In a lengthy December 2020 ruling, the New Jersey Supreme Court refused to enforce an arbitration agreement in a lawsuit filed against a major New Jersey law firm by a recognized former client as a “sophisticated businessman … no stranger to litigation.” ” Delaney v. Dickey, 242 A.3d 257 (NJ 2020).
The court ruled that “… lawyers who include provisions in their service contracts to arbitrate [either] future disputes regarding fees or malpractice claims should explain the pros and cons of the arbitration forum.[ ]; ”And such an explanation must specifically compare the characteristics of arbitration to those of the “judicial” forum. Among other authorities, the court relied on Formal Notice ABA 02-425 (“Retention Agreement Requiring Arbitration of Disputes Relating to Costs and Malpractice Claims”), a handful of ethical opinions similarly reasoned national and local governments, including ABC Informal Ethics Op. 99-20 (1999) – and two-state State Supreme Court decisions (Maine (2017) and Louisiana (2012)). The court also noted rule 1.4 (b) of the Rules of Professional Conduct which requires a lawyer “to explain a matter to the extent reasonably necessary to enable the client to make informed decisions” about “representation”.
The Court reached its conclusion notwithstanding its recognition that the impugned provision of the arbitration – which expressly warned the client of his obligation to share the arbitrator’s fees, as well as his waiver of his jury right, his right to a public trial, as well as his right to recover punitive damages – was both “detailed” and “easily [met] the standard for a “binding” arbitration clause in a standard commercial contract.
The court did not appear to adopt the additional requirement, approved in the Pennsylvania and Virginia ethics opinions, that a law firm’s arbitration provision must also include the directive that the client seeks an independent lawyer; or the requirement, mandated in Michigan Ethics Op. RI-257 (1996), that the arbitrary provision will not be enforceable at all unless the client Is first “get[ ] independent advice “before signing the agreement.
In ABC Informal Ethics Op. 99-20, the CBA Ethics Committee approved binding arbitration agreements between lawyers with clients, but with reservations. Consistent with the New Jersey Supreme Court’s analysis, the committee warned that if the law firm’s arbitration provision includes a “favorable opinion of arbitration,” the firm should also ensure that the agreement gives equal treatment to disadvantages arbitration. Failure to do so risks “leaving[ing] the client with the impression that there are no disadvantages to compulsory arbitration clauses.
Risk management lessons
If a law firm chooses to include in its client engagement agreements a dispute resolution provision requiring arbitration, it may find it unenforceable unless it accompanies the agreement with certain disclosures to the client. . The most important disclosure will be to alert the client – before signing the engagement agreement – of the two benefits and the disadvantages arbitration presented to the client. As the New Jersey court noted, the inconveniences identified to the client should include, at a minimum, lack of jury duty, lack of discovery, and potential costs.