State High Court Rejects Lawyer Retainer Arbitration Clause

• Pages: 6-6
• Date: 01 October 2022
• Author: Rachel A. Harris
• Subject Matter: Civil Law

state supreme court found an

arbitration clause in a law

f‌irm’s retainer agreement

unenforceable because

the lawyers did not suf-

f‌iciently discuss pros and cons of arbi-

tration. In so ruling, the court placed

arbitration clauses in engagement

contracts on a higher footing than

arbitration clauses in other contracts.

ABA Litigation Section leaders recom-

mend lawyers pay close attention to

this decision (and subsequent guid-

ance by advisory committees) because

it may represent a departure from

how many attorneys have approached

retainer agreements.

The dispute in Delaney v. Dickey

arose after “a sophisticated business-

man” hired a prominent law f‌irm to

represent him in a dispute with his

business partners. The businessman

signed the f‌irm’s four-page engage-

ment agreement, which said any

dispute about the f‌irm’s services or

fees would be determined by bind-

ing arbitration. The agreement stated

the businessman would be waiving his

right to a jury trial and agreeing that

the arbitral result would be f‌inal and

unappealable. It also stated that arbi-

tration would be conducted through

JAMS, a private organization, pursu-

ant to its rules and procedures. The

f‌irm did not include a copy of the rules

but oered to answer any questions

the businessman had and included a

hyperlink to 33 pages of JAMS’s rules

and procedures.

Later, the law f‌irm invoked arbitra-

tion to recover outstanding fees from

the businessman, who then f‌iled a law-

suit alleging legal malpractice. Relying

on the arbitration provision, the law

f‌irm argued both the fee dispute and

malpractice claim should be arbitrated.

The trial court agreed. But the court of

appeals reversed, so the f‌irm appealed

to the Supreme Court of New Jersey.

The supreme court found the arbi-

tration clause unenforceable because

State High Court Rejects Lawyer

Retainer Arbitration Clause

the law f‌irm did not explain the ben-

ef‌its and disadvantages of arbitrating

a future fee dispute or legal malprac-

tice claim. Such issues could include

the absence of a public jury trial, non-

appealability, conf‌identiality, client

responsibility for costs, and potentially

limited discovery. The court found the

f‌irm’s f‌iduciary duties were not satis-

f‌ied by the content of the engagement

agreement or by the link to the JAMS

rules and procedures.

Relying on New Jersey’s Rule of

Professional Conduct 1.4(c), ABA

Formal Opinion 02-425, and Model

Rules of Professional Conduct 1.4(b)

and 1.8(h), the court held the client

must understand “the fundamental dif-

ferences between an arbitral forum and

a judicial forum in resolving a future

fee dispute or malpractice action” in

order to make an informed decision.

The court explained “the forma-

tion of the attorney-client relationship

is not an ordinary commercial trans-

action, and ‘a retainer agreement is

not an ordinary contract.’” A retainer

agreement must satisfy both ordinary

contract principles and ethical rules

governing attorney-client relationships.

“Unlike the vendor in a typical com-

mercial transaction, a lawyer serves

in a f‌iduciary role,” which “raises the

specter of conf‌licting interests.”

While the f‌irm’s arbitration clause

satisf‌ied the requirements for “a typi-

cal consumer or commercial agree-

ment,” the heightened responsibilities

of an attorney demand more. The

court reasoned that “an attorney

is held to an even higher degree of

responsibility in these matters than is

required of all others.”

Litigation Section leaders urge law-

yers who want to include arbitration

provisions in retainers to review this

decision. “One thing that is well set-

tled and oft quoted about arbitration

clauses is that they’re contracts; courts

generally interpret them like contracts

and enforce them like contracts,”

explains Betsy A. Hellmann, New

York City, NY, cochair of the Section’s

Alternative Dispute Resolution

Committee. But the Delaney decision

represents that, at least in New Jersey,

“attorney-client retainer agreements

are special kinds of contracts and thus

arbitration provisions within those

agreements are treated specially,”

adds Hellmann.

For example, the Delaney deci-

sion stands in contrast to decisions by

other courts, which compelled arbitra-

tion based on incorporation by refer-

ence to arbitration rules. However,

those cases involved other types

of contracts—not attorney retainer

agreements.

“There are a lot of open questions

after this decision,” states Hellmann.

For example, “the court deferred to

Model Rules, but some lawyers inter-

pret rules relating to prospective cli-

ents more narrowly than the court

did,” elaborates Laura K. Lin, San

Francisco, CA, cochair of the Section’s

Ethics & Professionalism Committee.

The “idea that duties to prospective

clients may extend beyond just narrow

duties of conf‌identiality” seems “ripe

for guidance” by the state advisory

committee, she adds.

Hellmann agrees, noting that “it

would be useful for the advisory com-

mittee to opine on what steps lawyers

should take to comply” with the deci-

sion. For example, “would reciting the

court’s list of arbitration pros and cons

in the retainer agreement satisfy the

lawyer’s obligations?”

It is also not clear if lawyers must

always ensure prospective clients

receive independent counsel, Lin

observes. In this respect, model lan-

guage could be helpful, including

“what specif‌ic advantages or disad-

vantages should fall into the retainer

letter,” she suggests.

By Rachel A. Ha rris, Litigation News Contributing Editor

FALL 2022 • VOL. 4 8 NO. 1

6 | A BA LITIGATION SECTION

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