Arbitrating Legal Malpractice Claims: OK Clauses in Retainer Agreements
Kamaratos v. Palias, 360 N.J. Super. 76 (App. Div. 2003)
Student Contributor: Melissa Goldberg
NJ Underlying Commercial Action
Facts: The Plaintiff was a minority shareholder in a corporation and retained Defendant attorney to represent its interests in a dispute with the majority shareholder. The retainer agreement included an arbitration provision whereby Plaintiff agreed that any dispute regarding fees would be resolved by binding arbitration between the parties in accordance with the New Jersey Uniform Arbitration Act. As litigation continued, Plaintiff challenged bills submitted by the attorney. Defendant filed an attorney’s lien to recover the unpaid legal fees. Plaintiff filed for fee arbitration provided by NJ Court Rule 1:20A, but the fee arbitration committee declined to hear it given the amount in controversy (usually more than $100,000.) Plaintiff then argued that the retainer clause mandating arbitration of a fee dispute was against public policy and unenforceable.
Issue: Is a mandatory arbitration clause for fee disputes in a retainer agreement enforceable?
Ruling: Yes. The attorney-client relationship does not inherently mandate a blanket preclusion of the arbitration of fee disputes. However, in the instant case, the arbitration clause was not binding on the Plaintiff, since the court did not believe that the retainer agreements clearly articulated the consequences of an agreement to arbitrate a dispute over legal fees.
Lesson: In making a decision concerning the enforceability of arbitration clauses in retainer agreements, courts will consider:
- the circumstances in which the agreement was made;
- the parties’ past practices and agreements
- the extent to which the parties actually negotiated the agreement; and
- the client's level of sophistication or experience in retaining and compensating lawyers.
In addition, the prospective effect of an agreement to arbitrate must be clear to the client before it will be held to be binding upon him, e.g.,
- no right to a jury trial,
- no right to appeal,
- the binding nature of the arbitration award.
For an interesting student note see, L.A. Russo, The Consequences of Arbitrating a Legal Malpractice Claim: Rebuilding Faith in the Legal Profession, 35 Hofstra L.Rev. 327 (2006)
I found the student note on "The Consequences of Arbitrating a Legal Malpractice Claim: Rebuilding Faith in the Legal Profession" an interesting read. I think arbitration in lawyer malpractice claims could at times be more beneficial for both the lawyer and the client. As the note points out, there seems to be more downsides to litigation than to arbitration, such as it being a very costly process, can lead to the exposure of a client's confidential information and can elicit adverse publicity and ill will toward the legal profession in general. It seems that arbitration would be the preferred process for settling a lawyer malpractice claim since it is more private, and it also makes finality a reasonable expectation because it usually precludes any right to appeal or at least narrowly confines judicial review to a small set of circumstances.
Taking into account that this note was published in 2006, has there been a recent trend of including arbitration clauses in retainer agreements because of its advantages?
I had also done a brief of this case and found that it teaches an important lesson concerning arbitration agreements which is that courts will enforce arbitration clauses in retainer agreements where the agreement clearly states the consequences and effects of binding arbitration on the client and where the attorney establishes that the client clearly and unambiguously agreed to such arbitration. Also, I think the holding in this case demonstrates the dangers of using boilerplate language in agreements. I am unsure as to whether boilerplate was used in this case but I think it speaks to the point that if an attorney doesn't clearly state how arbitration is going to be handled and what arbitration will cover the attorney runs the risk that the agreement may not be binding.