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A Court May Not Enforce an Arbitration Clause for a Dispute Arising Out of a Separate Business Transaction With a Client When the Clause Does Not Explain What Disputes are Covered

Mr. Mayhew sued his Orange County divorce attorney. Mr. Mayhew sued for conversion, breach of fiduciary duty, and to impose a constructive trust of the $607,700 that the client entrusted to his Orange County divorce attorney. Mr. Mayhew had retained the attorney, Mr. Benninghoff, to handle his divorce, and then had entrusted the large sum of money to Benninghoff to invest in conjunction with a separate business dealing. Disputes arose over fees deducted from the large sum, leading to the lawsuit. The Orange County divorce attorney made a motion to compel arbitration pursuant to an arbitration clause in the engagement letter that he drafted, and was signed by Mayhew. However Mayhew contended that he did not understand that the arbitration agreement would also apply to future claims against his Orange County divorce attorney. The Orange County court denied Benninghoff’s motion, and he appealed.

Can an attorney rely on an arbitration clause in an engagement letter to require arbitration arising out of a separate business transaction, when the agreement fails to explain which disputes are included?  In short, the court explains that “the answer, like the transaction, does not bode well for the lawyer.”

The Rules of Professional Conduct require that attorneys who enter into business transactions with their client must first advise their client in writing to seek advice of independent counsel in the matter. In Lawrence v. Walzer & Gabrielson (1989) the Orange County divorce attorney also drafted a purportedly all-inclusive arbitration clause in his client’s retainer, that mirrors Benninghoff’s clause. The court in Lawrence refused to enforce the arbitration clause, holding that a reasonable client would only construe the clause to extend to “straightforward fee disputes.” Further the attorney must give his client all reasonable advise against himself that he would give to a third person. To that extent, if the same arbitration clause is intended to extend to legal services rendered, as well as separate business dealings, the attorney must take additional steps to clarify that. The lawyer must clearly and explicitly draft it the arbitration clause as indicating said intent. Then the lawyer must advise the client of his right to independent legal counsel per the Rules of Professional Conduct. The Court found no evidence to suggest that the Orange County divorce attorney complied with either requirement, despite several arguments he made that left the court unpersuaded.

An attorney involved in a separate business transaction has an arguably greater responsibility – more so than the attorney in Lawrence – to be clear in his agreement with a client because of the financial dealing as well as the attorney-client relationship. Specifically the Court rejected the Orange County divorce attorney’s argument that his ethical responsibilities are lessened because the client was very wealthy and highly schooled in business affairs. There is no such rule nor would a court adopt one. California does have a strong policy of favoring arbitration. However, that policy yields to the right to pursue claims in a judicial forum, which is “one not lightly to be deemed waived.” The Court of Appeal affirmed the Orange County trial court decision that the Orange County divorce attorney could not rely on the arbitration clause in his retainer agreement.

Mayhew v. Benninghoff (1997) 53 Cal.App.4th 1365.