Arbitration Jurisprudence Takes Strange Turn

Business Conflict Blog by Peter Phillips

The twisted course of arbitration jurisprudence in New Jersey has taken yet another peculiar detour. In the most recent development, it is hard not to infer a judicial bias against arbitration reminiscent of the 19th century.

In Itzhakov v. Segal (A-2619-17T4, August 28, 2019), the mid-level Appellate Division reviewed the trial court’s denial of defendant’s motion to compel arbitration. The court below had determined that the parties — commercial entities engaged on a breach of contract claim — had not conveyed their intention to arbitrate with sufficient clarity, and ordered plenary discovery in preparation for trial. The Appellate Division modified the order below to the extend of limiting discovery to the issue of the validity and scope of the arbitration agreement. On the way, however, the court wreaked havoc like a tornado.

The contract at issue was for the sale of an interest in a business. The contract was drafted by Mr. Yisroel Knopfler, was written in Hebrew, and contained a provision that in the event of dispute over the contract’s meaning the parties would “accept his interpretation as if it were one hundred valid and credible witnesses.” A second dispute resolution clause reads in translation:

It is hereby agreed between us that any questions of Jewish law that are relevant to this sale and to this document shall be decided by the Lakewood [NJ] Rabbinical Court, and we are required to do as they decide, and signing this document constitutes an acceptance of everything in the arbitration agreement that the said court regularly uses, and under no circumstances shall any dispute between us come to the civil courts, G-d forbid.

A subsequent contract for a related deal also contained language that “all disputes arising from this transaction shall be decided solely by the Badatz Rabbinical Court of Lakewood, in accordance with the standard arbitration agreement of the Rabbinical Court, which is hereby incorporated into this agreement.”

In determining “the validity and enforceability of the arbitration agreements,” the Appellate Division relied upon New Jersey Supreme Court’s 2014 Atalese opinion, which invalidated an arbitration agreement between an individual consumer and a debt adjustment firm on the ground that the term “arbitration” was not explained. The absence of express language advising the consumer that “arbitration” meant that the consumer had waived the right to sue in court was, to the Atalese Court, evidence of the lack of a meeting of the minds, and thus resulted in no enforceable agreement.

Those many of us who were alarmed by Atalese and its progeny took some solace in the fact that it and subsequent cases were in the settings of consumer or employment disputes. It was a case (we told ourselves) of well-meaning paternalism disguised as legal principle. But the Itzhakov Court dispelled even that faint hope by holding that “the principle that a person must knowingly waive the right to sue in court applies to any contracting party,” even commercial parties. “[E]ven a sophisticated party, or one represented by counsel, will not be deemed to waive his or her rights — whether constitutional, statutory, or common-law — without clear and unambiguous language.” Because the agreement at issue “does not explain with sufficient clarity that the parties waived their right to sue in civil court… [or] clearly contrast arbitration with litigation,” the court below correctly declined to compel the parties to arbitrate, absent “extrinsic evidence that illuminates the meaning of the arbitration provision.”

Thus, pursuant to this interpretation, the law of the State of New Jersey is that any contract containing an arbitration clause between any two parties — of any level of sophistication — must feature an “explanation” of what arbitration is, and “clear and unambiguous language” that agreement to arbitrate constitutes a waiver of the right to sue. And the required clarity of this required language — whatever the standard — is not satisfied by “under no circumstances shall any dispute between us come to the civil courts, G-d forbid “

Auto supply dealers, credit card companies, e-commerce enterprises, banks, national wholesalers, suppliers and retailers of business-to-business commerce, international internet service providers, take note. Your arbitration clauses may be enforceable in 49 states and the District of Columbia. But in New Jersey? G-d forbid.

                       

F. Peter Phillips

F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe. A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years… MORE >