Brian Delaney v. Trent S. Dickey and Sills Cummis & Gross, PC (083440)(Essex County & Statewide) ( 2020 )

SYLLABUS
This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the
Clerk for the convenience of the reader. It has been neither reviewed nor approved by the
Court. In the interest of brevity, portions of an opinion may not have been summarized.
Brian Delaney v. Trent S. Dickey (A-30-19) (083440)
Argued September 15, 2020 -- Decided December 21, 2020
ALBIN, J., writing for the Court.
In this appeal, the Court considers whether the arbitration provision in the retainer
agreement plaintiff Brian Delaney signed when he engaged the representation of Sills
Cummis & Gross P.C. is enforceable in light of the fiduciary responsibility that lawyers
owe their clients and the professional obligations imposed on attorneys by the Rules of
Professional Conduct (RPCs).
On September 16, 2015, Delaney, a sophisticated businessman, retained Sills to
represent him in a lawsuit. He met with a Sills attorney who presented him with a four-
page retainer agreement. It was understood that Trent Dickey, who was not in the office
that day, was slated to be the attorney primarily responsible for representing Delaney.
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 thirty-three pages of JAMS rules governing the
arbitral forum. The Sills attorney did not provide Delaney with a hard copy of the thirty-
three pages of 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 representation was terminated, 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 alleged that Dickey and Sills negligently represented him. The
1
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, stressing that Sills should have provided the
thirty-three 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.
The Court granted defendants’ petition for certification. 240 N.J. 194 (2019).
HELD: 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. 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. See RPC 1.4(c). That information can be
conveyed in an oral dialogue or in writing, or by both, depending on how the attorney
chooses best to communicate it. The Court refers the issues raised in this opinion to the
Advisory Committee on Professional Ethics, which may propose further guidance on the
scope of an attorney’s disclosure requirements. The new mandate will apply
prospectively, except as to Delaney, who must be allowed to proceed with his
malpractice action in the Law Division.
1. Unlike the vendor in a typical commercial transaction, a lawyer serves in a fiduciary
role to a client or prospective client. All fiduciaries are held to a duty of fairness, good
faith and fidelity, but an attorney is held to an even higher degree of responsibility in
these matters than is required of all others. Above all else, a lawyer’s fiduciary role
requires that the lawyer act fairly in all dealings with the client and provide the client
with not only complete and undivided loyalty, but also with advice that will protect the
client’s interests. Lawyers typically prepare retainer agreements, and clients rely on the
integrity of their lawyers who fashion the agreements. The attorney bears the burden of
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establishing the fairness and reasonableness of the transaction given the special
considerations inherent in the attorney-client relationship. One of the paramount duties
of a lawyer is to make necessary disclosures to the client so that the client can make
informed decisions. That duty is expressed in RPC 1.4(c), which states that “[a] lawyer
shall explain a matter to the extent reasonably necessary to permit the client to make
informed decisions regarding the representation.” (pp. 23-24)
2. The American Bar Association (ABA) has issued a formal opinion construing the
model rule on which RPC 1.4(c) is patterned. The ABA found that a provision in a
retainer agreement requiring “the binding arbitration of disputes concerning fees and
malpractice claims” did not violate the ABA Model Rules of Professional Conduct,
“provided that the client has been fully apprised of the advantages and disadvantages of
arbitration and has given her informed consent to the inclusion of the arbitration
provision in the retainer agreement.” Additionally, the ABA opinion recognized that a
mandatory arbitration provision in a retainer agreement that insulates the lawyer from
liability which she otherwise would be exposed under common or statutory law would
contravene ABA Model Rule of Professional Conduct 1.8(h), which is substantially
similar to New Jersey’s RPC 1.8(h). Professional ethics committees and courts in other
jurisdictions have reached conclusions similar to those in the ABA opinion. (pp. 25-32)
3. Noting that the advisory ethics opinions and judicial opinions from other jurisdictions
require attorneys, at the very least, to explain the advantages and disadvantages of
arbitrating a future fee dispute or malpractice action in light of the substantial differences
between adjudicating a dispute in a judicial and arbitral forum, the Court reviews some of
the differences between the arbitral JAMS forum in this case and a judicial forum. The
Court makes no value judgment whether a judicial or arbitral forum is superior in
resolving a legal malpractice action, which is a determination to be made by the lawyer
and client, after the lawyer explains to the client the differences between the two forums
so the client can make an informed decision. (pp. 32-36)
4. The arbitration provision at issue in this case -- on its face -- would be enforceable if
the Sills retainer agreement were a typical contract between a commercial vendor and a
customer. See Atalese, 219 N.J. at 444-45. But a retainer agreement is not an ordinary
contract -- it must conform not only to the legal principles governing contracts, but also
to the ethical obligations imposed on attorneys by the RPCs. Requiring attorneys to
explain to a client the advantages and disadvantages of arbitration so that the client can
make an informed decision whether to arbitrate a future fee dispute or legal malpractice
claim against the firm does not single out a retainer agreement’s arbitration provision for
disparate treatment and therefore does not run afoul of the Federal Arbitration Act or the
New Jersey Arbitration Act. (pp. 36-39)
5. The client comes to a lawyer for assistance in addressing a particular issue and is not
likely anticipating a day when he may have to do battle with the lawyer, who is retained
3
to promote his interests and protect his rights. Yet, the insertion of an arbitration
provision in a retainer agreement indicates that the attorney has given thought to the
prospect that the client may be a future adversary and has selected the forum in which
potential disputes, whether about the attorney’s fees or services, will be resolved. Not
even a shadow of a conflict of interest should be cast over the attorney-client relationship
at its inception. To dispel that shadow, lawyers should make the necessary disclosures in
a disinterested manner to allow clients to make an informed decision, as required by the
RPCs. Consistent with the ABA opinion, the weight of authority as expressed in
professional advisory opinions and judicial case law in other jurisdictions, and this
Court’s interpretation of its own RPCs, the Court holds that attorneys who insert
provisions in their retainer agreements to arbitrate future fee disputes or legal malpractice
claims must explain the advantages and disadvantages of the arbitral and judicial forums.
Attorneys can fulfill that requirement in writing or orally -- or by both means. The Court
provides examples of information that may be disclosed. (pp. 39-43)
6. The Court sets forth in this opinion the rudimentary requirements expected of
attorneys who include a provision in a retainer agreement that mandates the arbitration of
a future fee dispute or malpractice action. Noting that the issues raised here would
benefit from further study and discussion, the Court refers those issues to the Advisory
Committee on Professional Ethics. (pp. 43-44)
7. Although the Court’s opinion does not break with established precedent, the
retroactive application of its ruling may not have been reasonably anticipated and would
disturb the settled expectations of many lawyers throughout New Jersey, who genuinely
believed that an arbitration provision that met the standards of such cases as Atalese
would satisfy the requirements of the RPCs. Therefore, the Court’s holding will apply
prospectively from the day of the issuance of this opinion, except as to Delaney, in
keeping with the general practice whereby the plaintiff receives the benefit of the rule
established in the opinion. Here, because Delaney was not given an explanation of the
advantages or disadvantages of arbitration, the present malpractice action is not subject to
the arbitration provision of the Sills retainer agreement. Delaney therefore must be
allowed to proceed with this malpractice action in the Law Division. The Court stresses
that it makes no finding that Sills or its attorneys violated the Rules of Professional
Conduct, and it accepts their representations that they acted good faith. (pp. 44-47)
The judgment of the Appellate Division is AFFIRMED AS MODIFIED. The
matter is remanded to the Law Division.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, PATTERSON,
FERNANDEZ-VINA, SOLOMON, and PIERRE-LOUIS join in JUSTICE
ALBIN’s opinion.
