Party That Drafted Arbitration Provision Moves To Have Provision Deemed Unenforceable. It Lost.

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

Most cases involving commercial contracts and arbitration provisions follow a similar pattern. They generally involve consumers arguing that they cannot be bound by arbitration clauses found in the fine print of boilerplate contracts that they had no ability to negotiate. But Shah v. T & J Builders, LLC turns this scenario on its head. In Shah, plaintiffs, the consumers, drafted the contract that contained the arbitration clause but later argued that it was unenforceable. To make matters worse (or at least more unusual), plaintiffs took this position after participating in an arbitration proceeding with defendant for two years. Not surprisingly, plaintiffs efforts to have their own arbitration clause deemed unenforceable were unsuccessful.

In Shah, plaintiffs hired defendant to build an extension on their home. The contract, which was "heavily negotiated between the parties," albeit without counsel, was drafted by plaintiffs. It contained an arbitration clause that required the parties to arbitrate "any dispute [ ] relative to the performance of [the] contract that [they could not] satisfactorily resolve." After one such dispute arose, plaintiffs terminated the contract and defendant filed an arbitration demand. Plaintiffs answered the demand and filed a counterclaim, alleging breach of contract and violations of New Jersey Consumer Fraud Act. Nowhere in their answer or counterclaim did plaintiffs address, much less challenge, the arbitration clause.

The parties, through counsel, then pursued their claims in arbitration for almost two years, exchanging discovery and expert reports, participating in a site inspection, and participating in several conferences with the arbitrator. Two weeks before the scheduled arbitration date, the parties submitted their pre-arbitration briefs. This is where the fun began.

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You Can’t Be Compelled To Arbitrate In A Nonexistent Forum

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

This one may seem obvious, but, in MacDonald v. Cashcall, Inc., the U.S. Court of Appeals for the Third Circuit held that a contractual arbitration provision that calls for arbitration in an "illusory forum" is not enforceable. So, if you were thinking about trying to compel arbitration in Wakanda or before the Jedi Council, better think twice.

In MacDonald, plaintiff entered into a loan agreement with a entity known as Western Sky in connection with a $5,000 loan. The loan agreement stated that it was "subject solely to the jurisdiction of the Cheyenne River Sioux Tribe," and "governed by the . . . laws of the Cheyenne River Sioux Tribe." It also contained an arbitration provision requiring that any disputes arising out of the agreement be "conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of [the agreement]." But the agreement also provided that either party, after demanding arbitration, could select an arbitrator from the American Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services ("JAMS") to administer the arbitration, and, if it did, "the arbitration [would] be governed by the chosen arbitration organization's rules and procedures" to the extent that they did not contradict the "law of the Cheyenne River Sioux Tribe." The agreement also contained a severability clause, providing that, if any provision of the agreement was deemed invalid, the remaining provisions would remain in effect.

Although plaintiff originally borrowed $5,000, "[h]e was charged a $75 origination fee and a 116.73% annual interest rate over the seven-year term of the loan, resulting in a $35,994.28 finance charge." After paying approximately $15,493 on the loan, which included $38.50 in principal, $15,256.65 in interest, and $197.85 in fees, plaintiff filed a putative class action lawsuit against defendants, asserting federal RICO claims and state law claims for usury and consumer fraud. Defendants moved to compel arbitration. The district court denied the motion, holding that the loan agreement's "express disavowal of federal and state law rendered the arbitration agreement invalid as an unenforceable prospective waiver of statutory rights." Defendants appealed.

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Wait. This Is Arbitration? I Thought It Was Mediation.

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

Early in the movie, My Cousin Vinny, Joe Pesci's character, Vincent Gambini, tells the judge that he has significant experience trying cases in New York. The judge does some research and learns that there is no record of anyone named Vincent Gambini trying any cases in New York. Gambini then does what one should never do, he lies to the judge. He tells the judge that he tried cases under the name Jerry Gallo. Gambini thinks this is a brilliant move because Jerry Gallo is a notable New York lawyer who Gambini has read about in the papers. Unfortunately for Gambini, however, he never read the articles about Jerry Gallo's death. Naturally, the judge finds out that Jerry Gallo is dead, and confronts Gambini, which leads to the following exchange:

I imagine this may have been similar to what the defendant in Marano v. The Hills Highlands Master Association, Inc. said when it received an unfavorable arbitration award. "Did you say binding arbitration? No. We were participating in non-binding mediation. Not arbitration." Things worked out for Vincent Gambini in the movie, they did not work out so well for defendant in Marano.

