NJ Supreme Court Rules Attorneys Must Explains Risks and Benefits of Arbitration Provisions in Retainer Agreements

NJ Supreme Court Rules Attorneys Must Explains Risks and Benefits of Arbitration Provisions in Retainer Agreements

In Delaney v. Dickey, (A-30-19/083440) (Decided December 21, 2020), the Supreme Court of New Jersey held that attorneys must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client for an arbitration provision in a retainer agreement to be enforceable.

Facts of Delaney v. Dickey

Plaintiff Brian Delaney signed a retainer agreement when he hired Sills Cummis & Gross P.C. to represent him in a lawsuit. Delaney, a sophisticated businessman, met with a Sills attorney who presented him with a four-page retainer agreement. During the meeting, the Sills attorney told Delaney that he should take his time reviewing the retainer agreement and ask any questions he had about its contents.

The third page of the retainer agreement contained an arbitration provision stating that any dispute about the firm’s legal services or fees would be determined by arbitration and that, by agreeing to arbitration, Delaney waived his right to trial by jury; the agreement also advised Delaney that the arbitral result would be final and non- appealable. The fourth page of the retainer agreement indicated that the arbitration proceeding would be conducted through a private arbitration and mediation organization called JAMS and contained a hyperlink to 33 pages of JAMS rules governing the arbitral forum. The Sills attorney did not provide Delaney with a hard copy of the JAMS rules, offer an explanation of the arbitration provisions in the agreement or the hyperlink, or advise Delaney of the advantages and disadvantages of an arbitral forum in the event of a future fee dispute with or legal malpractice action against the Sills firm. Delaney reviewed and signed the retainer agreement in the presence of the Sills attorney without asking any questions.

After the legal representation ended, a fee dispute arose and, in August 2016, Sills invoked the JAMS arbitration provision in the retainer agreement. While the arbitration was ongoing, Delaney filed a legal malpractice action against Dickey and the Sills firm. The complaint also alleged that the mandatory arbitration provision in the retainer agreement violated the Rules of Professional Conduct and wrongly deprived him of his constitutional right to have a jury decide his legal malpractice action.

The court held that the retainer agreement’s arbitration provision was valid and enforceable. The court specifically found that the provision’s language — “any dispute with respect to the Firm’s legal services and/or payment by you of amounts to the Firm” will be submitted to arbitration — was sufficiently broad to encompass a claim of legal malpractice. Additionally, the court determined that Delaney waived his right to trial by jury by agreeing to the unambiguously stated arbitration provision, citing Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), and further observed that a law firm has no obligation to explain to a client the terms of a clearly written retainer agreement that “can be understood by a layperson.” Finally, the court noted that Delaney had sufficient time to consider the import of the retainer agreement.

The Appellate Division disagreed, emphasizing that Sills should have provided the 33 pages of JAMS arbitration rules incorporated into the agreement, that Sills did not explain the costs associated with arbitration, and that the retainer included a fee-shifting provision not permissible under New Jersey law.

NJ Supreme Court’s Decision in Delaney v. Dickey

The New Jersey Supreme Court agreed that Delaney’s malpractice action should not subject to the arbitration provision of the Sills retainer agreement. It also established a new rule for retainer agreements containing arbitration provisions.

“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 held. “Such an explanation is necessary because, to make an informed decision, the client must have a basic understanding of the fundamental differences between an arbitral forum and a judicial forum in resolving a future fee dispute or malpractice action.”

In reaching its decision, the New Jersey Supreme Court distinguished a retainer agreement from typical commercial contracts. “[A] retainer agreement is not an ordinary contract governed by the rules of the marketplace but is a contract that must meet the high standards of the Rules of Professional Conduct (or RPCs),” the court wrote. “An attorney’s professional and fiduciary obligations require scrupulous fairness and transparency in dealing with clients — requirements different from the typical norms that regulate arm’s-length commercial transactions between vendors and customers.”

The New Jersey Supreme Court went on to hold 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. The court explained:

That explanation may include, for example, that in arbitration the client will not have a trial before a jury in a courtroom open to the public; the outcome of the arbitration will not be appealable and will remain confidential; the client may be responsible, in part, for the costs of the arbitration proceedings, including payments to the arbitrator; and the discovery available in arbitration may be more limited than in a judicial forum.

According to the court, the information can be conveyed in an oral dialogue or in writing, or by both, depending on how the attorney chooses best to communicate it. It referred the issues raised in this opinion to the Advisory Committee on Professional Ethics for its review, which may make recommendations to the New Jersey Supreme Court and propose further guidance on the scope of an attorney’s disclosure requirements.

While the New Jersey Supreme Court advised that its ruling should be applied prospectively, it also determined that Delaney should receive its benefit. “[I]t would be unfair to deprive plaintiff, who has helped clarify the application of our RPCs in his and all future cases, of the relief he has sought — a judicial forum in which to air his claims,” the court explained. Accordingly, it held that Delaney’s malpractice action is not subject to the arbitration provision of the Sills retainer agreement, and he must therefore be allowed to proceed with his malpractice action in the Law Division.

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