4
SUPREME COURT OF NEW JERSEY
A-30 September Term 2019
083440
Brian Delaney,
Plaintiff-Respondent,
v.
Trent S. Dickey and Sills Cummis & Gross, P.C.,
Defendants-Appellants.
On certification to the Superior Court,
Appellate Division.
Argued Decided
September 15, 2020 December 21, 2020
Peter G. Verniero argued the cause for appellants (Sills
Cummis & Gross, attorneys; Peter G. Verniero, Richard
H. Epstein, and Joshua N. Howley, of counsel and on the
briefs).
Glenn A. Bergenfield argued the cause for respondent
(Glenn A. Bergenfield, on the briefs).
William E. Denver argued the cause for amicus curiae
New Jersey State Bar Association (New Jersey State Bar
Association, attorneys; Kimberly A. Yonta, President, of
counsel, and Andrea J. Sullivan and Kersten Kortbawi,
on the brief).
Michael S. Stein argued the cause for amicus curiae
Bergen County Bar Association (Pashman Stein Walder
1
Hayden, attorneys; Michael S. Stein and Janie Byalik, on
the brief).
Michael J. Epstein argued the cause for amicus curiae
New Jersey Association for Justice (The Epstein Law
Firm, attorneys; Michael J. Epstein, of counsel and on the
brief, and Michael A. Rabasca, on the brief).
JUSTICE ALBIN delivered the opinion of the Court.
An attorney serves in a fiduciary role with a client at the very inception
of the attorney-client relationship. In that fiduciary role, an attorney has a
professional obligation to explain the content of a retainer agreement “to the
extent reasonably necessary to permit the client to make informed decisions
regarding the representation.” RPC 1.4(c). 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). 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.
Through the lens of those basic principles, we view the issue before us:
whether a lawyer has a duty to explain the benefits and disadvantages of a
2
provision in a retainer agreement that binds the client to arbitrate a future fee
dispute or legal malpractice action in a non-judicial forum.
In this case, plaintiff Brian Delaney, a sophisticated businessman, sought
the representation of Sills Cummis & Gross P.C. (Sills), a prominent law firm,
in an ongoing commercial lawsuit with his estranged business partners.
At the Sills office, an attorney handed Delaney a four-page retainer
agreement, including a one-page attachment (fourth page). The retainer
agreement stated 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 one-page attachment
indicated that the arbitration proceeding would remain confidential and would
be conducted through a private arbitration and mediation organization called
JAMS pursuant to its rules and procedures. The attachment, moreover,
contained a hyperlink to thirty-three pages of JAMS rules governing the
arbitral forum. 1 On the day Delaney reviewed and signed the retainer
agreement, the Sills attorney did not provide a hard copy of the JAMS rules,
1
The thirty-three pages of JAMS rules include the cover page and table of
contents.
3
although he offered to answer any questions Delaney might have about the
agreement.
Delaney later terminated his relationship with Sills. When Delaney
refused to pay the outstanding fees allegedly owed to Sills, the firm invoked
the arbitration provision. Delaney later sued Sills for professional malpractice
and moved before the Chancery Division to stay the fee dispute that was
already in arbitration, pending the outcome of the malpractice action. The
Chancery Division ruled that the fee dispute and the malpractice claim were
subject to the retainer agreement’s arbitration provision.
The Appellate Division reversed. It found that Sills’s failure to provide
Delaney with the thirty-three pages of JAMS rules referenced in the retainer
agreement before Delaney signed the agreement or to explain to him the JAMS
rules, “some of which were material to the arbitration clause and the client’s
decision to retain Sills,” rendered the arbitration provision unenforceable
under the Rules of Professional Conduct.
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. Such an explanation is necessary because, to make an informed
decision, the client must have a basic understanding of the fundamental
4
differences between an arbitral forum and a judicial forum in resolving a future
fee dispute or malpractice action. See RPC 1.4(c).
An arbitration provision in a retainer agreement is an acknowledgement
that the lawyer and client may be future adversaries. That the retainer
agreement envisions a potential future adverse relationship between the
attorney and client -- and seeks to control the dispute-resolution forum and its
procedures -- raises the specter of conflicting interests. An arbitral forum and
judicial forum, and their accompanying procedures, are significantly different.
We do 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. 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. See RPC 1.4(c). That obligation is in
keeping with an attorney’s basic responsibility to explain provisions of a
retainer agreement that may not be clear on their face. Accordingly, the
disclosures required of an attorney in explaining an arbitration provision in a
retainer agreement stand on an equal footing with the disclosures required in
explaining other material provisions in the agreement. Such comparable
5
treatment does not offend the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to
16, or the New Jersey Arbitration Act (NJAA), N.J.S.A. 2A:23B-1 to -36.
The arbitration provision in this case satisfies the requirements for a
typical consumer or commercial agreement. The heightened professional and
fiduciary responsibilities of an attorney, however, demand more -- an
explanation of the differences between an arbitral and judicial forum. 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. 2
That information can be conveyed in an oral dialogue or in writing, or by
both, depending on how the attorney chooses best to communicate it. We refer
the issues raised in this opinion to the Advisory Committee on Professional
Ethics for its review. The Committee may make recommendations to this
Court and propose further guidance on the scope of an attorney’s disclosure
requirements.
2
The nature of the disclosure requirements will depend on the particular rules
of the arbitral forum chosen by the attorney.
6
Because the professional obligation we now impose may not have been
reasonably anticipated and would unsettle expectations among lawyers, we apply
this new mandate prospectively, with one exception. Applying the holding of our
opinion here is “consistent with the usual rule that the prevailing party who
brings a claim that advances the common law should receive the benefit of his
efforts.” See Estate of Narleski v. Gomes, 244 N.J. 199, 204 (2020). To be
clear, however, we do not find that Sills or its attorneys violated the Rules of
Professional Conduct, and we accept their representations that they acted in good
faith.
Therefore, Delaney must be allowed to proceed with his malpractice action
in the Law Division. We affirm and modify the judgment of the Appellate
Division and remand to the Law Division for proceedings consistent with this
opinion.
I.
A.
This appeal comes before us on facts essentially undisputed in the
parties’ pleadings.
In November 2014, Delaney filed a lawsuit in Morris County against his
business partners in two limited liability companies involved in real estate
development. In January 2015, one of those business partners filed a lawsuit
7
against Delaney in Sussex County. The law firm of Trenk DiPasquale
represented Delaney in both actions.
On September 16, 2015, Delaney retained Sills to represent him in the
Morris County lawsuit, replacing Trenk DiPasquale. That day, Delaney met
with a Sills attorney who presented him with a four-page retainer agreement.
It was understood that Trent Dickey, who was not in the office that day, was
slated to be the attorney primarily responsible for representing Delaney. The
Sills attorney signed Dickey’s name to the agreement and affixed his own
initials below the signature. 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 the following
arbitration provision:
[I]n the event that we and you are unable to come to
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. In such case, you
would need to engage separate counsel to represent
your interests and you would incur additional expense
in connection with such arbitration. The decision of the
Arbitrator will be final and binding and neither the Firm
nor you will have the right to appeal such decision,
whether in a court or in another arbitration proceeding.
8
You understand that, by agreeing to arbitrate disputes
as provided in this retainer letter, you are waiving any
and all statutory and other rights that you may have to
a trial by jury in connection with any such dispute,
claim or controversy. Notwithstanding the provisions
of this paragraph and Attachment 1, the Company will
retain the Company’s absolute right to proceed under
the Fee Arbitration Rules set forth in New Jersey Court
Rule 1:20A, which will take precedence.
