A number of arbitration-related cases have been decided so far this month in the NJ Court system and there is a theme to all of them: whether an arbitration clause in a contract can compel arbitration. Arbitration is where an arbitrator acts as a private judge for the parties. Arbitration must be entered into voluntarily and with full information as to what rights you give up. Arbitration can be quicker and cheaper than litigation. Parties to an arbitration can choose an expert on the subject matter to be their arbitration, as opposed to assigned a random judge and jury who likely have no expertise in the area of the dispute. The downside is that if the parties do not like the outcome, the grounds to appeal an arbitral award is very narrow (basically, fraud) — if the arbitration is binding. Parties also have to pay for the arbitrator’s time, which is not the case in court.
The New Jersey Supreme Court decided not to uphold an arbitration clause in Annemarie Morgan v. Sanford Brown Institute. The plaintiffs alleged violations of the NJ Consumer Fraud Act, among others claims. The Defendants moved to have the case arbitrated pursuant to the agreement the plaintiffs signed. The trial judge declined to force arbitration, reasoning that the language in the clause violated law in that it did not explicitly inform consumers that by arbitrating they are giving up their rights to sue in court. The Appellate Division overturned the trial judge. The NJ Supreme Court reasoned:
Last term, we held that an arbitration provision in a consumer contract that fails to explain in some minimal way that arbitration is a substitute for a consumer’s right to pursue relief in a court of law is unenforceable. Atalese v. U.S. Legal Servs. Grp., 219 N.J. 430, 436 (2014), cert. denied, __ U.S. __, 135 S. Ct. 2804, 192 L. Ed. 2d 847 (2015).
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The formation of an agreement to arbitrate under state law requires that a consumer have some understanding that, by accepting arbitration, she is surrendering her common-law and constitutional right of access to the courthouse. Because the term “arbitration” is not self defining, an arbitration agreement must inform a consumer in some manner that she is waiving her right to seek relief in the
judicial system.…..
The enrollment agreement signed by plaintiffs contained an arbitration provision that nowhere mentions that the two students were surrendering their right to resolve their legal claims in a judicial forum.
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…the arbitration provision in Sanford Brown’s enrollment agreement does not contain a clearly identifiable delegation clause. (A delegation clause is a clause in an arbitration agreement that assigns to the arbitrator the decision whether a dispute is subject to arbitration.)
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Unless the parties have clearly delegated to an arbitrator the decision whether the parties agreed to arbitration, the issue is for a court to resolve.
Last week, the Appellate Division, in a published decision, also declined to compel arbitration in Kleine v. Emeritus at Emerson. In this case, the defendant, a nursing home, tried to enforce an arbitration clause. While this case met the provisions of Atalese in that the waiver language was very clear, the court found that the arbitration clause was one-sided and that the arbitration forum was not available to the parties. In the former, the plaintiff was obligated to arbitrate, but the defendant could bring an action either in court or with an arbitrator. The court found this could be unconscionable. In the latter, the American Arbitration Association (AAA), the forum chosen in the contract, had changed their rules.
In opposing the motion to compel arbitration, plaintiff provided a certification, which authenticated an attached AAA statement that unequivocally expressed that, as of January 1, 2003, AAA would “no longer accept the administration of cases involving individual patients without a post-dispute agreement to arbitrate.” Consequently, when the parties contracted, their exclusive forum for arbitration was no longer available; there being no agreement to arbitrate in any other forum, arbitration could not be compelled. In short, even assuming the clause was otherwise enforceable and consented to by plaintiff, there was no meeting of the minds as to an arbitral forum if AAA was not available.
Finally, in an unpublished case decided last week (Souza-Bastos v. Federal Auto Brokers, Inc.), the court declined to enforce arbitration clauses that were inconsistent across three documents signed by a used car purchaser on the same day.
Three cases have been adjudicated and no one has resolved their underlying disputes. If arbitration is designed to save time and money, clearly those goals are not being met here. The parties may want to try mediation.