Enforcement of Arbitration Agreements in New Jersey

Companies in various industries in New Jersey frequently include arbitration agreements in their contracts with employees, vendors and/or customers. Binding arbitration agreements are found in construction contracts, sales agreements, service agreements, employment contracts, and brokerage account agreements, to name a few. As a result, extensive case law has developed regarding the enforcement of arbitration agreements in New Jersey.

Generally, New Jersey courts favor the enforcement of arbitration agreements. They acknowledge that state and federal courts across the country have widely recognized for years the utility of arbitrations, also known as alternate dispute resolution (ADR).

In addition, the Federal Arbitration Act (FAA) and the state’s New Jersey Arbitration Act (NJAA) reflect government policies favoring arbitration.

Notwithstanding the above, courts will not enforce arbitration agreements that violate the standards New Jersey courts have set over the years.

The enforcement of an arbitration clause can become an issue when an employee is fired and sues her employer, alleging the discharge was unlawful or retaliatory.

Or a brokerage firm customer sues the brokerage firm, alleging that his broker mishandled his account, resulting in losses.

Another example would be a homeowner purchases an expensive appliance and later determines that the appliance is defective. He sues the seller of the appliance.

In any of the scenarios above, if there is an arbitration agreement between the employee/employer, brokerage firm client/brokerage firm, or the consumer/seller, one of the parties could request that the court stay the lawsuit and order the disgruntled plaintiff to arbitrate his claims.

What Determines if an Arbitration Agreement Is Enforceable in New Jersey?

There are several arguments parties make challenging the enforcement of an arbitration agreement.

Waiver

In considering whether one party to an arbitration agreement has waived the right to compel arbitration, New Jersey courts will undertake a fact-sensitive examination of the case. Specifically, the court will review the litigation conduct of the party seeking to compel arbitration. In Cole v. Jersey City Med. Ctn., the New Jersey Supreme Court set out the factors a court should review to decide if a party has waived enforcement of an arbitration clause:

The delay in making the arbitration request;
the filing of any motions, particularly dispositive motions, and their outcomes;
whether the delay in seeking arbitration was part of the party’s litigation strategy;
the extent of discovery conducted;
whether the party raised the arbitration issue in its pleadings, particularly as an affirmative defense, or provided other notification of its intent to seek arbitration;
the proximity of the date on which the party sought arbitration to the trial; and
the resulting prejudice suffered by the other party, if any. No one factor is determinative.

In Cole, the defendant did not raise arbitration as an affirmative defense in its answer. The parties engaged in extensive discovery, including 12 depositions. The defendant moved for summary judgement, which was partially granted.

They moved to compel 21 months into the case and three days before the scheduled trial. Moreover, less than two weeks before the trial, the defense attorneys made their pretrial information exchange and did not mention arbitration.

Needless to say, the court denied the motion to compel arbitration.

Equitable Estoppel

Equitable estoppel relates to the concept of fair dealing, as noted by the Supreme Court in Knorr v. Smeal. Equitable estoppel will not allow a party to repudiate a course of conduct on which another party has reasonably relied. To prove estoppel in this context, the party seeking to avoid arbitration would have to show that she relied on the other party’s conduct, which induced her to take (or not take) an action (i.e. to proceed to arbitration). Lastly, that action/inaction must detrimental to her.

Laches

Similar to equitable estoppel, the doctrine of laches denies a party the right to compel arbitration when that party engages in unexplained and inexcusable delay in seeking to compel the contractual right to arbitrate disputes. In deciding if laches applies, the court will consider the length of the delay and the reasons for the delay and the changing positions of the parties. See Knorr.

Arbitration Clauses in Consumer Form Contracts

As stated previously, arbitration agreements are generally favored in New Jersey. However, New Jersey courts play close attention to arbitration agreements in consumer form contracts. These contracts of adhesion, by definition, are not negotiated between the consumer and the business or service with whom the consumer contracts. Recognizing this, New Jersey courts have placed stringent requirements on businesses that deal with consumers and place arbitration clauses in contracts, sales or service agreements.

The seminal New jersey Supreme Court case in this area is Atalese v. U.S. Legal Servs. Grp. LP.

In reviewing arbitration agreements involving consumers, New Jersey courts use basic contract law to determine if the arbitration clause is a product of mutual assent; that is, the arbitration clause must give the consumer the ability to know she is giving up her right to pursue her claim in court.

How Should Businesses Draft Arbitration Agreements in Consumer Form Contracts?

New Jersey courts are clear that there is no requirement that specific words or phrases be used in an arbitration agreement to make it enforceable.

However, there is certain language a business should include in its consumer contract to ensure a judge upholds and enforces the arbitration agreement:

Simply stating the consumer agrees to arbitrate all disputes is not enough. New Jersey courts do not view the term “arbitration” as self-defining; the agreement must explain what arbitration is;
That by agreeing to arbitrate disputes, the consumer is giving up his right to have particular disputes heard in state or federal court;
Arbitration will be the consumer’s exclusive remedy;
An explanation of how arbitration works and differs from court. The parties will present their evidence and arguments to the arbitrator, who will make evidentiary rulings and a binding final decision; and
The arbitrator’s decision means one party will lose the case.

Don’t Forget New Jersey’s Plain Language Act (PLA)

The PLA requires form consumer contracts to have plain, clear language, understandable to ordinary consumers. Consequently, businesses should avoid using technical, legalistic or complex words or phrases in an arbitration agreement.

The arbitration clause must also be conspicuous. New Jersey courts frown on the practice of placing the arbitration agreement deep into the contract, under an unrelated heading, in a wordy, single-spaced, small font paragraph.

In short, to be deemed enforceable, the arbitration clause should be sufficiently highlighted as to be noticeable to the average consumer.

The enforceability of an arbitration agreement, particularly those between a business and a consumer, can be a complicated issue. Also, the language of the agreement, how it was presented to the consumer, whether a party can contest the agreement, etc., can impact its enforceability. The experienced business litigation attorneys at Schiller, Pittenger & Galvin, P.C., have extensive experience representing both businesses and consumers on this issue. If you are a business seeking to enforce an agreement, or writing one into your contracts, we can help. Contact the firm at its Scotch Plains office at 908-490-0444 or email us here to schedule a consultation.