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The formation of an attorney-client relationship is generally memorialized by the client's execution of an engagement letter drafted by the attorney. It is not uncommon for lawyers to present a proposed engagement letter to a prospective client, either by email or at an in-person meeting, with instructions that the client communicate any questions or concerns and, if not, to execute the engagement letter and provide any requested retainer. There is, to be sure, an inherent tension created by this arm's-length negotiation of a contract at the inception of the relationship, where attorney and client are each trying to protect interests that might diverge. That said, it is not standard practice for lawyers to explain the terms of an engagement letter absent specific questions or concerns being raised. Nor do lawyers typically encourage their potential clients to obtain independent legal advice before agreeing to the terms in the engagement letter. But that might be about to change in New Jersey thanks to the Appellate Division's unpublished opinion in Delaney v. Dickey, where the Appellate Division invalidated an arbitration provision in an engagement letter because the law firm did not sufficiently explain its ramifications to the client.

We urge the Supreme Court to grant the pending petition for certification and provide much needed guidance to the bar—on a going-forward basis—on how best to ensure that clients are adequately informed of the substance of an engagement letter. The Delaney decision calls into question whether and to what extent lawyers need to explain the terms of an engagement letter to their prospective clients, and whether lawyers must encourage prospective clients to obtain independent counsel before agreeing to the terms of engagement proposed by the lawyer.

The facts in Delaney were undisputed and provide useful context. Delaney is a former Wall Street equity trader and a felon, having served time in prison for securities fraud. He is also a sophisticated and litigious procurer of legal services, familiar with both complex legal matters and legal documents. Before retaining petitioner Sills Cummis & Gross to represent him in two pending lawsuits, he had been represented by another law firm to whom he owed and refused to pay $165,000.

The three-page Sills engagement letter at issue was standard and unremarkable, with one twist—it contained a provision requiring arbitration of future disputes, including those related to legal malpractice, in accordance with terms in a one-page attachment. The arbitration provision unambiguously informed Delaney, among other things, that (i) he was waiving his right to a jury trial, (ii) he would need to engage separate counsel for the arbitration, and (iii) the arbitrator's decision would be final and binding. The one-page attachment contained a waiver by both sides of punitive damages claims and required that the arbitration be conducted under the auspices of the dispute resolution firm JAMS. It also provided a link to the JAMS website and, in particular, its 33 pages of commercial rules that would govern the arbitration. Delaney executed the engagement letter in the presence of a Sills partner, who observed Delaney review the letter and offered to answer any questions. Delaney had none.

Immediately upon settling one of the two pending lawsuits, Delaney terminated Sills and refused to pay outstanding attorneys' fees in the amount of $440,000. Sills promptly sent Delaney a letter advising him of his right to request fee arbitration, which Delaney declined to do. Sills then started a JAMS arbitration to recover its unpaid attorneys' fees. The parties participated in the arbitration for over a year, and on the eve of trial Delaney filed a malpractice action in Superior Court. After the arbitrator advised that the malpractice filing would not delay the arbitration hearing, Delaney filed a separate lawsuit seeking a stay of the arbitration and a declaration that the arbitration provision in the engagement letter was unenforceable. The trial court ruled that the arbitration provision was valid and enforceable but stayed the arbitration pending appeal.

The Appellate Division reversed and determined that the arbitration provision was unenforceable because it violated, most significantly, RPC 1.4 (c), which requires a lawyer to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." In particular, the panel determined that the 33 pages of JAMS rules had to be physically presented to Delaney rather than incorporated by reference to a link in the engagement letter. The panel also suggested that Sills violated RPC 1.4 (c) by failing to explain the JAMS rules to Delaney and failing, more generally, to explain the terms of the engagement letter. Even though no court in our state has ever imposed an ethical requirement that terms of an engagement letter must be explained beyond their plain terms or that documents referred to in an engagement letter must be physically presented and explained rather than incorporated by direct electronic link, the panel applied its decision retroactively.

The Appellate Division decision raises significant concerns and underscores the potential divergence of interest when attorney and client are negotiating the terms of engagement. Should lawyers be ethically required to explain every term of an engagement letter? Or only some terms? If only some, which ones? Should arbitration provisions in retention agreements be enforceable and, if so, with or without explanation or an invitation to the client to retain independent counsel? Should lawyers have a right to have malpractice claims adjudicated in an arbitration? How, if at all, does that benefit the client and, if it doesn't, is it an ethical violation if a lawyer still includes such a provision in an engagement letter? Should lawyers be permitted to include a waiver of punitive damages in an engagement letter? Should the inclusion of such a provision trigger the need for the client to obtain independent counsel? Do rules referred to in an engagement letter need to be physically presented to and explained to clients? How thorough of an explanation is required? What if the engagement letter has a forum selection clause or choice of law provision? Do the rules of that forum or ways in which the laws in other jurisdictions differ need to be provided and explained for a lawyer to meet his or her ethical obligations? Are lawyers better off simply not referring to rules or other documents in their engagement letters? Those questions and more, provoked by the Appellate Division's decision, need to be answered. Over time, and after reflection, we expect to comment substantively on the issues raised. Our overriding view, however, is that the bar needs guidance and clarification from the Supreme Court on the rules governing the formation of the attorney-client relationship.

As the above makes clear, this is fairly uncharted territory. Neither our rules of ethics nor our jurisprudence adequately inform lawyers of their obligations, or the boundary separating fair from unfair, when establishing the terms of a representation. It also bears mention that given Delaney's repeated refusal to pay legal fees due and owing and his participation in the underlying arbitration until the eve of trial, his action to stay the arbitration and seek a declaration—years after executing the engagement letter—that the arbitration agreement was unenforceable reeks of opportunism. Under the circumstances, we believe that retroactive application of the panel's decision would be grossly unfair.

Supreme Court intervention is needed to address the issues raised by the opinion below. Especially since the Appellate Division decision, in effect, imposed new requirements on lawyers when negotiating engagement letters, we hope that the Supreme Court will ultimately refer the matter to the Professional Responsibility Rules Committee to analyze and make recommendations to the court on how, if at all, the RPCs should be amended, on a prospective basis, to accommodate the complicated issues that arise during the formation of the attorney-client relationship.

Editorial Board Vice-Chairman James Hirschhorn and member Joseph Buckley recused from this editorial.