Risk Update

Terms of Engagement — Client Arbitration Clauses Can Be Cleared with Conditions (in New Jersey)

Attorney’s Duty to Explain Retainer Agreement Arbitration Clause to Client: Here’s What the New Jersey Supreme Court Held” —

  • “In a unanimous decision, the New Jersey Supreme Court upheld the Appellate Division’s view that for a retainer arbitration clause to be held valid, attorneys should fulfill their fiduciary duty to explain to their clients the advantages and disadvantages of agreeing to arbitrate a prospective dispute.”
  • “The decision delivered by New Jersey Supreme Court Justice Barry Albin in Delaney v. Dickey, stated, ‘We now hold that, for an arbitration provision in a retainer agreement to be enforceable, an attorney must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client.’ The court noted that in order to enable the client to make an informed decision, the client must be made aware of the fundamental differences between an arbitral forum and a judicial forum.”
  • “As per the factual submissions made, plaintiff Brian Delany approached Sills to represent him in his ongoing lawsuit with his previous business partners in a real estate business. The Sills attorney who met Delany asked him to sign a four-page retainer agreement. The arbitration clause mentioned on the third page of the agreement stated, ‘In the event that we and you are unable to come to an amicable resolution with respect to any dispute (including, without limitation, any dispute with respect to the Firm’s legal services and/or payment by you of amounts to the Firm), we and you agree that such dispute will be submitted to and finally determined by arbitration in accordance with the provisions set forth on attachment 1 to this retainer letter.'”
  • “As disputes arose between Delany and Sills, Delany terminated his retainer and also refused to pay certain outstanding fees he allegedly owed to the firm. Invoking the arbitration provision, Sills sent the matter to arbitration. However, Delany sued Sills before the Chancery Division for malpractice and asked for a stay on the arbitration proceedings, pending the result of the malpractice lawsuit. The Chancery Division upheld the arbitration clause and found it to be enforceable. Importantly, it noted that a law firm is not under an obligation to explain to its client the clearly written terms of a retainer which can be understood by a layperson. On appeal, the Appellate Division disagreed and found the arbitration clause to be unenforceable. It noted that Sills failed to provide all 33 pages of the JAMS arbitration rules to Delany and also failed to explain the related costs to Delany. It held that the clause is unenforceable under the Rules of Professional Conduct (RPC) and also found the fee-shifting provision to be impermissible under New Jersey law.”
  • “Affirming the decision of the Appellate Division, the New Jersey Supreme Court stated, ‘We conclude, however, that an attorney’s fiduciary obligation mandates the disclosure of the essential pros and cons of the arbitration provision so that the client can make an informed decision whether arbitration is to the client’s advantage.’ It then held, ‘Delaney, therefore, must be allowed to proceed with this malpractice action in the Law Division.’ The court also held that the decision will be applied prospectively, except for Plaintiff Delany.”

For additional detail and commentary, see: “NJ Supreme Court: Attorney-Client arb agreements OK – BUT advantages and disadvantages must be explained” —

  • “The State Bar – which fluctuates between its mission to preserve access to justice and its trade association function – expressed its ‘concern that the Appellate Division’s interpretation of RPC 1.4(c) will require lawyers to engage in ‘an in-depth review of legal services agreements with prospective clients” beyond the present requirement that lawyers provide ‘a reasonable explanation” about a retainer agreement sufficient for clients to make an informed decision about the representation.””
  • “[The New Jersey Association for Justice] argued instead that ‘in light of the imbalance of power between a lawyer and client and the lawyer’s fiduciary obligation to the client, ‘mandatory arbitration clauses in attorney-client retainer agreements [are] inherently unfair and unreasonable.’ The plaintiffs lawyers organization urged the Court to ‘prohibit mandatory arbitration provisions in retainer agreements to protect against ‘unwitting and uninformed prospective waivers of significant rights’ by clients at the very moment they retain counsel.'”
  • “The NJAJ position – which emphasizes the principle of access to justice – posed the risk that if embraced the decision might run afoul of the Federal Arbitration Act 9 USC 2 which declares arbitration provisions “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In an ordinary “arms-length” commercial contract the Sills retainer would be enforceable, but the fiduciary duties of a lawyer are said to be more demanding.”
  • “In this novel setting the Court was careful to limit its holding to attorney-client contracts and to firmly ground its decision in well established principles so as not to run afoul of the argument that it was particularly burdening and disfavoring arbitration agreements.”
  • “The practical implications of the decision are many. Lawyers will want guidance in how to draft agreements. In recognition of these considerations, the court decided to ‘refer the issues raised in this opinion to the Advisory Committee on Professional Ethics. The Committee may make recommendations to this Court and propose further guidance on the scope of an attorney’s disclosure requirements.'”