LOS ANGELES – A complicated web of malpractice claims and operating agreements has become clearer after a ruling from the 2nd Appellate District of California in June.
The appellate decision reversed a Los Angeles County trial court ruling that a $1.5 million malpractice and breach of contract claim filed by William Rice against Gary Downs, his lawyer and business partner, should not have been arbitrated.
In the original claim, Rice alleged that Downs billed Highland Property Development LLC, their joint real estate company, improperly for legal services. The case has centered around whether that malpractice claim was included in the arbitration clause that’s part of Highland’s operating agreement.
The trial court granted Downs’ motion to compel arbitration as to all causes of action, including the malpractice claim. However, the appeals court reversed that decision in part, holding that the trial court erred in compelling arbitration of Rice’s tort claims.
Karen Rubin, an Ohio-based business litigator who has written about the case, said the appellate court ruling does not bode well for Downs.
“Instead of escaping $1.5 million malpractice claim, the lawyer is looking at full-blown jury trial,” Rubin told the Northern California Record.
Rubin said the ruling will have broader implications on how attorneys work with clients and with each other, saying attorneys will need to be “careful drafters” when it comes to arbitration-related language.
“You have to be very careful to make your arbitration provisions broad enough to encompass all the claims that might arise, including tort claims if you want those to be subject to arbitration,” Rubin said.
California’s stand on this area of the law is not unique, Rubin said.
“Most of the jurisdictions say the lawyer has a duty to make sure that client understands nature of arbitration agreement … what the client is giving up by agreeing to arbitrate,” Rubin said.
Caution may also need to be exercised if turning an attorney-client relationship into anything more.
“When a lawyer and client become business partners, it can be a tricky situation,” Rubin said. “In this case, the lawyer drafted the operating agreement with the arbitration clause. That kind of situation means that the lawyer and client have to consider the effect of this business transaction on each other.”