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Legal Update

Arbitration for Lawyers and their Clients

19 April 2018
Mayer Brown JSM Legal Update

Can lawyers prevent their clients from suing them in court, and force them into arbitration instead?

The enforceability of an arbitration clause in a retainer agreement was the subject of the recent High Court case of Fung Hing Chiu v. Henry Wai & Co. [2018] 1 HKLRD 808.

The law firm in question commenced arbitration for outstanding fees in reliance on an arbitration clause, which provided:

"Any dispute, controversy or claim arising out of or relating to the contract between you and our firm, including the validity, invalidity, breach or termination thereof and any claim for any sum payable thereunder, shall be settled by arbitration in Hong Kong under the HKIAC Administered Arbitration Rules in force at the time of commencement of arbitration. The number of arbitrators shall be one and shall be appointed by the HKIAC."

The clients then issued court proceedings seeking a declaration that the arbitration clause was void and that the bills should be referred to a taxing master of the court pursuant to section 67 of the Legal Practitioners Ordinance (Cap. 159). In response, the law firm applied under section 20 of the Arbitration Ordinance (Cap. 609) to stay the court proceedings to arbitration.

The clients raised two main arguments in support of their case:

(i) they were "dealing as consumers", and so the arbitration clause was unenforceable under section 15 of the Control of Exemption Clauses Ordinance (Cap. 71) ("CECO"); and

(ii) the arbitration clause was unenforceable because it was contrary to public policy, as it sought to limit the supervisory powers of the Court over solicitors who are officers of the Court, as well as to remove the disciplinary powers of the Law Society or of the Court in respect of a solicitor's professional conduct.

It is noteworthy that the case did not consider simply disputes over legal fees. The Court found that any tortious claim by the client in relation to the law firm's negligence was also within the scope of the arbitration clause.

"Dealing as consumer"

Section 4(1) of CECO provides that a party to a contract "deals as consumer" if it does not make the contract in the course of a business, and the other party does do so.

Section 15(1) of the CECO states:

"As against a person dealing as a consumer, an agreement to submit future differences to arbitration cannot be enforced except –

(a) with his written consent signified after the differences in question have arisen; or

(b) where he has himself had recourse to arbitration in pursuance of the agreement in respect of any differences."

CECO recognises that a consumer is unlikely to focus on the existence or impact of an arbitration clause in a contract prior to a dispute. A company's standard terms and conditions will protect the interests of the company, with a corresponding weakening of the position of the consumer. As online consumers we will all be familiar with websites, which require us to click "I have read and understood the terms of business" accompanied by a web link to several pages of legalese.

Why does the law protect consumers from arbitration clauses? The judgment cited the Official Report of Proceedings prior to the passage of CECO, in which it was stated:

"The Administration supports the use of arbitration by parties to a contract who consciously choose that method of dispute resolution in the knowledge of all its implications. However, in the case of a consumer contract, it is possible that the consumer agreed to an arbitration clause either without knowing of its existence or without realising its implications. The consumer may then discover that it is much more costly for him to refer a dispute under the contract to arbitration than it would be for him to refer it to the courts. For these reasons the Administration supports the recommendation of the Law Reform Commission that arbitration clauses in consumer contracts be subject to a form of control."

As regards access to justice, consumer clients have a fundamental right to ensure the courts oversee the actions of their lawyers in a public forum, rather than before a privately-appointed arbitrator in a confidential hearing, with no right of appeal.

The position is however different where a client acts in the course of a business and enters into a retainer with a lawyer, with the result that the arbitration agreement is unaffected by CECO. In such a case, the arbitration clause in the terms of engagement will prima facie be valid.

The Court's Supervisory Powers and Public Policy

Section 67 of the Legal Practitioners Ordinance provides for taxation of bills on the application of the client, and makes reference to "the taxing officer". The Court ruled:

"The fact that such a dispute is referred to and decided by an arbitral tribunal does not mean that the Court has lost, and cannot exercise, its supervisory powers over the Firm. If [the clients] have any cause for complaint against the Firm as they alleged under the Legal Practitioners Ordinance, they may still make any application to the Court as they may be advised, to seek any appropriate order from the Court to address the conduct of the Firm, in reliance upon any findings made by the Tribunal in its final award [emphasis added]."

This suggests that the Court's supervisory function may be limited to considering simply the arbitrator's own findings.

The Court went on to hold that:

"The fact that there is statutory control over arbitration clauses for the protection of consumers in their transactions to which section 15 CECO applies, fortifies the conclusion that there is no necessity to recognise a general public policy against the recognition and enforcement of all arbitration agreements made between a solicitor and the client in respect of professional fees."

Comment

From the law firm's perspective, the advantages of arbitration are clear. Baseless counterclaims may be discouraged by the need to pay the arbitrators' costs, and the costs of any administering authority, calculated by reference to the quantum of the counterclaim. The unfavourable publicity, which a counterclaim for legal malpractice would otherwise attract, will also be avoided. The ease of international enforcement of arbitration awards will facilitate collection from overseas debtors.  

Whether the law firm and its insurers regard the absence of a right of appeal from a Hong Kong arbitration award as a disadvantage is a moot point. It is however safe to say that the judgment in the above case may prompt Hong Kong lawyers and their clients to review their dispute resolution terms.

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