I wanted to pass along to readers a recent decision. In this case, from New Jersey, the court invalidated an arbitration clause for violating generally-applicable ethics rules. The most common defense against arbitration agreements I tend to see involves unconscionability, and this case is notable for relying on ethics principles.
In connection with a legal malpractice claim and fee dispute, the appellate division of the New Jersey Superior Court recently held that an arbitration clause in an attorney-client retainer agreement was not enforceable due to a violation of the state’s ethical rules of professional conduct. The court found that the retainer agreement between an attorney and client failed to comply with the lawyer’s ethical duty of communication. For example, the retainer agreement did not inform the client of the possible fees or expenses associated with arbitration. Also, the attorney did not provide the client with a copy of the arbitral rules (such as a rule limiting the claimant to one deposition), which could impact the client’s ability to vindicate substantive rights. As a result, the agreement violated the attorney’s ethical duty of communication. Furthermore, the agreement limited the arbitrator’s ability to award punitive damages, and such a limit also violated the state’s ethics rules, which prohibit an attorney from prospectively limiting liability for malpractice.
The duty to communicate addressed in this case arises from the state’s ethics code governing attorneys. However, similar duties to communicate can be found in the fiduciary laws of many states in different contexts. By analogy and relying on this new case, perhaps a court can invalidate arbitration clauses in connection with a fiduciary relationship if there has been a failure to clearly communicate the significance of the arbitration clause.
The case name is Delaney v. Dickey, No. A-1726-17T (click here for a copy of the decision).
Also, with the court finding that the attorney violated ethics rules, I believe the state bar can discipline the attorney. I recently published an article exploring how state bars can discipline attorneys in connection with the drafting of arbitration clauses, The Failure of Legal Ethics to Address the Abuses of Forced Arbitration, 24 Harv. Negot. L. Rev. 127 (2019) (click here for a link to the article).