where it says the parties are to resolve all disputes at Ontario courts.

“There’s no mention of an arbitration clause,” she says, adding that, at the end of the day, being transparent and clear upfront is the basis for a good relationship. “If you have a good relationship, any inconsistencies, questions, or surprises get resolved rather quickly. So we never felt the need for a formal arbitration clause,” she adds.

Still, Tesla says she sees value in adding arbitration clause retainer agreements for confidentiality as well as efficiency and cost.

“It might be a much more efficient process if it were to come to that,” she says. “It’s something we may want to consider going forward.”

Pontello says that although in-house counsel know the advantage of putting arbitration clauses in agreements, they’re just not emboldened enough to do it.

“I think what’s behind it is that we’re a very traditional practice and we have difficulty letting go of the tried and true, and if we try a different route, we run a risk, an unknown risk we can’t quantify because we don’t have enough experience with it,” he says.

Pontello goes on to say that arbitration clauses are not included in retainers for the same reason lawyers are reluctant to offer alternative fee structures.

“My evidence for that is that lawyers and clients will sit down either in the beginning of their engagement when they first decide that they’re going to work together or at some point, maybe even midstream, they might say rather than just doing an hourly billing, as we’ve always done, why don’t we try a fixed fee or premium-based billing, or let’s do it based on a success fee, or what-have-you,” he adds. “But at the end of the day, the parties usually just end up saying, ‘OK, well let’s just talk about it next year.’”

The same is true when it comes to arbitration, Pontello says. “We consider them, but often they’re just removed because we just say, ‘Well, let’s just leave it to the courts.’”

But that’s not why Mary Martin, executive vice president and general counsel at Metrolinx, says she’s not in any hurry to push for arbitration clauses in her retainer agreements.

“I understand the pros of arbitration generally, including confidentiality, expeditious resolution, expertise of the arbitrator, potential cost savings, and customized processes. These are advantages [that] always, at least potentially, exist for all dispute resolutions through arbitration,” she says. “That said, I also see significant downsides to including an arbitration agreement in a legal retainer.”

Martin says “it is unlikely” she will be including this type of clause in legal retainer agreements. “I choose my law firms, and continue to work with such firms, based on a relationship of trust.”

She adds that Metrolinx has worked with its key legal service providers for some time and developed close working relationships with them. If she feels a law firm is overcharging her, she sits down with its relationship partner and works it out.

“If we cannot resolve these issues, we both lose. The law firm will not get the benefit of our continued work on future matters. We will lose the benefit of a partnership with a firm, which has come to understand our business,” Martin adds. “In other words, the interests of Metrolinx and our key firms are aligned. I believe this is more powerful than any retainer provision. I dislike the idea of introducing an element of formality into what is fundamentally a relationship of trust and mutuality.”

The same strategy “virtually always” works for Dean Scaletta, director of information and litigation at Manitoba Public Insurance legal department. Arbitration clauses aren’t something he’s currently considering, but he could see them coming in handy when the stakes are very high.

“If you’re getting bills that are in the millions, maybe getting an arbitration clause is probably a good thing,” he says. “I can see that if you’re involved in a major legal matter, whether it’s a litigation, a merger, or an acquisition, the last thing you want to have happening is a very public fight with your legal counsel over fees.”

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