Texas Supreme Court Finds Arbitration Clause in Attorney-Client Contract Was Not Unconscionable, Against Public Policy or Illusory

In Royston, Rayzor, Vickery & Williams, LLP v. Francisco (Frank) Lopez, the Texas supreme court reversed an interlocutory appeal from the Corpus Christi court of appeals, holding that the appellee failed to prove that an arbitration provision in an attorney-client employment contract was substantively unconscionable nor did the plaintiff prove any other defense to the arbitration provision.

The appellee had hired appellant to represent him in his divorce case. The attorney-client contract contained an arbitration provision which provided that any dispute arising out of or connected with the agreement shall be submitted to binding arbitration. The provision, however, excepted from arbitration any claims made by the firm for the recovery of its fees and expenses.

After the appellee and his wife reached a settlement, the appellee brought suit against appellant claiming the firm persuaded him to accept an inadequate settlement. The appellant filed a motion to compel arbitration pursuant to the contract. The trial court denied the motion and the appellants filed an interlocutory appeal. The appellate court affirmed the trial court’s decision concluding that the appellee’s claims were within the scope of the arbitration agreement but that the appellee had proven one of his affirmative defenses by proving that the arbitration provision was substantively unconscionable.

The court of appeals first reasoned that arbitration clauses in attorney-client employment contracts are not presumptively unconscionable nor did it negate the “principle that absent fraud, misrepresentation, or deceit, one who signs a contract is deemed to know and understand its contents and is bound by its terms.” The court of appeals then stated that appellant did not have an evidentiary burden regarding his contention that the arbitration agreement was unconscionable.

Finally, the court of appeals specified three reasons on which it determined the arbitration provisions one-sidedness: (1) the contract gave the appellant the right to withdrawal as counsel at any time for any reason; (2) the arbitration provisions facially favored the appellant by giving it the right to litigate claims for its fees and expenses while compelling appellee to arbitrate all his disputes; and (3) the contract provided that regardless of the outcome of the claims in the underlying divorce action, the appellee would be solely responsible for all costs and expenses of that suit.

The Texas supreme court agreed that arbitration clauses in attorney-client employment contracts are not presumptively unconscionable. Regarding the burden of proof, however, the Texas supreme court disagreed with the court of appeals stating that as previous decisions have made clear, parties asserting defenses to arbitration clauses have the burden to prove the defenses.

The court then dismissed the appellate court’s first and third reasons supporting its conclusion of one-sidedness because they were based on other provisions in the contract and not specifically on the arbitration provision. The court noted that “challenges relating to an entire contract will not invalidate an arbitration provision in the contract; rather, challenges to an arbitration provision in a contract must be specifically to that provision.”

In addressing the court of appeals’ second reason, the court noted that “an arbitration agreement is not so one-sided as to be unconscionable just because certain claims are excepted from those to be arbitrated.” The court starts its analysis with the rule that as a party to a written agreement, appellee is presumed to have knowledge of and understand its contents. The court finds that the arbitration provision did not, as appellee argued, require appellee to arbitrate all claims against the firm while allowing the firm to choose whether to litigate or arbitrate the only claim it realistically would have against him. Rather, it found the provision merely specified that claims of both parties arising from appellant’s representation of appellee must be resolved by arbitration, except for one category—any claims made by the firm for the recovery of fees and expenses—which is excluded from the provision. The court found that appellant did not have a unilateral choice about arbitrating them.

Next, the court considered appellee’s argument that an attorney-client agreement is unenforceable as against public policy if it violates a Disciplinary Rule. Appellee argued that the standard in Disciplinary Rule 1.03(b), providing that “[a] lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation,” applies to a prospective client, and that the appellant had the burden to show that the explanations were made. The court, however, agreed with appellant that even if Disciplinary Rules and Ethics Committee’s Opinions applied in whole or in part so that appellant had a duty to explain something to appellee, it was appellee who had the burden to prove that the explanations were not made, which he did not. The court highlighted that legislative enactments generally establish public policy. It noted that while it is true that public policy is not solely established through legislative enactments and may be informed by Disciplinary Rules, “where the Legislature has addressed a matter, as it has addressed the enforceability of arbitration provisions, the [court is] constrained to defer to that expression of policy.” The court declined to impose, as a matter of public policy, a legal requirement that attorneys explain to prospective clients, either orally or in writing, arbitration provisions in attorney-client employment agreements.

In his last defense against the arbitration provision, Appellee argued that the arbitration provision is illusory because it bound him to arbitrate all his claims against the firm while excluding the only possible claim the firm might ever realistically make against him. The court once again, however, agreed with the firm that appellee’s illusory defense failed because consideration existed for the provision and the firm cannot avoid its promise to arbitrate all claims within the scope of the arbitration provision by unilaterally amending or terminating the provisions.

The Texas supreme court found that appellee failed to prove a defense to arbitration. The court reversed the judgment of the court of appeals and remanded the cause to the trial court for further proceedings.