A one-page attachment entitled “Attachment 1 to Engagement Letter -
Arbitration Provisions” -- the fourth page of the agreement -- gave a general
description of some of the arbitration rules and provided a hyperlink to thirty-
three pages of JAMS rules governing any dispute between the law firm and the
client. The attachment stated:
Any disputes arising out of or relating to this
engagement agreement or the Firm’s engagement by
you will be conducted pursuant to the JAMS/Endispute
Arbitration Rules and Procedures (the “JAMS Rules”)
then in effect (see http://www.jamsadr.com), except
that, notwithstanding those rules, the following
provisions will apply to the arbitration:
Panel. The arbitration will be conducted by one
impartial arbitrator (who may be a former judge,
practicing attorney or person who is not an attorney),
selected by mutual agreement or, if we and the
Company cannot agree, the arbitrator will be selected
in accordance with the JAMS Rules.
Process. The arbitrator will not award punitive
damages to either party, and we and the Company will
each be deemed to have waived any right to such
damages. The arbitrator will, in rendering his or her
decision, apply the substantive law of the State of New
9
Jersey (excluding its choice of law rules that would
require the application of the laws of another
jurisdiction). The place of arbitration will be Newark,
New Jersey. The award of the arbitrator will include a
written explanation of his or her decision and specify
the basis for any damages. The written decision of the
arbitrator will be final, binding and non-appealable and
may be enforced in any court of competent jurisdiction.
The Firm and You will pay an equal share of all costs
and expenses related to compensation of the arbitrator,
the site 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.
Confidentiality. The arbitration proceeding will be
confidential. The existence of any matter submitted to
arbitration, and the award, will be kept in confidence
by you, the Firm and the arbitrator, except as required
in connection with the enforcement of such award or as
otherwise required by applicable law.
The Sills attorney did not provide Delaney with a hard copy of the
thirty-three pages of 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.
In an October 7, 2015 supplemental retainer letter forwarded to Delaney,
Dickey confirmed that Sills would substitute as counsel for Trenk DiPasquale
10
in the Sussex County lawsuit. The supplemental letter -- signed by Delaney
and returned to Sills the next day -- advised that an additional retainer was
required and that the firm’s “fees will likely exceed $300,000 up to trial, and
could be substantially higher.” That letter made no reference to arbitration.
At some point, Dickey and Delaney agreed that Sills would withdraw
from the Sussex County lawsuit, allowing another attorney, who agreed to cap
Delaney’s fees, to substitute as counsel. In April 2016, Delaney allegedly
agreed to accept a financial settlement in the Morris County litigation sub ject
to the parties’ agreement to negotiate additional terms. After a final agreement
was purportedly reached, Delaney terminated his relationship with Sills on
July 21, 2016. At the time, Delaney refused to pay the almost $440,000 in
legal fees that Sills asserted it was owed.3
By letter dated July 25, 2016, Sills forwarded a pre-action notice to
Delaney advising him of his right to elect fee arbitration with the Essex
County Fee Arbitration Committee under the New Jersey Court Rules. 4
Delaney did not avail himself of that right.
3
According to Delaney, the Sills firm billed him nearly $1,000,000 in legal
fees.
4
Rule 1:20A-6 provides that “[n]o lawsuit to recover a fee may be filed until
the expiration of the 30 day period herein giving Pre-action Notice to a client,”
advising the client of the right to seek fee arbitration under the New Jersey
11
On August 29, 2016, Sills invoked the JAMS arbitration provision in the
retainer agreement. The parties postponed the arbitration as they attempted to
resolve the fee dispute through mediation. After mediation failed, on April 6,
2017, Sills restarted the arbitration process, and the parties selected an
arbitrator. In the ensuing months, the parties skirmished over discovery and
procedural matters.
On August 31, 2017, Delaney filed a legal malpractice action against
Dickey and the Sills firm in the Superior Court, Law Division, Essex County. 5
The complaint alleged that Dickey and Sills negligently represented him. 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. Afterwards, the arbitrator stated that arbitration, scheduled for October
10-12, 2017, would not be postponed on account of the filing of the
malpractice case.
Court Rules. In the scenario before us, under our Court Rules, Delaney, not
Sills, could request arbitration of a fee dispute before a court-appointed fee
arbitration committee. See R. 1:20A-3.
5
The malpractice lawsuit also named as defendants Delaney’s prior attorneys,
the Brach Eichler firm and one of its lawyers.
12
On September 19, 2017, Delaney filed an Order to Show Cause and
verified complaint in the Superior Court, Chancery Division, Essex County ,
seeking a declaratory judgment that the retainer agreement’s arbitration
provision was unenforceable. Alternatively, Delaney requested that the
Chancery Division stay the arbitration pending the outcome of the legal
malpractice action, explaining that to do otherwise would result in the
“likelihood of inconsistent rulings and piecemeal litigation.” In the verified
complaint, Delaney asserted that Sills did not make him “aware of the
inequities and costs associated with proceeding with arbitration.” More
specifically, he asserted that Sills did not explain to him that he might be
responsible for arbitration fees that could greatly exceed the filing fees in a
comparable court action and for the firm’s attorneys’ fees and costs, depending
on how the arbitrator ruled. Finally, he alleged that he would not have signed
the retainer agreement if he had been told that he was giving up his right to a
jury trial in the event he had to bring a legal malpractice claim against Sills .
The Chancery Division granted Delaney’s Order to Show Cause and
heard oral argument.
B.
On November 9, 2017, the Chancery Division denied Delaney’s
application to stay the arbitration proceeding and held that the retainer
13
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. 6
The Chancery Division and Law Division entered separate orders
directing that Delaney’s malpractice action proceed in arbitration and
dismissing his malpractice complaint filed in the Law Division.
6
The Chancery Division incorrectly concluded that Delaney had twenty-two
days to ponder the retainer agreement handed to him by the Sills attorney on
September 16, 2015. In fact, Delaney signed the agreement on that date. The
Chancery Division believed that Delaney did not sign and return the initial
agreement until October 8, 2015, but it was Dickey’s supplemental retainer
letter that Delaney signed and returned on that date.
14
C.
In an unpublished opinion, the Appellate Division declared that the
arbitration provision in the Sills retainer agreement was unenforceable because
Sills did not fulfill its fiduciary responsibility under the Rules of Professional
Conduct to explain to its client the effect of arbitrating a future malpractice
action. The Appellate Division primarily focused its analysis on RPC 1.4(c),
which requires that a lawyer “explain a matter to the extent reasonably
necessary to permit the client to make informed decisions regarding the
representation.” In doing so, it noted that “[t]he potential effect of an
agreement to arbitrate must be clear to the client to be binding upon him .”
(alteration in original) (quoting Kamaratos v. Palias, 360 N.J. Super. 76, 87
(App. Div. 2003)).
The Appellate Division held that, when presenting the retainer
agreement to Delaney for his signature, Sills should have provided the thirty-
three pages of JAMS arbitration rules incorporated into the agreement, “some
of which were material to the arbitration clause and the client’s decision to
retain Sills.” The court emphasized that Sills did not explain the arbitration
provision or the JAMS rules to Delaney and that, without having a copy of the
rules when he signed the agreement, Delaney could not have agreed to the
15
limitation on his right to discovery or to forgo other benefits available in an
action filed in a court.
The Appellate Division observed that although the arbitration provision
informed Delaney that “he would be required to pay an equal share of all costs
and expenses related to compensation of the arbitrator,” without an
explanation from Sills, “the client had no way of gauging whether the
arbitrator’s fee would be closer to $10,000, $50,000 or $100,000.” The court
also pointed out that the text of the retainer agreement allowed for the
arbitrator to impose “reasonable attorneys’ fees and reasonable costs” on the
client in the malpractice action -- fee-shifting not permissible under New
Jersey law.
