Category Archives: Arbitration

Trends in Arbitration Agreements

Trends in arbitration agreementsThe New Jersey Supreme Court in late November 2019 heard oral argument in Flanzman v. Jenny Craig, Inc., 456 N.J. Super. 613 (App. Div. 2018), cert. granted, 237 N.J. 310 (2019), in which the Appellate Division boldly refused to enforce arbitration agreements that fail to identify a specific “arbitral forum.” At least one Justice hinted during the argument that Flanzman may have taken Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 447 (2014) – the Supreme Court’s landmark decision requiring arbitration agreements to waive unambiguously the parties’ “time-honored right to sue” in court – to an unintended extreme.

Atalese focused on the need for arbitration provisions to reflect, through unequivocal language, the parties’ understanding of the rights they give up by agreeing to arbitration. Id. at 443-45. Flanzman, by contrast, held they must also demonstrate they understand the process that will replace those rights. According to the Appellate Division, only a mutual assent to a specific “arbitral forum” – which it defined as the “mechanism” or “setting” for arbitration – reflects “a meeting of the minds about what rights the parties gave up and what rights they received.” 456 N.J. Super. at 624. Justice Patterson, noting this foundational gap in Flanzman’s premise, remarked, “Atalese is about what you’re giving up.”

In fact, Flanzman rested not so much on Atalese as on the Appellate Division’s decision in Kleine v. Emeritus at Emerson, 445 N.J. Super. 545 (App. Div. 2016). In Kleine, the arbitration clause named the AAA, but when the suit arose the AAA no longer arbitrated claims of that type. The appellate court, finding no mutually agreed-on forum should the AAA prove unavailable, held the clause unenforceable for lack of mutual assent; it then proceeded to ground its holding in Atalese: “As Atalese instructs, the party . . . must be able to understand – from clear and unambiguous language – both the rights that have been waived and the rights that have taken their place.” Id. at 552-53. But Atalese spoke only of the waived rights; it said nothing about an understanding of the rights that will take their place.

As for how to adequately show the parties’ mutual understanding, Flanzman stressed the need to identify an arbitral forum. According to Flanzman, different sets of arbitral rules – for example, those of the AAA and JAMS – can mean different substantive and procedural rights for the parties. Flanzman, 456 N.J. Super. at 626-27. But the significance of that identification was not obvious to the Court. “How will knowing the name of the arbitrator assist your client in knowing the rules of the game?” Justice Albin asked. Flanzman itself conceded that parties, instead of actually naming a forum, may agree to decide later on a forum when the need arises, or to each select an arbitrator who would, in turn, select a third. Id. at 629. However, the court did not explain how such a broad provision would inform the parties of their rights in the arbitral process. Nor did it say how much detail an arbitration clause must contain, insisting only that parties “generally address in some fashion what rights replace those that have been waived.” Id. at 626. “The question is, what is essential?” Justice LaVecchia asked. In reply, respondent’s counsel tried to direct the Court’s focus towards Flanzman’s larger point: “How can you waive your right to a jury trial if you have absolutely zero information?”

The Justices’ comments and questions may have shown a reluctance to broaden Atalese, itself a bold decision that stopped just short of enforcing arbitration agreements more narrowly than other contracts, which the Federal Arbitration Act forbids. Interestingly, in a 2019 unpublished decision, the Appellate Division declined an opportunity to limit Atalese to consumer and employment agreements. The court explained that Atalese’s central concern – that waiver of the right to judicial resolution must be clear and unambiguous – applies to sophisticated parties, too. See Itzhakov v. Segal, No. A-2619-17T4, 2019 N.J. Super. Unpub. LEXIS 1829, *10 (App. Div. Aug. 28, 2019). That decision was in keeping with Atalese, which continues to control New Jersey courts’ enforcement of arbitration agreements. Nonetheless, the Court may well decide, under the Federal Arbitration Act and established principles of contract law, that it has gone far enough in requiring greater specificity in arbitration provisions.

Daniel Epstein Litigation Attorney
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Daniel C. Epstein is a member of Flaster Greenberg’s Litigation Department, where he represents corporate and individual clients in all aspects of litigation.

New Jersey Court Sets Limits For Enforcement Of Mandatory Arbitration Clause

 

Companies considering including a provision requiring arbitration of disputes in their contracts can learn valuable lessons from a recent New Jersey appellate court decision.  The court’s opinion highlights the pitfalls of relying upon an imprecisely drafted and/or one-sided arbitration clause, especially in a consumer contract.  Despite the continuing rise in popularity of arbitration clauses and the strong preference for arbitration under both federal and New Jersey law, the case reminds us that not every arbitration agreement will be enforced.

Background.

Analysis of early impact of the revised federal rules of discroty.

