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

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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 per the terms of the attachment, the arbitration was to be conducted through JAMS and in accordance with its rules and procedures. The attachment contained a link to the 33-page long JAMS rules of arbitration. Delany was not provided with a hard copy of those rules by Sills. The retainer further stated that all additional costs related to the arbitration including fees for another counsel may be required to be incurred by Delany and that he was giving up his right to a trial in the court.

  

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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.

The decision also highlighted the difference between a commercial contract and a retainer agreement from the viewpoint of an attorney’s professional duties. It noted, “Thus, 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).” It noted that while dealing with a client, an attorney’s professional and fiduciary duties require scrupulous fairness and transparency and that these requirements differ from norms that govern an arm’s length commercial contract between vendors and customers.

Three bar associations, including the New Jersey State Bar Association, New Jersey Association for Justice, and the Bergen County Bar Association were also the amici in the case.

However, the court did not make any adverse findings against Trent Dickey, the attorney who represented Delany, or the law firm, Sills Cummis & Gross of Newark. It also noted that the firm acted in good faith and did not make any violations of the RPC while dealing with the client. The court further referred the issues relating to the scope of an attorney’s disclosure requirements relating to retainer arbitration terms to the Advisory Committee on Professional Ethics for review.

Commenting on the decision, Richard Epstein, deputy managing partner at Sills, issued the following statement: “We are pleased that the Supreme Court stressed that it made no finding that Sills Cummis & Gross had violated any Rules of Professional Conduct and accepted that Sills Cummis & Gross had acted in good faith. We are also pleased that the Court upheld arbitration agreements between attorneys and their clients, provided that certain explanations are given, and that the Court referred the subject to the Advisory Committee on Professional Ethics for further guidance. As for the remand to the trial court, we look forward to prevailing in that forum.”

Many people have previously opined that an arbitration provision in a retainer agreement favors the attorney and not the client. With this decision, lawyers in New Jersey will now be under an obligation to explain the pros and cons of an arbitration clause in retainer agreements to their clients. The decision is also expected to start a debate on why lawyers prefer to have an arbitration clause in their retainer agreements.