In conclusion, the Appellate Division stressed that it was not holding
that retainer agreements mandating arbitration of legal malpractice claims were
per se invalid or that the “reasonable explanation” required by RPC 1.4(c)
could not be provided in writing. Rather, it determined only that when an
attorney does not provide to the client, at the time of the signing of a retainer
agreement with an arbitration provision, a document incorporated into the
agreement containing material terms concerning arbitration and gives no
explanation of the import of those material terms, the arbitration provision
cannot stand.
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D.
We granted defendants’ petition for certification. 240 N.J. 194 (2019).
We also granted the motions of the New Jersey State Bar Association, the
Bergen County Bar Association, and the New Jersey Association for Justice to
participate as amici curiae.
II.
A.
Sills argues that the clear and unambiguous four-page written retainer
agreement handed to Delaney by one of its attorneys, who offered to answer
any questions Delaney might have concerning the agreement’s contents,
satisfied the firm’s obligations under the Rules of Professional Conduct. Sills
rejects the notion that it had a duty under existing law to provide the client
with any additional explanation about arbitration, such as opining on the
benefits or disadvantages of arbitrating a future fee dispute or legal
malpractice claim. Sills contends that the Appellate Division violated this
Court’s jurisprudence by failing to place the arbitration provision on an equal
footing with other contracts or to view arbitration as a favored means for
resolving disputes. Sills also maintains that the Appellate Division erred by
retroactively imposing on it new disclosure requirements under the RPCs and
by trespassing on the domain of the bodies responsible for promulgating new
17
ethical obligations -- the Advisory Committee on Professional Ethics, the
Professional Responsibility Rules Committee, and this Court. Sills asks this
Court to reverse and remand the fee dispute and legal malpractice claim for
arbitration.
B.
Delaney counters that Sills breached its fiduciary duty to him by
including an arbitration provision in the retainer agreement and then by failing
to explain the parts that did not benefit him in the event the firm committed
malpractice. That he asked no questions about the retainer agreement is of no
moment, he argues, because under RPC 1.4(c) the firm had a duty to disclose
that the language about arbitrating “any dispute with respect to the Firm’s
services” would encompass a malpractice claim against the firm. Delaney
maintains that he came to Sills to engage its services in his contract dispute
with business partners -- not as the firm’s sophisticated and wary adversary.
He insists that Sills had an ethical duty to disclose to him how -- in the event
Sills committed malpractice -- he benefitted by waiving his rights to sue and
publicly air his dispute in court before a New Jersey judge and jury, to
expansive discovery, to appeal, and not to be bound by an automatic
confidentiality requirement.
18
Delaney also asserts that, in violation of RPC 1.8(h)(1), the arbitration
provision impermissibly made him potentially liable for Sills’s legal fees and
shielded Sills from a claim for punitive damages. He argues that the
conflicting interest between Sills and its client made the firm incapable of
giving him disinterested guidance. He therefore urges this Court to hold that
retainer agreements, like this one, requiring mandatory arbitration of legal
malpractice claims are against public policy and our ethics rules.
C.
Amicus New Jersey State Bar Association asks this Court to reverse that
part of the Appellate Division’s judgment that imposes new professional
obligations on attorney-client communications and attorney retainer
agreements and to allow the ethical issues raised to be vetted through the
formal rulemaking process. The State Bar Association expresses concern that
the Appellate Division’s interpretation of RPC 1.4(c) will require lawyers to
engage in “an in-depth review of legal services agreements with prospective
clients” beyond the present requirement that lawyers provide “a reasonable
explanation” about a retainer agreement sufficient for clients to make an
informed decision about the representation.
The Bergen County Bar Association recognizes that retainer agreements
mandating arbitration for disputes, such as malpractice claims, raise “novel”
19
and “important” questions about disclosures that lawyers are required to make
to clients. It recommends that any proposed disclosure requirements be
evaluated by the appropriate Supreme Court committees and through the
rulemaking process, and that any new disclosure requirements should be
imposed prospectively only.
The New Jersey Association for Justice posits that in light of the
imbalance of power between a lawyer and client and the lawyer’s fiduciary
obligation to the client, “mandatory arbitration clauses in attorney -client
retainer agreements [are] inherently unfair and unreasonable.” It urges this
Court to prohibit mandatory arbitration provisions in retainer agreements to
protect against “unwitting and uninformed prospective waivers of significant
rights” by clients at the very moment they retain counsel.
III.
A.
We must determine what disclosures an attorney must make to a
potential client about a provision included in a retainer agreement that
mandates arbitration of a future fee dispute or legal malpractice claim.
Typically, a retainer agreement addresses the terms governing an attorney’s
representation of the matter for which the client has sought the attorney’s
counsel. Here, the retainer agreement provides for the terms governing a quite
20
different matter, a future event -- a time when the attorney and the client might
become adversaries, a time when the client might file a malpractice lawsuit
against the lawyer for money damages. The planning for that discordant event
-- for an adversarial relationship with a client to whom the attorney owes a
fiduciary duty -- signals that the interests of the lawyer and client may be
divergent even at the inception of the attorney-client relationship.
Although, presumably, Sills concluded that arbitration would be a more
favorable dispute-resolution forum for the firm and its client in the event of a
malpractice action, it is at least reasonably debatable whether the client would
be best served by substituting an arbitral forum for a judicial forum to litigate
an attorney’s malpractice. See Kamaratos, 360 N.J. Super. at 89 (Fuentes,
J.A.D., concurring) (“The insertion of a commercial arbitration clause in a
retainer agreement . . . pit[s] the lawyer’s interests against the client’s. The
terms and features of an arbitration clause are designed, not for the client’ s
benefit, but to protect and advance the lawyer’s interest in a forum of his or
her choosing.”).
In an arm’s-length transaction, ordinarily, a vendor and purchaser are
free to agree to mutually acceptable contractual terms in pursuit of their
individual best interests. But the formation of the attorney-client relationship
21
is not an ordinary commercial transaction, and “a retainer agreement is not an
ordinary contract.” Balducci v. Cige, 240 N.J. 574, 580 (2020).
“[A]n attorney’s freedom to contract” is subject to this Court’s exercise
of its constitutional authority to regulate the practice of law. Cohen v. Radio-
Elecs. Officers Union, 146 N.J. 140, 155 (1996); N.J. Const. art. VI, § 2, ¶ 3.
In exercising our constitutional authority, we have promulgated Rules of
Professional Conduct and issued decisions setting forth the “ethical duties that
attorneys owe their clients and potential clients.” Balducci, 240 N.J. at 591-
92. The RPCs and case law make clear “that a retainer agreement [must]
satisfy not only ordinary principles governing contracts, but also the
professional ethical standards governing the attorney-client relationship.” Id.
at 592. Unlike the vendor in a typical commercial transaction, a lawyer serves
in a fiduciary role to a client or prospective client. Id. at 580, 592.
“[P]reserving the fiduciary responsibility that lawyers owe their clients” is a
principle to which this Court is firmly committed. State in Interest of S.G.,
175 N.J. 132, 139 (2003) (quoting Cohen, 146 N.J. at 155).
It is the scope of the duties that Sills owed to Delaney in that fiduciary
relationship -- as well as the tensions arising from the inclusion of the
arbitration provision in the retainer agreement -- that is the preeminent issue in
22
this case. Therefore, we must first delineate the lawyer’s role as fiduciary to a
client or potential client.
B.