In Dvorak v. AW Development, LLC, (N.J. App. Div. January 13, 2016), homeowners contracted with AW Development to construct and install a two-bedroom prefab ranch home after their previous home had been destroyed by Superstorm Sandy.  Disputes arose about whether the house was timely delivered.  Despite a provision in the contract seemingly requiring non-binding arbitration, the homeowners filed a lawsuit in New Jersey state court alleging breach of contract and other causes of action.  The trial court granted AW’s motion to dismiss the complaint on the basis of the non-binding arbitration provision, and the homeowners appealed.

The Contract’s Arbitration Clause.

The arbitration clause in the contract said, in relevant part:

Any claim arising out of or related to this Agreement shall be subject to non-binding arbitration . . . in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect. . . .  [T]his paragraph does not preclude [AW Development] from seeking prejudgment remedies and/or emergency relief from a court of equity or other court of competent jurisdiction.  Buyer may not seek such prejudgment/emergent relief under any circumstances.  EACH PARTY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR OTHERWISE RELATING TO THE RELATIONSHIP OF THE PARTIES, WHETHER IN CONTRACT, TORT OR OTHERWISE.  (emphasis in original)

The Court’s Decision.  

  1. Imprecise Contract Language.

An arbitration clause will be enforced only when it is the product of mutual assent and clearly explains to the parties that they are waiving their right to go to court.  If arbitration is intended to be a mandatory condition that must be satisfied before a lawsuit can be filed, the contract must clearly say so.  Because this contract did not clearly state that arbitration was a condition precedent to filing a lawsuit, the court ruled that it was not.  In the court’s opinion, the statement in the contract that claims “shall be subject to non-binding arbitration,” does not expressly or impliedly prohibit a party from filing suit or empower another party to force the dispute into arbitration after a lawsuit has been filed; it merely says the parties agree to non-binding arbitration if one of them demands it.

Next, the court took issue with the fact that the jury waiver provision had a broader reach than the arbitration clause.  The latter applied only to “claims arising out of or related to this Agreement,” whereas the jury waiver provision applied additionally to claims “relating to the relationship of the parties, whether in contract, tort or otherwise.”  Certain claims, therefore, could be subject to the jury waiver but not the non-binding arbitration clause.  That inconsistency also led the court to conclude that the arbitration provision was unenforceable.

Finally, with regard to the precision of the non-binding arbitration clause, the court found fault with its reference to “the Construction Industry Arbitration Rules of the [AAA],” because those rules do not include a provision for non-binding arbitration.  For all these reasons involving imprecise drafting, the court found that the arbitration clause did not clearly and unambiguously require the parties to arbitrate their claims before filing a lawsuit.

  1. Unconscionable Contract.

Even if this arbitration clause had been precisely drafted to bar a lawsuit, it would have been unenforceable, nonetheless, because it is an unconscionable contract of adhesion.  A contract of adhesion is one drafted solely by a party with superior bargaining power and imposed on the other party as a “take it or leave it” proposition.  Although calling a contract one of adhesion sounds pejorative, such contracts are, in fact, enforceable unless they are unconscionable in content.  Here, the court found the contract was so unfairly one-sided that it was unenforceable.  Among other reasons, the contract was objectionable because it allowed AW, but not the homeowners, to cure defects, and because it allowed AW, but not the homeowners, to seek recovery of consequential damages.  Such provisions, the court held, reflect the unequal bargaining power of the parties.  The most egregious discrepancy was in the arbitration provision itself.  That clause gave AW, but not the homeowners, the right to seek injunctive and emergent relief from a court without regard to the arbitration requirement.  As the court put it, “[t]his grossly imbalanced approach to the availability of interlocutory or emergent relief constitutes harsh and unfair one-sided terms that do not deserve judicial enforcement.”

WHAT SHOULD CONTRACTING PARTIES DO TO ASSURE THAT THEIR ARBITRATION AGREEMENTS ARE ENFORCED?

  • First, define all contract terms and reference arbitration rules and procedures that actually exist. If your contract calls, for example, for arbitration under the rules of the American Arbitration Association, make sure that the AAA rules and procedures provide for the type of arbitration your contract mandates.
  • Second, your contract must state that the parties are waiving their legal right to go to court and have a jury trial and are agreeing instead to refer their disputes to arbitration. If the intent is to make arbitration non-binding, but a prerequisite to filing suit, the agreement must expressly state those terms.
  • Third, be fair in allocating rights and privileges under the contract and resist the temptation to give the company, but not the other party, a procedural or substantive advantage unless there is an objective rationale for doing so. Courts do not look kindly on contracts that provide for disparate treatment of the parties without justification, and any attempt to use superior bargaining power to gain an unfair advantage over an adversary might backfire.
  • The same dynamics at play in this case involving a consumer contract are frequently found in employment agreements, which are also prone to contracts of adhesion. An employer that chooses to implement mandatory arbitration agreements with its employees should ensure that the contracts are even-handed and comply with other legal requirements the courts have imposed on employment arbitration agreements.

Philip Kirchner is a member of Flaster/Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

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