Many people confuse the difference between mediation and arbitration and in an NJ Supreme Court ruling this week, it cost a company who inserted what was purported to be a mandatory arbitration clause into a consumer agreement. In a nutshell, arbitration is a process whereby a private judge — the arbitrator — makes a decision, often binding, upon the disputants. In mediation, the parties come to a voluntary resolution (or not) with the help of the mediator. So, in mediation, the parties make the decision and in arbitration (or litigation) the decision is imposed by a third party. Further, arbitration is a creation of contract — the parties must explicitly agree to enter arbitration as that is also a waiver of rights to go to court. That concept — mutual assent — is at the heart of this case.

The case the NJ Supreme Court decided was Amanda Kernahan v. Home Warranty Administrator of Florida, Inc. Kernahan purchased a home service agreement from the defendant for her home in Florida. When she was unhappy with the service provided, she filed a lawsuit in NJ Superior Court. The defendant asked the court to dismiss the case and order it into arbitration pursuant to a claimed arbitration clause in the agreement the plaintiff signed. Here is the clause in question (from the court’s opinion):

G. MEDIATION In the event of a dispute over claims or coverage You agree to file a written claim with Us and allow Us thirty (30) calendar days to respond to the claim. The parties agree to mediate in good faith before resorting to mandatory arbitration in the State of New Jersey. Except where prohibited, if a dispute arises from or relates to this Agreement or its breach, and if the dispute cannot be settled through direct discussions you agree that:

1. Any and all disputes, claims and causes of action arising out of or connected with this agreement shall be resolved individually, without resort to any form of class action.

2. Any and all disputes, claims and causes of action arising out of or connected with this Agreement (including but not limited to whether a particular dispute is arbitrable hereunder) shall be resolved exclusively by the American Arbitration Association in the state of New Jersey under its Commercial Mediation Rules. Controversies or claims shall be submitted to arbitration regardless of the theory under which they arise, including without limitation contract, tort, common law, statutory, or regulatory duties or liability.

3. Any and all claims, judgments and awards shall be limited to actual out-of-pocket costs incurred to a maximum of $1500 per claim, but in no event attorneys fees.

4. Under no circumstances will you be permitted to obtain awards for, and you hereby waives [sic] all rights to claim, indirect, punitive, incidental and consequential damages and any other damages, other than for actual out-of-pocket expenses, and any and all rights to have damages multiplied or otherwise increased. All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement, shall be governed by, and construed in accordance with, the laws of the State of New Jersey, U.S.A. without giving effect to any choice of law or conflict of law rules (whether of the State of New Jersey or any other jurisdiction), which would cause the application of the laws of any jurisdiction other than the State of New Jersey.

The plaintiff argued that this clause was unclear and even misleading. It’s titled mediation, the American Arbitration Association’s Commercial Mediation Rules would be used, yet the dispute would be submitted to arbitration. There is no explicit acknowledgment that the plaintiff would be giving up her rights to go to court if she arbitrated. Both the trial and appellate court found this was not a meeting of the minds in agreeing to use arbitration and denied the defendant’s motion to dismiss.

The NJ Supreme Court agreed. They saw the confusion between using the terms mediation and arbitration and that they are not interchangeable processes. NJ also has a plain language act, meaning agreements are supposed to be written in clear enough language so the average person could understand it. The Supreme Court didn’t think this clause did — at least enough to determine there was mutual assent to a process and that the plaintiff knew she would be giving up her right to go to court.

So what’s the takeaway? Arbitration and mediation are two different processes. If you are using an arbitration clause in your agreements, make sure they comport with NJ law.