“All fiduciaries are held to a duty of fairness, good faith and fidelity, but
an attorney is held to an even higher degree of responsibility in these matters
than is required of all others.” In re Honig, 10 N.J. 74, 78 (1952). Above all
else, a lawyer’s fiduciary role requires that the lawyer act fairly in all dealings
with the client. Balducci, 240 N.J. at 592; see also Black’s Law Dictionary
770 (11th ed. 2019) (stating that a fiduciary owes the beneficiary of his or her
concern the duty “of good faith, loyalty, due care, and disclosure”). In that
fiduciary role, a lawyer must provide the client with not only “complete and
undivided loyalty,” but also with advice that will “protect the client’s
interests.” S.G., 175 N.J. at 139 (quoting In re Dolan, 76 N.J. 1, 9 (1978)).
The foundation of the attorney-client relationship, like any fiduciary
relationship, is trust and confidence. Ibid. The client places trust and
confidence in the attorney, expecting that the attorney will use his or her
superior expertise, knowledge, training, and judgment for the client’s benefit.
See ibid.; F.G. v. MacDonnell, 150 N.J. 550, 563 (1997). A lawyer is never
“privileged to exercise an advantage which will in any respect prove
detrimental to his client’s interests.” Honig, 10 N.J. at 78.
23
“We also must be mindful that lawyers typically prepare retainer
agreements [and] that clients rely on the integrity of their lawyers who fashion
the agreements . . . .” Balducci, 240 N.J. at 594. In reviewing the fairness of a
retainer agreement, “a court may consider the circumstances related to the
making of the agreement, including whether the parties ‘actually negotiated
the agreement,’ ‘the client’s level of sophistication or experience in retaining
and compensating lawyers,’ and other relevant factors.” Id. at 593 (quoting
Cohen, 146 N.J. at 160); see also Restatement (Third) of the Law Governing
Lawyers § 18 cmt. h (Am. Law Inst. 2000). The attorney, however, bears the
burden of “establishing the fairness and reasonableness of the transaction”
given the “special considerations inherent in the attorney-client relationship.”
Cohen, 146 N.J. at 156.
One of the paramount duties of a lawyer is to make necessary
disclosures to the client so that the client can make informed decisions. See
Dolan, 76 N.J. at 9. That duty is expressed in RPC 1.4(c), which states that
“[a] lawyer shall explain a matter to the extent reasonably necessary to permit
the client to make informed decisions regarding the representation.”
Sills claims that its attorney fulfilled his professional obligation when he
handed the client the retainer agreement, which contained an arbitration
provision and a hyperlink to the JAMS rules, and asked the client if he had any
24
questions. Delaney, on the other hand, contends that, at a minimum, the Sills
attorney had an affirmative duty to advise him of the advantages and
disadvantages of arbitrating a malpractice claim before he signed the retainer
agreement. Although interpreting RPC 1.4(c) to address this issue is a novel
undertaking for our Court, courts and professional ethics committees in other
jurisdictions already have trod this terrain. Also, importantly, the American
Bar Association (ABA) has spoken on this issue in a formal opinion construing
the model rule on which RPC 1.4(c) is patterned.
C.
In 2002, the ABA issued Formal Opinion 02-425, Retainer Agreement
Requiring the Arbitration of Fee Disputes and Malpractice Claims (ABA
Opinion), which held that a provision in a retainer agreement requiring “the
binding arbitration of disputes concerning fees and malpractice claims” did not
violate ABA Model Rule of Professional Conduct 1.4(b), “provided that the
client has been fully apprised of the advantages and disadvantages of
arbitration and has given her informed consent to the inclusion of the
arbitration provision in the retainer agreement.” 7 ABA Opinion at 1 (emphasis
added). According to the ABA Opinion, under Model Rule 1.4(b), a lawyer’s
7
The language of ABA Model Rule of Professional Conduct 1.4(b) is
identical to New Jersey’s RPC 1.4(c).
25
fiduciary “duty to explain matters to a client” encompasses “the duty to advise
clients of the possible adverse consequences as well as the benefits that may
arise from the execution of an agreement” that includes an arbitration
provision. Id. at 4-5. Thus, the lawyer must “‘explain’ the implications of the
proposed binding arbitration provision ‘to the extent reasonably necessary to
permit the client to make (an) informed decision’ about whether to agree to the
[provision’s] inclusion” in the retainer agreement. Id. at 5 (quoting Model
Rule 1.4(b)). The scope of the disclosure will depend on “the sophistication of
the client.” Ibid. The lawyer, however, “should make clear that arbitration
typically results in the client’s waiver of significant rights, such as the waiver
of the right to a jury trial, the possible waiver of broad discovery, and the loss
of the right to appeal.” Ibid. A lawyer “also might explain that the case will
be decided by an individual arbitrator or panel of arbitrators and inform the
client of any obligation that the lawyer or client may have to pay the fees and
costs of arbitration.” Id. at 6.
Additionally, the ABA Opinion recognized that a mandatory arbitration
provision in a “retainer agreement [that] insulates the lawyer from liability . . .
to which she otherwise would be exposed under common or statutory law”
26
would contravene ABA Model Rule of Professional Conduct 1.8(h).8 Id. at 3-
4. To illustrate that point, the ABA Opinion explains that “if the law of the
jurisdiction precludes an award of punitive damages in arbitration but permits
punitive damages in malpractice lawsuits, the provision would violate Rule
1.8(h) unless the client is independently represented in making the agreement.”
Id. at 4.
Professional ethics committees, which primarily operate under the
auspices of state bar associations, have issued advisory opinions reaching
conclusions similar to those in the ABA Opinion. 9 Those ethics opinions
8
The Model Rule is substantially similar to New Jersey’s RPC 1.8(h), which
provides that
“[a] lawyer shall not
(1) make an agreement prospectively limiting the
lawyer’s liability to a client for malpractice
unless the client fails to act in accordance with
the lawyer’s advice and the lawyer nevertheless
continues to represent the client at the client’s
request. Notwithstanding the existence of those
two conditions, the lawyer shall not make such an
agreement unless permitted by law and the client
is independently represented in making the
agreement . . . .”
9
Unlike New Jersey’s Advisory Committee on Professional Ethics, which is
appointed by this Court, see R. 1:19-1, the ethics committees in many
jurisdictions that issue professional advisory opinions are creatures of their
27
instruct attorneys in their jurisdictions that they must disclose the benefits and
disadvantages of arbitration when an arbitration provision is included in a
retainer agreement. See Ariz. Ethics Op. 94-05, at 5 (1994) (advising that an
arbitration clause in a retainer agreement is permissible if, among other things,
the attorney “fully discloses, in writing and in terms that can be understood by
the client, the advantages and disadvantages of arbitration”); Tex. Ethics Op.
586, 72 Tex. B.J. 128, 129 (2009) (advising that the lawyer must provide
“sufficient information about the differences between litigation and
arbitration” and “the significant advantages and disadvantages of binding
arbitration to the extent the lawyer reasonably believes is necessary for an
informed decision by the client”); 10 Conn. Ethics Op. 99-20 (1999) (expressing
concern over an arbitration provision in a retainer agreement in which the
lawyer noted the benefits but not the potential drawbacks of arbitration); Pa.
Ethics Op. 97-140, at 3 (1997) (advising that a retainer agreement’s arbitration
provision must be “fully disclosed in writing to the client, setting forth the
principal advantages and disadvantages of arbitration”); N.Y. Cty. Lawyers
state bar associations. The opinions referenced here are products of those
committees unless noted otherwise.
10
This opinion was issued by the Texas Committee on Professional Ethics,
whose members are appointed by the Supreme Court of Texas.
