Arbitration remains a prominent method for dispute resolution outside of the formal judicial system. As a substitute to litigation, the arbitration process is intended to provide a final disposition in a more expeditious, inexpensive, and less formal manner for the involved parties. Nonetheless, disputes frequently arise regarding the enforceability of arbitration clauses that render some agreements subject to judicial scrutiny. This article examines recent developments concerning the enforceability of arbitration provisions in commercial agreements and highlights emerging issues for practitioners to be aware of when reviewing such clauses and litigating arbitration disputes. In light of several recent decisions in New Jersey on these issues, this article focuses on arbitration issues under New Jersey law.
Arbitration of Disputes in Context
Arbitration provisions are commonplace in commercial contracts, permitting consenting parties to resort to the private resolution of disputes and thereby waive the right to litigate in a court of law. Both the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1–16, and the New Jersey Arbitration Act (NJAA), N.J.S.A. 2A:23B-1-36 express a general policy in favor of arbitration “as a means of settling disputes that otherwise would be litigated in a court.” See Badiali v. New Jersey Manufacturers Insurance Group, 220 N.J. 544, 556 (2015). Under the NJAA, an agreement “to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.” The standard for enforcement of an arbitration provision differs based on the existence of a consumer, employment, or commercial agreement.
Generally, an enforceable arbitration provision requires “mutual assent” to the terms of the contract and to resolve those covered disputes by way of arbitration rather than in a court of law. See Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014). The determination as to whether there is mutual assent is often made on a case-by-case basis and hinges on whether the contracting parties understand the terms of the contract as well as their ramifications. See Volt Information Sciences v. Board of Trustees of Leland Stanford Jr. University, 489 U.S. 468, 478 (1989)(parties are not required “to arbitrate when they have not agreed to do so.”); Garfinkel v. Morristown Obstetrics & Gynecology Associates, 168 N.J. 124, 132 (2001)(“Only those issues may be arbitrated which the parties have agreed shall be.”)). When drafting and reviewing contracts, attorneys should pay close scrutiny to the scope of claims subject to arbitration and clearly delineate the intent of the parties to avoid judicial review after the fact.
Sophistication of the Parties
In the commercial context, a court’s determination of the enforceability of an arbitration provision is often guided by the sophistication of the parties. This notion is rooted in the concept that sophisticated commercial parties are presumed to understand the nature of arbitration and waiver of rights to judicial recourse.
In Atalese, the New Jersey Supreme Court declined to enforce an arbitration clause in a consumer contract because it lacked clear and unambiguous language that the consumer was waiving her right to seek relief in a judicial forum. See 219 N.J. at 447 (requiring waivers of constitutional or statutory rights to be stated “clearly and unambiguously”). The U.S. Court of Appeals for the Third Circuit has since held that the explicit waiver language enunciated in Atalese does not apply to commercial contracts involving sophisticated parties. See In re Remicade Antitrust Litigation, 938 F.3d 515, 525 (3d Cir. 2019) (noting that “while the New Jersey Supreme Court has not definitely resolved the scope of the rule [set out in Atalese], it has applied it thus far only in the context of employment and consumer contracts.”).
Notwithstanding that Atalese involved arbitration provisions as applied in consumer transactions, there has been evolving tension about whether its rationale should be extended to sophisticated commercial parties and other contexts.
A recent Appellate Division opinion held that an arbitration provision need not contain an express waiver of the right to a judicial forum to be enforceable when the parties to a commercial contract “are sophisticated and possess relatively equal bargaining power.” See County of Passaic v. Horizon Healthcare Services, No. A-0952-21, 2023 N.J. Super. LEXIS 10, at *3 (App. Div. Feb. 8, 2023). This marked the first published opinion by an appellate panel to weigh in on whether the court’s holding in Atalese established a bright line rule that all commercial contracts containing an arbitration provision must include an explicit waiver to be enforceable. The Appellate Division rejected the the plaintiff’s assertion that Atalese rendered the arbitration provision unenforceable due to the lack of an explicit waiver observing that Atalese focused on, among other things, the unequal relationship between contracting parties outside of a commercial setting. The “concern for those not versed in the law or not necessarily aware of the fact that an agreement to arbitrate may preclude the right to sue in a court or invoke the inestimable right of trial by jury, on the other hand, vanishes when considering individually-negotiated contracts between sophisticated parties—often represented by counsel at the formation stage—possessing relatively similar bargaining power.”
Although the New Jersey Supreme Court has yet to weigh in on the issue, the decision in County of Passaic provides added clarity for practitioners who represent sophisticated parties to a commercial agreement.
Of particular note to attorneys, is to what extent Atalese may continue to be applicable in the context of attorney-client engagement letters. In Delaney v. Dickey, 244 N.J. 466, 473-474 (2020), the New Jersey Supreme Court permitted attorneys to include arbitration provisions in engagement agreements, but imposed significant requirements on their use to be enforceable, including disclosure of the specific differences between the “arbitral and judicial forum” which may include limitations on discovery mechanisms in ADR, the lack of a jury trial, associated costs of arbitration, and that the outcome is non-appealable and confidential. Under the reasoning advanced in County of Passaic, it is unclear whether Dickey’s reasoning should apply to an engagement agreement with a sophisticated client.
Waiver of Arbitration Rights
Issues may also arise during the course of litigation that impact a party’s ability to invoke an otherwise enforceable arbitration provision. For example, a party may waive the right to arbitrate by acting in a manner inconsistent with an intent to assert that right. In White v. Samsung Electronics America, 2023 U.S. App. LEXIS 5398 (3d Cir. Mar. 7, 2023), the Third Circuit held that Samsung, through its litigation conduct, waived its right to compel arbitration by continuously seeking dismissal on the merits and sought to invoke an arbitration provision only after it was apparent that the case would not be fully dismissed before discovery. In cases involving waiver, the focus of the inquiry is on the actions of the party who holds the right to invoke arbitration, (observing that Samsung’s litigation actions evinced “a preference for litigation over arbitration” and thus constituted a waiver of its arbitration rights). The court in White found it significant that Samsung knew the plaintiffs’ claims were arbitrable “from the outset of litigation,” but failed to inform the plaintiffs or the court until after it had filed a motion to dismiss on the merits, engaged in “multiple instances of nonmerits motion practice and acquiesced to the district court’s pretrial orders.” See also Laguna v. Chester Housing Authority, 2023 U.S. Dist. LEXIS 45036, at *7 (E.D. Pa. Mar. 17, 2023)(holding that defendant waived its right to arbitrate where litigation conduct was “inconstant with an intent to arbitrate” as defendant actively participated in the case and not once mentioned arbitration in court filings over the course of ten months).
Given the stakes involved in protracted litigation, a party wishing to compel arbitration under the terms of an enforceable agreement must act in a manner consistent with that right. This means weighing the costs and benefits of invoking an arbitration provision early on and coming to a decision before the right is deemed waived during litigation. See Nepomuceno v. Midland Credit Management, 2017 U.S. Dist. LEXIS 79307 (D.N.J. May 24, 2017)(the defendant waived right to arbitrate where it waited two years to file a motion to compel arbitration and after engaging in “significant discovery”).
The Bottom Line
Arbitration remains a favored alternative for the resolution of disputes outside of court. In order to take advantage of its benefits, know what is required for a provision to be enforceable in your jurisdiction, and take care to invoke the right to arbitrate early on should litigation commence.
Reprinted with permission from the April 20, 2023 edition of The Legal Intelligencer © 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.