Saturday, October 26, 2019

Arbitration clause in legal malpractice claim barred by New Jersey appellate court

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The New Jersey legal community has been roiled by an unpublished – but binding – Appellate Division decision that barred enforcement of the mandatory arbitration provision of a prominent firm’s standard retainer agreement. 

In Delaney v. Dickey and Sills Cummis & Gross, P.C., 2019 WL 3982756, a legal malpractice action, plaintiff Brian Delaney claims the retainer agreement used by defendants   violated several RPCs and therefore its provision to arbitrate all disputes arising from the representation should not be enforced. The Chancery Division judge rejected the argument but a three judge panel reversed. Sills has now appealed to the state’s Supreme Court, and Delaney’s lawyer agrees the Court should grant certification.

A Sills partner handed a complex engagement agreement to Delaney a prospective client – who they describe as a sophisticated businessman.. The partner offered to answer questions, but gave no advice, while waiting for the client to sign it.  In the circumstance, the appellate court concluded this did not satisfy the duty to “reasonably consult” with the client.  RPC 1.4 (c).

The retainer informs prospective clients of the rights they are giving up but does not inform them of the costs and charges they could incur by waiving their right to access to the courts and agreeing to arbitration of all disputes with the firm.  That includes in the drafters contemplation – any malpractice claim by the client, a possibility not discussed or described beyond the language of the attachment to the engagement letter.

The rub arose from the retainer agreement’s incorporation by reference of the JAMS arbitration rules – a long and complex document.  The Sills retainer was faulted because as the same court had held in Alpert v. Quinn, 410, NJ Super 510, 531 (App. Div. 2009) “Merely directing the client to ask for another document that is not directly presented and explained to the client but will bind him or her does not fulfill the lawyer’s obligation pursuant to R.P.C. 1.4(c).”

The engagement letter’s appendix said that “any dispute arising out of the engagement” would be arbitrated.  But it did not state expressly that even a malpractice lawsuit would be barred.  The arbitration clause was found unenforceable because the JAMS rules were neither explained nor attached, merely referenced with a hypertext link.  Review of the JAMS rules would have shown the prospect of the client being compelled to pay substantial undeterminable costs for arbitration, the counsel fees of the law firm in a malpractice action, and the severe limitations on discovery in an arbitration under JAMS rules.  

To the common distress of the Bar the New Jersey Supreme Court has long provided that a successful legal malpractice plaintiff is entitled to counsel fees.   Of special concern to the court here was this somewhat ambiguous clause:
The firm and you will pay an equal share of all costs and expenses related to compensation of the arbitrator and any administrative fees except that the award rendered by the arbitrator may include the costs and expenses of arbitration reasonable attorneys' fees and reasonable costs for expert and other witnesses..

As the panel notes  the JAMS rules referenced but not explained   required the parties not only to share the arbitrator's fees and expenses, but also "that the award rendered by the arbitrator may include the costs and expenses of arbitration, reasonable attorneys' fees and reasonable costs for expert and other witnesses."

These provisions plainly benefit the drafter and burden prospective clients who, contrary to New Jersey’s established case law in Saffer v. Willoughby, 143 N.J. 256 (1996), may find themselves indebted to their former lawyers (and insurers) for the costs of a successful defense even of a non-frivolous malpractice claim.  The panel cited RPC 1.8(h)(1) for its proscription of “an agreement prospectively limiting the lawyer’s liability for malpractice unless the client is independently represented in making the agreement…”

The Appellate Division alarmed lawyers whose retainer agreements provide for arbitration.  They face the prospect of explaining such pros and cons at the point of sale.

In my opinion the Appellate Division correctly held that the retainer agreement’s arbitration clause was not enforceable because it did not assure informed consent to provisions which substantially limited the client’s rights vis a vis the law firm.  There was no explanation of the “the material risks of and reasonably available alternatives to the proposed course of conduct” embodied in the retainer agreement as called for by RPC 1.0 [e] Informed consent.

-         George Conk

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