28
Ass’n Ethics Op. 723 (1997) (advising that an attorney must make a full
disclosure of the “material differences between arbitration and litigation in a
court of law” if an arbitration provision is included in a retainer agreement);
Okla. Ethics Op. 312 (2000) (same); Vt. Ethics Op. 2003-7, at 1 (advising that,
in the absence of the client seeking the advice of independent counsel
regarding a retainer agreement’s arbitration provision, the attorney “must (1)
fully apprise the client as to the advantages and disadvantages of binding
arbitration, and (2) obtain the client’s informed consent in writing to the
inclusion of the binding arbitration clause in the representation agreement”).
Some jurisdictions require lawyers to advise their potential clients to
seek the advice of independent counsel before signing a retainer agreement
containing an arbitration provision. See, e.g., Pa. Ethics Op. 97-140, at 3
(1997) (“[T]he client [must] be advised and given an opportunity to seek the
advice of independent counsel.”); Va. Legal Ethics Op. 638, at 1 (1984)
(stating that an arbitration provision in a retainer agreement is permissible
“provided that the client consents after full disclosure of the effect of such a
provision and after the client is advised to seek independent counsel in regard
to the advisability of such a provision”). Going even further, Michigan Ethics
Opinion RI-257 (1996) bars a provision in a retainer agreement to arbitrate
future disputes unless “the client obtains independent counsel concerning the
29
advisability” of agreeing to the arbitration provision. At the far end of the
spectrum, the Ohio Supreme Court’s Board of Commissioners on Grievances
and Discipline has advised that a client’s retainer agreement “should not
contain language requiring a client to prospectively agree to arbitrate legal
malpractice disputes.” 11 Ohio Advisory Op. 96-9, at 5 (1996) (emphasis
added).
State courts have reached similar conclusions -- that lawyers have a
heightened duty of disclosure when they include a provision in a retain er
agreement requiring clients to arbitrate future disputes, including malpractice
claims against the law firm. In Snow v. Bernstein, Shur, Sawyer & Nelson,
P.A., the Supreme Judicial Court of Maine held that an attorney’s fiduciary
relationship with a client mandates informed consent when the attorney seeks
“to enforce a contractual provision that prospectively requires a client to
submit malpractice claims against the law firm to arbitration.” 176 A.3d 729,
736 (Me. 2017). The Maine high court set forth a “heightened standard” for an
attorney to secure the client’s informed consent: “the attorney must effectively
communicate to the client that malpractice claims are covered under the
11
Now referred to as the Ohio Board of Professional Conduct, each member
of this “quasi-judicial body” is appointed by the Ohio Supreme Court. See
https://www.bpc.ohio.gov/copy-of-about-the-board.
30
agreement to arbitrate”; “explain, or ensure that the client understands, the
differences between the arbitral forum and the judicial forum, including the
absence of a jury” as well as “costs” and “appealability”; and “take into
account the particular client’s capacity to understand that information and
experience with the arbitration process, as these factors may affect both the
breadth of information and the amount of detail the attorney is obligated to
provide.” Id. at 736-37.
Similarly, the Louisiana Supreme Court has determined that a lawyer’s
fiduciary duty of loyalty and candor to a client requires a full explanation “to
the client [of] the possible consequences of entering into an arbitration clause,
including the legal rights the client gives up by agreeing to binding arbitration”
of future disputes. Hodges v. Reasonover, 103 So. 3d 1069, 1077 (La. 2012).
The lawyer’s duty of loyalty, the Court explained, “forbids a lawyer from
taking any action in his own self-interest which would have an adverse effect
on the client.” Ibid. To ensure that the client’s consent to a binding
arbitration clause in a retainer agreement is “truly ‘informed,’” ibid., at a
minimum, “an attorney must make full and complete disclosure of the potential
effects of an arbitration clause, including the waiver of a jury trial, the waiver
of the right to appeal, the waiver of broad discovery rights, and the possible
high upfront costs of arbitration,” id. at 1078. In addition, the retainer
31
agreement “must explicitly list the types of disputes covered by the arbitration
clause, e.g., legal malpractice, and make clear that the client retains the right to
lodge a disciplinary complaint.” Ibid. Last, the attorney must advise the client
that he “has the opportunity to speak with independent counsel before signing
the contract.” Id. at 1077; see also Castillo v. Arrieta, 368 P.3d 1249, 1257
(N.M. Ct. App. 2016) (holding that if a retainer agreement includes a provision
requiring the arbitration of a future legal malpractice claim, to secure informed
consent, the attorney must provide “any explanation reasonably necessary to
inform the client . . . of the material advantages and disadvantages of
[arbitration]” and discuss with the client “options and alternatives”).
D.
Advisory ethics opinions and judicial opinions in many jurisdictions
make clear that, when a retainer agreement includes an arbitration provision,
attorneys acting in their fiduciary relationship with a client, at the very least,
must explain the advantages and disadvantages of arbitrating a future fee
dispute or malpractice action. That is so because of the substantial differences
between adjudicating a dispute in a judicial and arbitral forum. We cannot
presume that a person untrained and inexperienced in legal practices and
procedures would have a familiarity with those differences. The examples
32
below highlight some of the differences between the arbitral JAMS forum in
this case and a judicial forum.
In the arbitral forum, a single arbitrator presides over the disputed
issues. In a judicial forum, Delaney could bring his malpractice lawsuit in
Superior Court in the county where he resides or where Sills maintains its
offices, R. 4:3-2(a)(3), and have a jury representing a cross-section of the
county’s citizens sit in judgment of the case.
In the arbitral forum, the arbitrator’s decision is final and binding with
no right of appeal. In the judicial forum, the non-prevailing party has a right
of appeal to challenge any errors made in the trial court proceedings. See R.
2:2.
In the arbitral forum, the arbitration proceedings are conducted privately,
and those proceedings and the award of any damages must be kept
confidential. In a judicial forum, the proceedings are held in an open
courtroom, and the jury’s verdict and award of any damages is a matter of
public record. If there is a settlement of the malpractice claim, then any
confidentiality provision would be a negotiated term of the settlement.
In this arbitral forum, there is no right to broad discovery. For example,
the JAMS rules limit each party to “one deposition of an opposing Party or of
one individual under the control of the opposing Party” and the “necessity of
33
additional depositions” is determined by the arbitrator. In the judicial forum,
our Court Rules provide for broad discovery with no set limitation on the
number of depositions a party may take. 12 See R. 4:14; R. 4:15.
In the arbitral forum, under JAMS procedures, both the party initiating
arbitration and the party filing a counterclaim must pay a $1,500 filing fee, and
the parties are jointly and severally liable for the costs of arbitration and the
arbitrator’s compensation. Notably, the attorney-client fee dispute submitted
to arbitration has already incurred $34,000 in JAMS costs, which include
payments to the arbitrator -- and a hearing has yet to be held. 13 In the judicial
forum, a plaintiff filing a civil complaint must pay a filing fee of $250, and a
party filing a counterclaim must pay a filing fee of $175. See R. 1:43. Neither
party pays for the services of the judge.
In the arbitral forum here, the Sills retainer agreement provides that the
arbitrator “will not award punitive damages to either party” and that the parties
12
Although many arbitrations are conducted with only limited discovery,
some arbitral settings allow for broader discovery. We also do not suggest that
a court is not authorized to limit depositions in appropriate circumstances.
13
Because of Delaney’s challenge to the arbitration, Sills has had to cover the
entirety of those fees.
34
“will each be deemed to have waived any right to such damages.” 14 In the
judicial forum, a prevailing plaintiff in a legal malpractice action may be
entitled to punitive damages. See Guatam v. De Luca, 215 N.J. Super. 388,
400 (App. Div. 1987).
