CSG Law Alert: Law Firm’s Arbitration Clause Contained in a Retainer Agreement is Unenforceable as it Violates RPCs

The Appellate Division recently ruled that a retainer agreement which contained a mandatory arbitration clause, for both fee disputes and legal malpractice claims, is unenforceable against the firm’s former client, under the circumstances. Delaney v. Trent S. Dickey and Sills Cummis & Gross, PC, Docket No. A-1726-17T4, decided August 23, 2019.

Appellant Delaney sought the services of Sills in a business dispute with limited liability company partners. He was apparently dissatisfied with his original attorney and retained Sills. He signed a three-page retainer agreement which briefly summarized the scope of the representation.

The retainer agreement stated in the last paragraph that disputes between the client and the firm would be resolved through Arbitration “in accordance with the provisions set forth in Attachment 1 to this retainer letter.” The thirty-three-page attachment (JAMS rules) was not provided to the client.

An attorney at Sills stated he provided the client with the Agreement and watched him sign it, and that the client (who was a sophisticated businessman), did not ask any questions.

The client stated that the attorney did not explain the agreement and did not explain the arbitration process outlined in the attachment which had not been given to him. The client stated if he had been told the costs of arbitration would greatly exceed the cost of filing in Superior Court and that fees and costs could be shifted against him, he never would have signed the agreement.

The trial court held the retainer agreement was enforceable, both as to the fee and the related malpractice action.

The Appellate Division reversed the trial court and held that the terms of an Agreement that violate the RPCs are unenforceable. Specifically, the agreement and conduct surrounding the signing violated RPC 1.4(c), since the matter in question was not explained to the client to the extent necessary “to permit the client to make informed decisions regarding the representation”. Specifically, the client was not told an estimate of the costs associated with arbitration, since the JAMS material was not provided.

Additionally, the JAMS rules limit substantive discovery, another fact not revealed or explained to the client. Finally, the Court held that the retainer agreement violated RPC 1.8(h)(1), which prohibits a lawyer from making an agreement with a client to prospectively limit the client from filing a legal malpractice claim.

The Appellate Division described its ruling as narrow: when a firm provides a retainer agreement to a client but omits the attached terms and does not explain them to a client, it runs afoul of the RPCs and the agreement is void.

Firms should review their retainer agreements and procedures for explaining terms to a prospective client, including the possible need for suggesting independent counsel to review terms for the client.