Clear Arbitration Provision, Negotiated By Sophisticated Party While Represented By Counsel Deemed Enforceable

     by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Arbitration def (pd)The headline of this post is a little like "Dog bites man." But, given the recent trend in New Jersey of "man bites dog" type cases where courts have invalidated arbitration provisions that once seemed unambiguous (look here, here, and here for examples), the headline should make more sense.

In Columbus Circle NJ LLC v. Island Construction Co., LLC, the Appellate Division enforced an arbitration provision contained in a construction contract. Plaintiff was a single-member LLC that retained defendant to build a $1.9 million home on the bay in Avalon, New Jersey. Plaintiff's representative circulated an initial draft contract for the project that used the standard American Institute of Architects (AIA) forms. These forms contain a provision entitled "BINDING DISPUTE RESOLUTION," which, as the name suggests, requires the parties to choose "the method of binding dispute resolution" for any claims between them that are not resolved by mediation. In the draft it circulated, plaintiff's representative checked off "Arbitration pursuant to Section 15.4 of AIA Document A201-2007," rather than "Litigation in a court of competent jurisdiction." Before it was signed, the attorney for the LLC's sole member reviewed the draft and proposed changes, as did defendant, but none of these changes appear to have altered the dispute resolution provision.

During construction, disagreements arose between the parties regarding the cost of the project, leading both parties to terminate the contract. When mediation apparently failed, defendant filed a demand for arbitration. Three months later, plaintiff sued in state court. Defendant successfully moved to dismiss plaintiff's complaint and compel arbitration, and Plaintiff appealed.

As nearly every decision on arbitration does, the Appellate Division's decision in Columbus Circle begins by acknowledging that public policy, in New Jersey and nationally, favors arbitration as a means for settling disputes. Nonetheless, an agreement to arbitrate must be "the product of mutual assent, as determined under customary principles of contract law." Simply put, parties must understand the terms to which they have agreed, including the waiver of the right to litigate in court. As the Appellate Division noted: "this requirement of a 'consensual understanding' about the rights of access to the courts that are waived in [an arbitration] agreement has led our courts to hold that clarity is required" in all arbitration provisions.

In the seminal case of Atalese v. U.S. Legal Servs. Grp. L.P., the New Jersey Supreme Court held that, "[b]y its very nature, an agreement to arbitrate involves a waiver of a party's right to have her claims and defenses litigated in court," but that "an average member of the public may not know — without some explanatory comment — that arbitration is a substitute for the right to have one's claim adjudicated in a court of law." As a result, the Supreme Court required that, to be enforceable, an arbitration provision must "at least in some general and sufficiently broad way, [ ] explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve her dispute." 

In Columbus Circle, the Appellate Division held that the provision in the AIA contract satisfied the requirements of Atalese. By its terms, the provision required plaintiff to choose between arbitration and "litigation in a court of competent jurisdiction," therefore, when plaintiff chose "arbitration," it did so "with full knowledge that arbitration [was] a substitute for the right to have [its] claim adjudicated in court." Moreover, the Appellate Division noted that neither the LLC nor its sole member was "an average member of the public." The individual was sophisticated enough to operate as an LLC, to hire a representative, to negotiate and change the terms of the contract with the advice of counsel, and to "engage in a two-million dollar transaction." This was a far cry from plaintiff in Atalese, an unrepresented consumer, seeking debt relief counseling, who agreed to a more vague arbitration provision in a contract of adhesion.

Plaintiff argued that Atalese and its progeny require arbitration provisions to explain that a party is giving up both its right to bring claims in court and its right to have a jury resolve any disputes. It argued that the arbitration provision in the AIA contract failed to mention anything about waiver of the right to trial by jury. The Appellate Division rejected this argument. It noted that case law requires that an arbitration provision contain one or the other of these explanations, not both. It further noted:

[T]hose cases held an arbitration clause was sufficient if it advised the parties they were waiving the fundamental right to seek relief in court, without requiring it to advise them of all the component rights encompassed in that waiver. To require advice on all component rights encompassed in a waiver of seeking relief in court would render arbitration clauses either too complex and hard to understand, or too easy to invalidate, in contravention of the strong policy favoring arbitration.

Finally, the Appellate Division rejected plaintiff's argument that its sophistication, and the fact that it was represented by counsel, should have been irrelevant. The Appellate Division acknowledged that that the presence of counsel alone would not generally cure any inadequacies in a contractual arbitration provision, but noted that this was not an issue in Columbus Circle, where the arbitration provision clearly informed plaintiff that it was choosing to waive litigation in favor of arbitration. The Appellate Division further held that "[i]n determining whether the LLC and [its sole member] understood their choice, it was obviously relevant that they were sophisticated and represented by counsel."

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