Greenbaum, Rowe, Smith & Davis LLP
In This Issue:
The Entire Controversy Doctrine
Until recently, the entire controversy doctrine ("ECD") in New Jersey required that all claims and parties relating to a single transaction or controversy be joined in a single legal action to ensure that all aspects of a legal dispute were resolved in one lawsuit. The goals of the ECD are obvious: the avoidance of duplicative litigation, the elimination of delay, and the promotion of fundamental fairness. While in theory the ECD appears to be a simple and admirable legal doctrine -- designed to resolve all issues at one time -- its application has wreaked havoc on both clients and attorneys and has often resulted in more rather than less litigation.
The difficulty created by the ECD stems from the effect it has on claims or parties that are not joined in an initial action. While aimed at preventing parties from selectively omitting certain claims or parties from an action for strategic or other reasons, it has been applied equally to preclude the successive litigation of claims or against parties that were omitted unintentionally or due to legitimate concerns that the assertion of a particular claim or litigation against a particular party was premature at the time of the original action.
Circle Chevrolet v. Giordano, Halleran & Ciesla
A prime example of the problem was the case of Circle Chevrolet v. Giordano, Halleran & Ciesla. In that 1995 ruling, the New Jersey Supreme Court applied the ECD in the context of a legal malpractice claim. The Court ruled that the ECD barred a subsequent legal malpractice suit in light of the client's failure to assert the malpractice claim against its lawyer in an action against a landlord regarding the correct rental increase calculation. The client's malpractice claim was that its lawyer had been negligent in determining and reviewing the client's rent increases.
The severe practical result of such use of the ECD put clients at war with their lawyers. Clients who wished to preserve the right to bring a malpractice suit against his or her attorney for services relating to a transaction that resulted in litigation had to sue their attorney in the lawsuit concerning that transaction. The net effect of this requirement was that, once a claim for a potential malpractice suit arose, a client was required to file a malpractice claim against his attorney -- often the same attorney who was representing him in the underlying action -- thus, forcing the client to either fire his lawyer in midstream or forever forgo his malpractice claim. In addition, the decision as to whether to bring the malpractice claim had to be made by the client prior to resolution of the underlying suit, necessitating the institution of a malpractice action without the benefit of knowing the extent of the damage, if any, from the potential malpractice. The untenable position in which both the client and the attorney were placed by this requirement caused an outcry from members of the bar.
Olds v. Donnelly
This untoward result led the New Jersey Supreme Court three years later to re-evaluate and reverse its previous position. In Olds v. Donnelly, the Court, "aware of the criticism of Circle Chevrolet's expansion of the entire controversy doctrine to attorney-malpractice actions," noted that "[c]andor compels that we acknowledge" that application of the Circle Chevrolet rule "has not fulfilled our expectations." After further consideration, the Court found that the risk of the disclosure of attorney-client confidences and the adverse effect on attorney-client relationships outweighed any benefit achieved from requiring a client to assert a legal malpractice claim in the pending lawsuit. Thus, the Court decided to exempt all legal malpractice actions from the ECD.
Although the New Jersey Supreme Court in Olds v. Donnelly declined to reconsider the application of the ECD to claims other than for legal malpractice, it did recognize the need for a general reevaluation of the doctrine. As a result, the Court directed the Entire Controversy Doctrine Subcommittee of the Committee on Civil Practice to examine all aspects of the ECD.
ECD Disclosure Requirement
This reevaluation resulted in the most recent change to New Jersey Court Rule 4:5-1, effective September 1, 1998, which has undercut the ECD's requirement to join all parties against whom there are potential claims. The amended rule requires that each party to a lawsuit disclose the names of any nonparty whose joinder in the lawsuit is required in order to effect complete relief or who is potentially liable to any party on the basis of the same transactional facts. This disclosure requirement is a continuing obligation on the parties throughout the litigation. The rule sets forth various sanctions for failure to comply with the disclosure requirements including imposition of litigation costs for unnecessary litigation stemming from non-disclosure and the possible dismissal of the successive action against a party who was not disclosed. The rule further provides that "[a] successive action shall not, however, be dismissed for failure of compliance with this rule unless the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action." Thus, the party joinder requirement has been transformed into a disclosure requirement and the sanction for failure to comply may, but will not necessarily, lead to preclusion of the claim.
Conclusion
The ECD, while diminished, is not yet dead. The circumstances under which preclusion of a claim will be appropriate are not yet known and, undoubtedly, will be the subject of future litigation. We must await new cases interpreting when the failure to disclose a required party is "inexcusable," and when the non-disclosed party's rights are deemed to be so "substantially prejudiced," that preclusion of the claim is warranted.