Arbitration Clauses at Risk of Being Invalid

It’s time to dust-off and review your arbitration provisions. This week, the Superior Court of the State of New Jersey, Appellate Division issued a published opinion in Marilyn Flanzman v. Jenny Craig Inc. et. al., No. A-2580-17T1, 2018 WL 5914420 (App. Div. Nov. 13, 2018), striking down an arbitration provision that failed to designate a “forum” or “setting” for the arbitration. The Appellate Division held that parties to an arbitration agreement must select an arbitral forum such as the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Services (JAMS), or otherwise agree to a general process for arbitration at the time they enter into the agreement. Without so doing, there is no “meeting of the minds” and the arbitration provision is unenforceable.

In Flanzman, the plaintiff commenced a suit in the Superior Court of New Jersey for employment discrimination. Defendant then filed a motion to compel arbitration, relying on the parties’ arbitration agreement, which provided:

Any and all claims or controversies arising out of or relating to [plaintiff’s] employment, the termination thereof, or otherwise arising between [plaintiff] and [defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration. This agreement to arbitrate includes all claims whether arising in tort or contract and whether arising under statute or common law including, but not limited to, any claim of breach of contract, discrimination or harassment of any kind.

The Appellate Division reversed the trial court’s order compelling arbitration and held that the parties lacked a “meeting of the minds” because the arbitration agreement failed to “identify any arbitration forum and any process for conducting the arbitration.” Citing the New Jersey Supreme Court’s decision in Atalese v. United States Legal Services Group, 219 N.J. 430 (2014), the Appellate Division explained that “[b]ecause arbitration involves a waiver of the right to pursue a case in a judicial forum, courts take particular care in assuring the knowing assent of both parties to arbitrate, and a clear mutual understanding of the ramifications of that assent.” The Court explained that “[t]he mechanism or setting for the proceeding is important because the rights associated with arbitration forums may differ depending on which forum the parties choose, or on how they define the arbitral process.” The Appellate Division concluded that to “understand the ramifications of waiver of a jury trial, the parties must generally address in some fashion what rights replace those that have been waived.” Accordingly, the Court reasoned that the failure to identify in the arbitration provision the general process for selecting an arbitration mechanism or setting deprived the parties “from knowing what rights replaced their right to judicial adjudication.” As such, the Court invalidated the arbitration provision for lack of mutual assent. The Opinion, however, clarifies that parties do not need to identify a specific arbitrator.

In light of the Flanzman holding, companies and employers across all practice areas and industries in New Jersey should review their arbitration provisions to make sure they include more than a general agreement to arbitrate disputes – they must designate an “arbitral-forum” or otherwise set forth the process for arbitration. Even though there is a strong public policy in favor of arbitration, the Appellate Division has made clear that general arbitration provisions will not be enforceable. As such, even though you attempted to save time and money by including an arbitration provision in your contract, you could find yourself right back in court.

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