Unenforceable Clause In Arbitration Agreement Does Not Void Agreement

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

Arbitration (pd)One of my children's preschool teachers was fond of saying, "you get what you get and you don't get upset." (Not to my little angel, of course, but to other children.) In Curran v. Curran, the Appellate Division basically applied this admonition to the parties to an arbitration agreement, holding that they got what they intended out of the agreement, therefore they could not argue, after the fact, that an unenforceable provision in the agreement voided the entire agreement.

In Curran, plaintiff filed for divorce from defendant. With the advice of counsel, the parties entered into a consent order to refer all issues incident to their divorce to arbitration under the New Jersey Arbitration Act. In the consent order, the parties acknowledged that any arbitration award that was entered could only be set aside or modified by a court under the limited grounds set forth in the Arbitration Act — e.g., the award was procured by fraud, corruption, or undue means, the court found evidence of "evident partiality" by the arbitrator, the arbitrator exceeded his or her powers, etc.  But the parties also included a handwritten provision, which provided: "The parties reserve their rights to appeal the arbitrator's award to the appellate division as if the matter was determined by the trial court." This is the provision that would cause all of the problems.

After the arbitrator entered a preliminary award, plaintiff requested reconsideration. The arbitrator then issued a comprehensive award setting forth his findings of fact and conclusions of law. Plaintiff filed a motion in the Law Division for an order modifying the award, citing eight alleged "mistakes of law" made by the arbitrator. Plaintiff also argued that the intent of the handwritten provision was not to allow for direct appeal to the Appellate Division, but was instead was evidence that the parties intended a more searching review of the award that what would normally be allowed under the Arbitration Act. The trial court agreed, holding that the paragraph itself was unenforceable because it purported to "create subject matter jurisdiction by agreement." The trial court noted that "[t]he authority of a court to hear and determine certain classes of cases rests solely with the Constitution and the Legislature." But the trial court agreed with plaintiff that the handwritten provision demonstrated the parties' intent to provide for "a little more review" than what would normally be allowed under the Arbitration Act. Therefore, the trial court "in essence act[ed] as the Appellate Division of the arbitrator." It performed a comprehensive review of the arbitrator's decision and affirmed the award. 

Plaintiff appealed, arguing, for the first time, that the handwritten provision in the consent order was illegal, and therefore voided the entire arbitration provision. Plaintiff did not argue that he satisfied any of the grounds that would justify modification of the arbitration award under the Arbitration Act. Instead, he argued that the illegality of the handwritten provision rendered the award void in its entirety. The Appellate Division rejected this argument and affirmed the trial court.

The Appellate Division began by observing that parties are "free to invoke [the Arbitration Act's] procedures in toto or subject to agreed-upon modification." Thus, even though the Arbitration Act itself offers only very narrow grounds on which an arbitration award can be vacated or modified by a trial court, "parties may voluntarily elect to expand that review by providing for such expansion in their contract." What they cannot do, however, is "bypass the trial court and seek immediate appellate review." Therefore, the handwritten provision in Curran — which purported to do just that — was illegal and unenforceable.

The question then was whether the entire arbitration agreement was unenforceable because it contained an unenforceable provision. To answer this question the Appellate Division had to determine whether "striking the illegal portion defeat[ed] the primary purpose of the contract." If it did, then the whole agreement would be deemed unenforceable. If not, then the illegal provision could be severed and the rest of the agreement enforced.

The Appellate Division held that the primary purpose of the arbitration agreement was to resolve issues incident to the parties' divorce, in an expeditious and comprehensive manner, subject only to limited appeal. Striking the handwritten provision would not defeat this purpose. In support of this conclusion, the Appellate Division favorably cited plaintiff's argument to the trial court, noting that plaintiff had argued that the purpose of the handwritten provision was to make any arbitration award subject to modification by the trial court, "with the right thereafter preserved to appeal to the Appellate Division from an adverse ruling." Thus, the parties got exactly what they intended — enhanced review from the trial court with the ability of the Appellate Division to hear any appeal of the trial court's decision. Therefore, revoking the award would not only defeat the purpose of the arbitration award, but would frustrate the parties' intent when they entered into the arbitration agreement.

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