A defendant’s attorney inserts handwritten paragraph 3A into an Agreement to Arbitrate that reads, “The parties reserve their rights to appeal the arbitrator’s award to the appellate division as if the matter was determined by the trial court.” Both sides initialed the inserted paragraph. Just one problem: to vacate an arbitration award, the matter must first be heard by a Superior Court trial level judge (and not Appellate Division).
So How does a Court handle an invalid clause in an Agreement to Arbitrate?
This is addressed in the recently published NJ Appellate Division case of Curran v. Curran (A-3968-15T2) Arbitration is a creation of contract and is regulated by the Federal and NJ Arbitration Act (which are largely similar). The underlying case is a divorce of a twenty-year marriage. The couple agreed to have an arbitrator decide any open matters, which was incorporated into a consent order entered by the court. The agreement/order also required the court to confirm the arbitration award unless good cause exists under the NJ Arbitration Act to modify or set aside the award. Generally speaking, arbitration awards are not subject to appeal except on very limited grounds (generally fraud or where parties were not allowed to fully present their case). The parties further signed a retainer agreement with the arbitrator that specified his award was final.
The First “Appeal”
The husband did not like the final award by the arbitrator and appealed to Law Division trial court. The wife asked the court to confirm the award.
In an oral decision following argument on November 13, 2015, the trial judge referred to the Act and concluded that there was no evidence presented to vacate the award under any of the grounds listed under N.J.S.A. 2A:23B-23. He also noted that there was no provision under the Act to permit a direct appeal from an arbitrator’s decision to the Appellate Division. In addressing paragraph 3A, the judge stated: “The parties are not permitted to create subject matter jurisdiction by agreement which I think they tried to do here. The authority of a court to hear and determine certain classes of cases rests solely with the Constitution and the Legislature.” He concluded that paragraph 3A was unenforceable.
The judge determined that: the parties intended something more than just a review of the grounds in [N.J.S.A. 2A:23B-28] and then passing this on to the Appellate Division, I think there’s room to find here that the parties intended a little more, more review than that. So with that in mind, I’m going to in essence act as the Appellate Division of the arbitrator in this case.
The judge then analyzes whether any grounds to vacate the award exists under the NJAA and finds there is not. He confirms the award.
Appealing the Appeal
Unhappy with the trial court’s determination, the Husband then appeals the case to Appellate Division. This time, he argues that since paragraph 3A is unenforceable so is the entire agreement to arbitrate.
First, the Appellate Court determined that the trial court was correct in stating that the parties cannot create an original jurisdiction to the Appellate Division. Then the court looked at the severability of paragraph 3A.
We must consider, then, whether the trial judge’s decision to sever paragraph 3A and enforce the remainder of the arbitration award was appropriate or whether the illegal clause voids the entire award. We “must determine whether the unenforceability of [the] provision renders the remainder of the contract unenforceable. In other words, should we sever the offending portion and enforce the remainder . . . ?” Jacob v.
Norris, 128 N.J. 10, 32 (1992). “If striking the illegal portion defeats the primary purpose of the contract, we must deem the entire contract unenforceable. However, if the illegal portion does not defeat the central purpose of the contract, we can sever it and enforce the rest of the contract.” Id. at 33.
The panel found that the intention of the parties was to have an arbitrator decide the outcome of their case and that invalidating paragraph 3A did not change that intention. Thus, the court ruled that 3A was not enforceable but that the rest of the agreement to arbitrate was still valid. The panel also upheld the trial court’s determination that no grounds exist to vacate the award.