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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)

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Posted in: Alternate Dispute Resolution, Attorneys Fees, Commercial, New Jersey