N.J. Supreme Court Finds Material Breach by Company That Knowingly Refused to Cooperate with Arbitration Demands Filed in Compliance with the Arbitration Agreement

The New Jersey Supreme Court has ruled that a company’s refusal to cooperate with plaintiffs’ arbitration demands was a material breach of their arbitration agreement, which barred the company from later compelling arbitration. Tahisha Roach v. BM Motoring, LLC 

The plaintiffs had purchased cars from BM Motoring, LLC and Federal Auto Brokers, Inc. d/b/a BM Motor Cars (BM).  As part of the transaction, each plaintiff signed an arbitration agreement requiring resolution of disputes through arbitration in accordance with the rules of the American Arbitration Association (AAA).  The plaintiffs had filed demands for arbitration against BM with AAA.  In one case, despite repeated requests by AAA, BM refused to advance the filing fees that the arbitration agreement obligated BM to pay, resulting in dismissal of the arbitration for nonpayment of fees. In another case, a plaintiff’s claims were dismissed based on BM’s failure to comply with AAA’s rules and procedures.  The plaintiffs then jointly filed the present action against BM, who moved to dismiss the complaint in favor of arbitration.

Ruling in the plaintiffs’ favor, the Court noted that arbitration agreements are governed by general principles of contract law.  BM’s arbitration agreement required arbitration in accordance with AAA’s rules and therefore permitted arbitration before the AAA.  The Court held that BM’s failure to pay the AAA fees or to respond to plaintiffs’ arbitration demands violated BM’s duty of good faith and fair dealing that New Jersey law implies in all contracts.  Specifically, BM’s actions destroyed the benefit plaintiffs expected in signing the arbitration agreement, namely, the ability to arbitrate claims.  Accordingly, BM was barred from later compelling arbitration.

The New Jersey Supreme Court refused to enact a bright-line rule on the issue, emphasizing the fact-sensitive nature of its determination.  Nonetheless, businesses that include standard arbitration clauses in their agreements, should be aware that a failure to cooperate in bringing the case before an arbitrator may result in a waiver of the arbitration agreement.

For more information, please contact Kathleen Barnett Einhorn, Esq., Chair of the Firm’s Complex Commercial Litigation Group, at keinhorn@genovaburns.com or Jennifer Borek, Esq., Partner in the Complex Commercial Litigation Group, at jborek@genovaburns.com.