New Jersey Supreme Court Rules Mis-Labeled Arbitration Provision in Consumer Contract Unenforceable

A day after the U.S. Supreme Court issued a decision seen as pro-arbitration – see our January 10, 2019 Blog Post, Arbitrator to Decide Whether Dispute is Subject to Arbitration Even if Argument is “Wholly Groundless,” Supreme Court Holds – the New Jersey Supreme Court ruled an arbitration provision unenforceable in Kenahan v. Home Warranty Administrator of Florida, Inc. The decision reminds New Jersey businesses that they must still comply with the New Jersey Plain Language Act (PLA) and make arbitration clauses in consumer contracts conspicuous, internally consistent, and able to convey to an ordinary person that they are giving up their right to file an action in Court.

The defendant, a consumer and a home warranty company, entered into a contract with the plaintiff, who later sued for violations of the New Jersey Consumer Fraud Act and other statutes.  The home warranty company sought to dismiss the lawsuit and force the plaintiff to go to arbitration based on a clause in the parties’ contract.  The trial court refused, finding the arbitration provision in the contract unenforceable. 

Relying on its prior decisions, the New Jersey Supreme Court agreed.   The purported arbitration clause, the Court explained, was ambiguous for a number of reasons.  It appeared on the last page of the contract under the heading “Mediation.” Mediation and arbitration are not the same: mediation is a non-binding mechanism for parties to reach a settlement, whereas arbitration results in a binding award in favor of one party or the other.  Including the arbitration agreement under the heading “Mediation,’ the Court concluded, fails to signal to a consumer that the contract contains an arbitration provision affecting their rights.  The provision also referred to the American Arbitration Association’s Commercial Mediation Rules, also signaling that it was about mediation, not arbitration.  Finally, the contract was in less than 10-point font, in direct violation of the PLA.   Given these issues, the Court found that the plaintiff had not agreed to arbitrate the dispute.

Justice Albin wrote a separate concurring opinion in which he defended New Jersey’s decisions in light of U.S. Supreme Court precedents that are more favorable to enforcing arbitration decisions.  The defendant in the case had abandoned the argument that New Jersey’s case law cannot stand in light of U.S. Supreme Court precedent, but Justice Albin’s defense of New Jersey law will likely be cited in future disputes pertaining to arbitrations.

In light of this decision, as well as other recent cases regarding enforcement of arbitration provisions in New Jersey, businesses should have their consumer contracts reviewed to ensure that their arbitration provisions remain enforceable.

For more information on this decision or arbitration clauses 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.