Attorneys Whose Retainer Agreements Include Mandatory Arbitration for Malpractice Claims or Fee Disputes Must Explain the Arbitration Clause to the Client Up Front

Delaney v. Dickey, ___ N.J. ___ (2020). Justice Albin’s opinion for a unanimous Supreme Court in this case today is an important one for attorneys and their clients. The Court held that if an attorney includes in a retainer agreement a provision that legal malpractice claims must proceed in arbitration rather than in court, the attorney “must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client. 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.”

The basis for this decision was Rule of Professional Conduct 1.4(c). That provision states that an attorney has a professional obligation to explain a retainer agreement “to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Justice Albin emphasized that the principle announced today was not new or unexpected. He cited an American Bar Association Formal Opinion, as well as numerous court rulings and ethics opinions from other jurisdictions that had reached this same result. The Court’s opinion also relied on some of its own prior rulings regarding other aspects of the attorney-client relationship, including its retainer agreement opinion in Balducci v. Cige, 240 N.J. 574 (2020), which was discussed here.

The Court emphasized that a client who enters into a contract for legal services is very different from a consumer “purchasing a telephone, a refrigerator, or an automobile.” A retainer agreement must conform not only to “the legal principles governing contracts, but also to the ethical obligations imposed on attorneys by the RPCs.”

Justice Albin recited at length the many differences between arbitration and court proceedings, ranging from different filing fees to different discovery procedures to different adjudicators to different appeal rights. The Court did not “make any value judgment about whether an arbitral or a judicial forum would be more beneficial to a client if the client and attorney part as adversaries.”

The important thing, Justice Albin said, is 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.” That disclosure can be made “in an oral dialogue or in writing, or by both, depending on how the attorney chooses best to communicate it.” The Court referred the scope of disclosure to its Advisory Committee on Professional Ethics (“ACPE”) for recommendations and guidance.

Though today’s opinion was “not a break with established precedent” and its underlying principles were not “foreign to our jurisprudence,” the Court chose to apply its decision prospectively only, except for plaintiff in today’s case. That was because, Justice Albin said, retroactive application “may not have been reasonably anticipated and would disturb the settled expectations of many lawyers throughout our state.”

The defendant law firm did make some disclosure about its arbitration clause, and one of its attorneys offered to answer any questions that the prospective client might have had about the clause. Though the Court found that insufficient to enforce the clause against plaintiff, the Justices noted that the firm “did not have the benefit of the clarity of this opinion in interpreting a lawyer’s professional obligation under RPC 1.4(c).” The Court found no violation of the RPCs by the firm or its attorneys, and it accepted “their representations that they acted [in] good faith.”

Any attorney who includes or is considering including an arbitration clause in a retainer agreement needs to be aware of this opinion. Attorneys also need to watch for any followup generated by the ACPE.