In Marano, plaintiffs owned a unit in a condominium development. The relationship between unit owners, like plaintiffs, and the association was governed by the association's bylaws, which "arguably include[d] an arbitration provision." So, after a dispute developed between plaintiffs and the condominium association over a "flooding condition" in their backyard, plaintiffs' attorney wrote to the association's attorney to demand arbitration. He received no response, so he wrote again and stated that unless the association's attorney confirmed that he was "in the process of arranging for the arbitration proceeding," plaintiffs would sue to compel arbitration. The association's attorney responded by disputing some of the claims in plaintiffs' letter but agreeing to participate in "ADR" (alternative dispute resolution). Several weeks later, plaintiffs' attorney again wrote to the association's attorney asking for confirmation that the parties would proceed to an "arbitration hearing," with a hearing officer who would serve "as an arbitrator." In response, the association's counsel contacted a retired judge to determine his availability and willingness to serve as "the arbitrator."

Up to this point, it appears clear that the parties were discussing arbitration, not mediation. What happened next created the confusion that sent the case down the path that would eventually land it before the Appellate Division.

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Appellate Division Questions The “Liberal Policy In Favor of Arbitration”

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

I have written a few times recently about the enforceability of arbitration agreements. Although usually (always?) a dry topic, it has become somewhat “hot” recently in New Jersey. The Appellate Division’s published decision in Kleine v. Emeritus at Emerson is the most recent example.

In Kleine, plaintiff filed a personal injury claim against the nursing facility in which she was living. The nursing home moved to dismiss or stay the case in favor of arbitration pursuant to an arbitration provision in her admission agreement. The trial court granted the motion and plaintiff appealed. The Appellate Division reversed, and in doing so, took a number of shots at the “liberal policy favoring arbitration,” which was developed in the lower federal courts and the U.S. Supreme Court, and which applies even in the face of contrary state law.

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Arbitration Provision Without Clear Jury Trial Waiver Still Not Enforceable

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

In recent years, and certainly ever since the New Jersey Supreme Court decided Atalese v. U.S. Legal Services Group, L.P., there is a perception that arbitration provisions have been more difficult to enforce in New Jersey. In Scamardella v. Legal Helpers Debt Resolution, LLC, defendants tried to get around the notice requirements set forth in Atalese — namely that an arbitration provision contain a clear waiver of a party's right to a jury trial — by arguing that those requirements were against public policy. They did not succeed, partly because the Appellate Division held that there was no evidence supporting the anecdotal belief that arbitration provisions were being struck down more frequently since Atalese.

In Scamardella, plaintiff entered into an agreement with defendants to negotiate a settlement of his debts with his creditors. As part of this agreement, plaintiff was required to establish a special purpose bank account with one of the defendants. The account agreement for the account contained an arbitration provision that included the following language:

In the event of a dispute or claim relating in any way to this Agreement or our services, you agree that such a dispute shall be resolved by binding arbitration in Tulsa, Oklahoma utilizing a qualified independent arbitrator of [defendant's] choosing. The decision of an arbitrator will be final and subject to enforcement in a court of competent jurisdiction.

Plaintiff alleged that one of the defendants did not perform as agreed and sued all of them, alleging violations of the RICO, Consumer Fraud, and Debt Adjustment and Credit Counseling Acts, along with various common-law claims. The trial court concluded that these claims were not subject to arbitration because the arbitration provision did not, as required under Atalese, "at least in some general and sufficiently broad way, [ ] explain that the plaintiff [was] giving up [his] right to bring [his] claims in court or have a jury resolve the dispute." In other words, the arbitration provision did not clearly indicate that plaintiff was waiving his right to a jury trial.

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