In the arbitral forum here, the Sills retainer agreement allows the
arbitrator to render an award that may include imposing “the costs and
expenses of arbitration, reasonable attorneys’ fees and reasonable costs”
against the non-prevailing plaintiff/client in the malpractice action. In the
judicial forum, imposing reasonable attorneys’ fees against a non-prevailing
client in a non-frivolous malpractice action is not permissible under our court
rules or case law.15
14
That arbitral provision barring punitive damages in a legal malpractice
action evidently is contrary to substantive law. See, e.g., Osborne v. Keeney,
399 S.W.3d 1, 23 (Ky. 2012) (stating that punitive damages can be awarded in
a legal malpractice case against attorneys who have “acted with oppression,
fraud, or malice”); Ferguson v. Lieff, Cabraser, Heimann & Bernstein, 69 P.3d
965, 1053 n.3 (Cal. 2003) (same). See also RPC 1.8(h)(1); ABA Opinion at 3-
4. Delaney did not seek punitive damages in his complaint for legal
malpractice against defendants.
15
The general rule, known as the American Rule, “prohibits recovery of
attorneys’ fees ‘by the prevailing party against the losing party.’” In re Estate
of Folcher, 224 N.J. 496, 507 (2016) (quoting In re Estate of Stockdale, 196
N.J. 275, 307 (2008)). A number of exceptions to that rule are set forth by
court rule, see R. 4:42-9(a), state statutes, and case law. In the realm of legal
malpractice cases, a prevailing plaintiff in a legal malpractice action may
recover attorneys’ fees and costs. Saffer v. Willoughby, 143 N.J. 256, 272
35
Significantly, not all arbitration provisions are alike, and many have
features different from those in the Sills retainer agreement and may include
more liberal discovery. To be sure, arbitration can be an effective means of
resolving a dispute in a low cost, expeditious, and efficient manner. The
parties may be afforded the opportunity to choose a skilled and experienced
arbitrator in a specialized field to preside over and decide the dispute. And the
proceedings may be conducted in a forum out of the public glare.
We make no value judgment whether a judicial or arbitral forum is
superior in resolving a legal malpractice action, for that is a determination to
be made by the lawyer and client, after the lawyer explains to the client the
differences between the two forums so the client can make an informed
decision.
IV.
The arbitration provision at issue in this case -- on its face -- would be
enforceable if the Sills retainer agreement were a typical contract between a
commercial vendor and a customer. See Atalese, 219 N.J. at 444-45. In clear
and unambiguous language, the arbitration provision explains that Delaney “ is
(1996); see also Packard-Bamberger & Co., Inc. v. Collier, 167 N.J. 427(2001) (allowing a prevailing plaintiff to recover attorneys’ fees and costs in
an action against an attorney for intentional violation of fiduciary duties).
36
choosing to arbitrate disputes rather than have them resolved in a court of
law.” See id. at 447. But Delaney was not purchasing a telephone, a
refrigerator, or an automobile -- he was retaining the services of an attorney,
licensed to practice law in New Jersey and subject to the Rules of Professional
Conduct promulgated by this Court. As earlier discussed, a retainer agreement
is not an ordinary contract -- it must conform not only to the legal principles
governing contracts, but also to the ethical obligations imposed on attorneys
by the RPCs.
RPC 1.4(c)’s mandate that a lawyer “explain a matter to the extent
reasonably necessary to permit the client to make informed decisions regarding
the representation” applies to every provision of a retainer agreement, not just
an arbitration provision. Neither the FAA, 9 U.S.C. §§ 1 to 16, nor the NJAA,
N.J.S.A. 2A:23B-1 to -36, stands as an obstacle to the neutral enforcement of
the RPCs.
The FAA and “nearly identical” NJAA both “enunciate federal and state
policies favoring arbitration.” Atalese, 219 N.J. at 440 (citing AT&T Mobility
LLC v. Concepcion, 563 U.S. 333, 339 (2011)). The main thrust of the FAA,
as well as the NJAA, is to ensure that states “place arbitration agreements on
an equal footing with other contracts,” id. at 441 (quoting Concepcion, 563
U.S. at 339), and do “‘[not] subject an arbitration agreement to more
37
burdensome requirements than’ other contractual provisions,” ibid. (quoting
Leodori v. Cigna Corp., 175 N.J. 293, 302 (2003)). Under this scheme of
uncompromising neutrality, the FAA and NJAA grant courts the authority to
invalidate an arbitration provision “upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2; accord N.J.S.A.
2A:23B-6(a); see also Concepcion, 563 U.S. at 339; Martindale v. Sandvik,
Inc., 173 N.J. 76, 85 (2002). Our inquiry is twofold: “whether the agreement
to arbitrate all, or any portion, of a dispute is ‘the product of mutual assent, as
determined under customary principles of contract law,’” Flanzman v. Jenny
Craig, Inc., 244 N.J. 119, 137 (2020) (quoting Kernahan v. Home Warranty
Adm’r of Fla., Inc., 236 N.J. 301, 319 (2019)), and whether it satisfies “the
professional ethical standards governing the attorney-client relationship,”
Balducci, 240 N.J. at 592.
For example, in Balducci, we made clear that an attorney has a duty to
provide the client with needed information about the fee provisions in a
retainer agreement to allow the client to make an informed decision whether to
engage the attorney’s services. Id. at 601-04. Thus, “an attorney has an
obligation to provide the client with meaningful information about the
potential aggregate hourly fees and costs that may be incurred during the
course of the litigation so that the client may make an intelligent assessment
38
whether to retain the attorney and on what terms.” Id. at 603; see also Cohen,
146 N.J. at 157 (stating that to meet their fiduciary obligations to their clients,
lawyers “must explain at the outset the basis and rate of the fee” and “advise
the client of potential conflicts, the scope of representation, and the
implications of the agreement”).
When viewed through the lens of the RPCs, arbitration provisions are
not treated differently from other provisions in a retainer agreement.
Requiring attorneys to explain to a client the advantages and disadvantages of
arbitration so that the client can make an informed decision whether to
arbitrate a future fee dispute or legal malpractice claim against the firm does
not single out a retainer agreement’s arbitration provision for disparate
treatment and therefore does not run afoul of the FAA or NJAA. See Snow,
176 A.3d at 739; see also Hodges, 103 So. 3d at 1077.
V.
A.
We conclude that the professional and fiduciary obligation imposed on a
lawyer by RPC 1.4(c) -- to “explain a matter to the extent reasonably necessary
to permit the client to make informed decisions regarding the representation”
-- requires that the lawyer discuss with the client the basic advantages and
39
disadvantages of a provision in a retainer agreement that mandates the
arbitration of a future fee dispute or malpractice claim against the attorney.
We reach that conclusion for a number of reasons. Given the lawyer’s
fiduciary duties of loyalty and candor to the client, there should never be a
perception that a lawyer is exalting his own self-interest at the expense of the
client. The client comes to a lawyer for assistance in addressing a particular
issue -- such as representing the client in bringing or defending a claim, or in
purchasing a home or a business, or handling a matrimonial dispute involving
the custody of children and division of assets. The client is likely
concentrating on his legal situation or predicament and looking for help from
the attorney -- and not thinking that the lawyer may commit malpractice in
handling the case. The client is not likely anticipating a day when he may
have to do battle with the lawyer, who is retained to promote his interests and
protect his rights. See Jean Fleming Powers, Ethical Implications of Attorneys
Requiring Client to Submit Malpractice Claims to ADR, 38 S. Tex. L. Rev.
625, 647-48 (1997).
Yet, the insertion of an arbitration provision in a retainer agreement
indicates that the attorney has given thought to the prospect that the client may
be a future adversary and has selected the forum in which potential disputes,
whether about the attorney’s fees or services, will be resolved. Presumably,
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the attorney has concluded that an arbitral forum is in his best interests -- and
maybe in the best interests of the client as well -- if there is a later falling out.
