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December 29, 2020

New Jersey Supreme Court Highlights Pitfalls in Fee Agreement Arbitration Clauses

On December 21, 2020, the New Jersey Supreme Court issued an opinion that invalidated an arbitration clause in a written fee agreement between a law firm and its client.  In doing so, the Supreme Court provided additional direction and guidance on how an enforceable arbitration clause can be drafted.
In Delaney v. Dickey, 2020 N.J. Lexis 1435 ( December 21, 2020) a client retained a law firm to represent him, and signed a retainer agreement that contained a provision that “any dispute” with respect to the Firm’s legal services and/or payment of legal fees would be submitted to arbitration.  The firm was later terminated by the client and a fee dispute arbitration proceeding was initiated under Court Rules.  While the fee arbitration was pending, the client filed a malpractice action in Superior Court, Law Division alleging that the Firm negligently represented him.

Relying on the arbitration clause in the retainer agreement, the Law Division found that the malpractice claim fell within the definition of  “any dispute” thereunder and dismissed the lawsuit.  On appeal, the Appellate Division reversed the lower court’s dismissal of the action, finding that the retainer agreement lacked sufficient explanation of the rules and costs of arbitration to properly allow the client to make an informed decision to waive his rights to proceed in a judicial forum.

The Supreme Court, in affirming the decision of the Appellate Division, first noted that when a client hires a firm to represent him that one of the primary obligations of the firm is to ensure that necessary disclosures are made so that the client can make an informed decision.  This duty applies even at the initial stage of being retained by a client and must be reflected in the retainer agreement.  While a client may not be anticipating a later dispute with the firm at the time he retains it, if the agreement is intended to govern a possible later dispute, the firm is under the obligation to ensure that the client has the requisite information to make an informed decision about it.

To that end, the Supreme Court, in reliance upon RPC 1.4 (c), held that to provide the client with the required amount of information to reach an informed decision on whether to arbitrate or not,  that the firm must explain the advantages and disadvantages of arbitration or a judicial forum and must make clear that the agreement to arbitrate applies to not only fee disputes but to possible malpractice claims as well.

The Supreme Court discussed the significant differences between a judicial forum and an arbitration, such as the waiver of a right to a jury trial, the differences in the amount of discovery permitted, the right of appeal versus lack of appeal rights in an arbitration and directed that these advantages and disadvantages must be communicated to the client at the time that the firm is retained. The Court held that these disclosures must be made in a disinterested manner and may be made in writing or communicated verbally.

If you utilize or intend to incorporate an arbitration clause into a retainer agreement, the Delaney case now requires full disclosure of the differences, advantages and disadvantages of arbitration at the time the agreement is executed or otherwise the clause will not be enforced.  A wary practitioner will not only ensure that the arbitration clause references its applicability to future malpractice claims and explain the advantages and disadvantages, but also attach a copy of the intended arbitration forum’s rules and fee schedules so that a lack of informed consent cannot be later argued.

Richard Bryan, Esq. is a partner at Cipriani & Werner with a diverse civil litigation practice in New Jersey.  He can be reached at rbryan@c-wlaw.com.