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The New Jersey courts are tackling the issue of whether lawyers can write arbitration clauses into retainer agreements, and, if so, what kind of warning bells they must throw in. Last June, Monmouth County Superior Court Judge Clarkson Fisher Jr. enforced such a clause, sending a dispute over $115,000 in fees to binding arbitration. On appeal, the client is arguing that the clause violates ethics rules against retainer agreements that induce clients to unknowingly waive rights. The fight has spilled over into another venue. The client, represented by Fairfield, N.J., malpractice maven Hilton Stein, has filed a professional negligence suit. The lawyer, Frank Araps of North Brunswick, N.J., once again is invoking the arbitration clause in the retainer agreement, saying the client is barred from suing him. The issue is likely to end up before the New Jersey Supreme Court, and Stein says a victory by Araps would send this signal to drafters of retainer agreements: Put in a boilerplate arbitration clause as a poison pill against malpractice suits. “They would welcome this with open arms,” Stein says. “If the clause is valid, all malpractice claims would end up in arbitration.” For now, few lawyers appear to be using such clauses. Stein, who has been on both sides of malpractice litigation for 25 years, says he has never seen one. Araps’ lawyer, Michael Canning, says, “I suspect it’s not a common practice.” Susan Jacobs, marketing director of All-State Legal in Cranford, N.J., says none of the tailored, standard, retainer agreements the firm markets to New Jersey lawyers includes such a clause. At issue in the Appellate Division fee fight, Kamaratos v. Palias, A-00201-01T2, and the malpractice suit, Kamaratos v. Araps, MON-L-116-02, is the legality of Araps’ retainer agreement language, which is similar to arbitration clauses in commercial contracts. Do these clauses, as Stein argues, usurp the New Jersey Supreme Court’s authority to regulate legal fees and impose an impermissible prospective limitation on a lawyer’s liability to a client? Or do they reflect the growing, commendable trend toward arbitration, a process that doesn’t deprive clients of their rights? That’s the view of Canning, a partner in Middletown, N.J.’s Giordano, Halleran & Ciesla. The client, Gus Kamaratos of Ocean Township, N.J., hired Araps five years ago to represent him in a financial dispute with another shareholder in a closely held plumbing and construction corporation. In the Feb. 26, 1997, retainer agreement that Araps drafted, Kamaratos pledged to pay the firm rates of up to $250 per hour and he paid a $5,000 advance. In return, Araps agreed to negotiate a settlement and litigate if necessary. The agreement also said, “any controversy and/or dispute between the Law Firm and You regarding Fees or any controversy, claim, dispute or other matter in question arising out or relating to this Agreement, or the breach thereof, shall be resolved by binding arbitration between the parties.” The clause went on to say that the arbitration would be governed by the Commercial Industry Arbitration Rules of the American Arbitration Association. It also outlined the notice provisions and concluded that any award by an arbitrator would be final. Araps’ job turned out to be difficult and nasty. Complicated litigation ensued, not just between the warring shareholders — who are cousins — but with other construction companies. Finally, a partial settlement was reached before Judge Fisher. But with other parts of the litigation continuing and with some of his bills unpaid, Araps bowed out. Collection efforts failed and eventually he filed a lien seeking $115,000 in unpaid bills, and demanded arbitration under the clause. Last June, Fisher issued an order enforcing the clause. In an opinion, Fisher noted that when the fee dispute arose, Kamaratos demanded fee arbitration under state court rules familiar to vast numbers of practitioners, or at least the 1,500 who end up before panels each year. The rules require lawyers seeking payment to inform clients that they have the right to elect arbitration rather than be sued, and Kamaratos chose that option. But the Middlesex County Fee Arbitration Committee declined to take the case, exercising its right to opt out of disputes in which more than $100,000 is at stake. Fisher reasoned that Kamaratos, having chosen arbitration provided by the court system, albeit a choice that was aborted, was estopped from arguing that enforcement of the arbitration clause in the retainer agreement violated his rights. Stein, hired after Fisher’s ruling, is making a more elaborate pitch in the Appellate Division. He argues that arbitration clauses violate rules against retainer agreements that unreasonably waive the client’s rights. At the very least, the clause should have included language that made clear that the client was aware that binding arbitration curtailed his rights to have disputes resolved in court. For an analogy, Stein cites Garfinkel v. Morristown Obstetrics and Gynecology Associates, 168 N.J. 124 (2001), in which the court declined to enforce a standard arbitration clause in a labor contract, which would have barred a suit under the Law Against Discrimination. “The right to a trial by jury is a substantial right, and for a contractual clause depriving a citizen of access to the courts to be enforceable, the contractual language must specifically and clearly state the purpose,” Stein says. Even if the agreement is enforceable on the fee issue, it can’t be used to bar Kamaratos from filing a malpractice suit, Stein says. In a brief seeking the dismissal of the malpractice suit, Canning argues that the arbitration clause applies because it covers “any dispute” that might arise between the parties. For authority, he cites Daly v. Komline-Sanderson Engineering Corp., 40 N.J. 175 (1963), in which the New Jersey Supreme Court rejected an argument similar to Stein’s and declined to overturn an arbitration award in a fee dispute. “We think we should encourage arbitration of disputes between attorney and client,” the Court said in Daly. Stein notes that the 39-year-old case addressed the fee-arbitration issue, but it didn’t say anything about “compelling unwilling clients to arbitrate a legal malpractice claim.” Stein sought to supplement the record in the appeal of the fee fight to have the malpractice question decided as well, but the Appellate Division declined, so the malpractice case is a separate complaint. A hearing of Canning’s dismissal motion is scheduled for April 5; no date for appellate argument is set. Andrew Dwyer, a Newark, N.J., employment rights lawyer who won the anti-arbitration argument in Garfinkel, says he thinks Stein is on the right track. A retainer agreement can’t include a waiver of a client’s essential rights, he says. Dwyer says such clauses would erode the New Jersey Supreme Court’s authority to supervise the legal profession. “The courts have an obligation to police the legal profession and arbitration would, in effect, privatize that function,” Dwyer says. Robert Hille, a malpractice defense lawyer at Hackensack, N.J.’s Contant, Atkins, Rogers Fede and Hille, says on the other hand that there’s no reason why arbitration can’t provide a fair remedy for both sides. “If you are going to make an assumption that arbitration is a valuable tool, why can’t it be used for legal negligence?” he asks. He suggests that the anti-arbitration argument may have a questionable foundation. “Are they against arbitration because it is less fair or is it because they won’t be able to try to bamboozle a jury?” he asks. “It all gets back to what serves justice.”

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