But whether the client’s interests are best served by agreeing in advance to
submit a future malpractice claim to an arbitral forum will be a reasonably
debatable issue. We will not find universal agreement among members of the
bar that a client is better served arbitrating a malpractice claim as opposed to
submitting the case to our judicial system, which guarantees, among other
things, the right to broad discovery and the right to a jury trial. Not even a
shadow of a conflict of interest should be cast over the attorney-client
relationship at its inception. To dispel that shadow, lawyers should make the
necessary disclosures in a disinterested manner to allow clients to make an
informed decision, as required by the RPCs.
Consistent with ABA Formal Opinion 02-425, the weight of authority as
expressed in professional advisory opinions and judicial case law in other
jurisdictions, and this Court’s interpretation of its own RPCs, we hold that
attorneys who insert provisions in their retainer agreements to arbitrate future
fee disputes or legal malpractice claims must explain the advantages and
disadvantages of the arbitral and judicial forums. Attorneys can fulfill that
requirement in writing or orally -- or by both means.
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Attorneys may explain, 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.
Additionally, a lawyer who drafts a retainer agreement that channels any
future legal malpractice action into an arbitral forum must say so directly in
the written agreement. The client should not be left to discern the meaning of
language that is clothed in ambiguity.
In Snow, the Supreme Judicial Court of Maine found that, in context, a
retainer agreement’s language that “any other dispute that arises out of or
relates to this agreement or the services provided by the law firm shall also . . .
be subject to binding arbitration” was insufficient to place the client on notice
that a future malpractice action was within the scope of the agreement. 176
A.3d at 737. Here, the Sills retainer agreement states that “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), . . . will be submitted
to and finally determined by Arbitration” and “[a]ny disputes arising out of or
relating to this engagement agreement or the Firm’s engagement by you will
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be conducted pursuant to the JAMS/Endispute Arbitration Rules and
Procedures.”
We acknowledge that if this were an ordinary commercial contract, the
term “any dispute” is broad enough to encompass a dispute about whether the
attorney committed legal malpractice. But again, we emphasize that the
retainer agreement is not an ordinary contract and that the attorney has a
fiduciary duty to make clear the retainer agreement’s terms so that the meaning
of those terms is readily apparent to the client. See Balducci, 240 N.J. at 594
(“[C]lients rely on the integrity of their lawyers who fashion [retainer]
agreements, and . . . , as such, an agreement susceptible to two reasonable
interpretations should be construed in favor of the client.”). We can well
imagine that an attorney might not be eager to discuss legal malpractice at the
beginning of an attorney-client relationship, but if the retainer agreement
intends to cover that potential scenario, then the attorney must directly and
clearly address the subject.
B.
In this opinion, we have set forth the rudimentary requirements expected
of attorneys who include a provision in a retainer agreement that mandates the
arbitration of a future fee dispute or malpractice action. We do not pretend
that this opinion is or should be the last word on this subject. We believe that
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the issues raised here would benefit from further study and discussion. We
refer the issues raised in this opinion to the Advisory Committee on
Professional Ethics. The Committee may make recommendations to this Court
and propose further guidance on the scope of an attorney’s disclosure
requirements.
VI.
A.
We now address the relevant facts of the case before us.
Delaney came to the Sills law firm for representation in a commercial
lawsuit against his business partners. A Sills attorney presented him with a
four-page retainer agreement. The third page of the agreement contained an
arbitration provision, and the fourth page generally described some of the rules
governing arbitration and provided a hyperlink to thirty-three pages of JAMS
procedures. A hard copy of those procedures, which detailed the limitations
on pre-arbitration discovery and the inapplicability of the rules of evidence at
the arbitration proceeding, was not given to Delaney. The Sills attorney
advised Delaney to take his time reading the engagement letter and ask any
questions he had about it.
The Sills attorney did not explain to Delaney that, in the event of a
future malpractice action against the firm, the retainer agreement’s provisions
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barring an arbitrator from awarding punitive damages to the plaintiff and
allowing the arbitrator to award the costs and expenses of arbitration against
the plaintiff were unenforceable because RPC 1.8(h)(1) forbids a lawyer from
making “an agreement prospectively limiting the lawyer’s liability to a client
for malpractice.” 16 The Sills attorney did not explain the advantages and
disadvantages of arbitrating a malpractice action. He did not explain, for
example, that in the judicial forum Delaney would have access to broad
discovery, the right to a jury trial in an open courtroom, the right to speak
freely on the subject matter without confidentiality restrictions, and the right to
appeal an erroneous ruling. He did not explain that in a judicial forum
Delaney would not have to pay a high filing fee or for the services of the
judge.
We acknowledge that Delaney was a sophisticated businessman and not
unfamiliar to litigation, but we cannot ascribe to him the knowledge of
attorneys whose training and experience make them keenly aware of the fine
distinctions between an arbitral and judicial forum. To be sure, the detailed
arbitration provisions in the Sills retainer agreement easily meet the standard
16
Sills agreed at oral argument before this Court that the parts of the
arbitration provision at odds with RPC 1.8(h) were severable from the
agreement.
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for an arbitration provision in a typical commercial contract. But, as we have
repeatedly noted in this opinion, lawyers are held to a higher standard under
the RPCs in the fulfillment of their fiduciary obligations to their clients.
B.
The opinion we issue today is not a break with established precedent,
and the professional principles we apply to the unique facts of this case are not
foreign to our jurisprudence. Our ruling is foreshadowed by ABA Formal
Opinion 02-425 and opinions issued by courts and professional ethics
committees in many other jurisdictions that have addressed the issue.
Nevertheless, the retroactive application of our ruling today may not have been
reasonably anticipated and would disturb the settled expectations of many
lawyers throughout our state, who genuinely believed that an arbitration
provision that met the standards of such cases as Flanzman, Kernahan, and
Atalese would satisfy the requirements of our RPCs. Therefore, our holding
will apply prospectively from the day of the issuance of this opinion, with one
exception.
The general approach in our jurisprudence is that the plaintiff receives
the benefit of the rule established in the opinion -- even if it is a new rule --
because “to do otherwise would not only deprive the plaintiff of any benefit
resulting from her own efforts but would also make it less likely that, in the
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future, individuals will be willing to claim rights, not yet established, that they
believe are just.” See Narleski, 244 N.J. at 228-29 (quoting Kelly v. Gwinnell,
96 N.J. 538, 551 (1984)). In light of that recognized practice, it 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.
Because Delaney was not given an explanation of the advantages or
disadvantages of arbitration, we hold that the present malpractice action is not
subject to the arbitration provision of the Sills retainer agreement. Delaney
therefore must be allowed to proceed with this malpractice action in the Law
Division.
We realize that Sills did not have the benefit of the clarity of this
opinion in interpreting a lawyer’s professional obligation under RPC 1.4(c). In
reaching this holding, we do not find that Sills or its attorneys violated the
Rules of Professional Conduct, and we accept their representations that they
acted good faith.
VII.
We affirm and modify the judgment of the Appellate Division and
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remand to the Law Division for proceedings consistent with this opinion. 17
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA,
PATTERSON, FERNANDEZ-VINA, SOLOMON, and PIERRE-LOUIS join
in JUSTICE ALBIN’s opinion.
17
Delaney did not challenge the validity of submitting the fee dispute to
arbitration until a year after Sills invoked the arbitration provision. An issue
to be resolved on remand is whether the arbitration proceeding relating to the
fee dispute should be stayed pending the outcome of the malpractice action.
We offer no opinion on that subject.
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