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Posted: October 9, 2018

Party Bound by Arbitration Provision Despite Its Lack of Conspicuousness

On September 18, 2018, Judge Mega of the Union County Superior Court (Law Division) issued a decision in Brothers General Construction & Painting, LLC v. Tocci Building Corporation, Inc., Docket No. UNN-L-941-18, holding that a party was bound by an arbitration provision despite its lack of conspicuousness, explaining:

The strong public policy of this State favors arbitration as a means of settling disputes that otherwise would be litigated in a court. The Federal Arbitration Act (“FAA”), 9 U.S.C.A ยงยง 1 to 16, expresses a national policy favoring arbitration. The FAA requires courts to place arbitration agreements on an equal footing with other contracts and enforce them according to their terms. The New Jersey Arbitration Act, N.J.S.A. 2A:23B-l to -22, follows these same principles. Accordingly, the existence of a valid and enforceable arbitration agreement poses a question of law.

In light of the fact that arbitration agreements are generally favored under the law, an agreement to arbitrate is read liberally in favor of arbitration. However, this preferential status is not without limits. In determining whether the parties agreed to arbitrate, courts generally apply state-law contractual principles. An agreement to arbitrate, like any other contract, must be the product of mutual assent, as determined under customary principles of contract law. Mutual assent requires that the parties have an understanding of the terms to which they have agreed. This requirement of a consensual understanding about the rights of access to the courts that are waived in the agreements has led our courts to hold that clarity is required.

By its very nature, an agreement to arbitrate involves a waiver of a party’s right to have her claims and defenses litigated in Court. The Atalese Court noted that an average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law. Accordingly, the absence of any language in the arbitration provision that plaintiff was waiving her statutory right to seek relief in a court of law renders the provision unenforceable. However, no magical language is required to accomplish a waiver of rights in an arbitration agreement.

New Jersey courts have upheld arbitration clauses phrased in various ways when those clauses have explained that arbitration is a waiver of the right to bring suit in a judicial forum.

In the present matter, the Tocci-Brothers General Subcontract is the 1991 edition of the standard form agreement produced and approved by the Associated General Contractors of Massachusetts. In relevant part, the Subcontract is comprised of a twenty-five-page form agreement and a fourteen-page Rider attached thereto. Both the form agreement and Rider were executed by the parties.

Page one of the Subcontract clearly indicates that: “THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS MODIFICATION[.]” Plaintiff does not contend and there is nothing in the record to suggest that Brothers General was not afforded, nor did they seek the opportunity to retain an attorney to review the Subcontract.

The arbitration provision at issue is not referenced in the twenty-five-page Tocci Brothers General Subcontract. The “Detailed Table of Contents” does not identify the existence of an arbitration provision. Similarly, the Rider does not contain an index or table of contents. Paragraph R.16 does not contain a heading denoting the existence of an arbitration provision therein. Unlike paragraph R.15 – which immediately precedes paragraph R.16 and is conspicuously entitled “CHANGE ORDER AUTHORIZATION[,]” – paragraph R.16 is not distinguished in any way. The Court notes that a number of the provisions contained in the rider are conspicuously labeled/titled. See~ R.15; R.22; R.23; R.24; R.25; R.26; R.27; R.30; R.31; pp. 8-14. Moreover, paragraph R.16 does not solely address the issue of arbitration. Instead, the paragraph first appears to address the issue of additional compensation. Brothers General argues that this lack of conspicuousness is fatal as it did not have notice of the arbitration provision.

. . .

The present matter is distinguishable from Atalese. Atalese is a consumer case. Neither Brothers General nor Tocci are average members of the public. This is not a consumer contract. This is not a contract of adhesion where one party possessed superior bargaining power and was the more sophisticated party. To the contrary, the contract was negotiated between sophisticated business entities with years of experience in the industry. Brothers General was not forced to enter into the Subcontract. They had ample opportunity to review the terms contained therein and could have retained counsel to review same. As such, the standard articulated in Atalese may not be applicable in this context. While agreements between sophisticated business entities may be permitted more leeway, the Court looks to the aforementioned principles for guidance as it interprets the enforceability of R.16.

Viewing the pertinent language of R.16 in isolation, the Court finds that the scope of the agreement clearly encompasses the underlying dispute. The relevant langue states: The Trade Contractor [Brothers General] further agrees to become a party to and to be bound by any proceeding involving the Construction Manger [Tocci], the Architect, or the Owner [Connell Hospitality] to the extent that such proceedings involve any of the rights or obligations of the Trade Contractor [Brothers General] under the subcontract.

. . .

While no magical language is required to accomplish a waiver of rights in an arbitration agreement, it is clear that this provision would not satisfy the heightened consumer standard set forth in Atalese. However, as previously stated application of such a standard in a case involving sophisticated business entities would not be appropriate. Instead, the Court searches the disputed provision for some simple explanation that arbitration is a waiver of the right to bring suit in a judicial forum. The Court finds such a general statement as R.16 clearly indicates that at the election of Tocci that the “parties agree to arbitrate any such claim or dispute in accordance with Construction Industry Rule of the American Arbitration Association and the locale shall be Boston, Massachusetts. This Agreement to arbitrate, if so elected, shall be specifically enforceable under the prevailing arbitration law. The quoted provision clearly establishes that a dispute amongst the parties will be subject to arbitration at Tocci’s election. R.16 sets forth that Construction Industry Rules of the AAA shall govern and that locale shall be Boston, Massachusetts. It is clear that the agreement to arbitrate is enforceable under the prevailing arbitration law. While R.16 does not specifically reference waiver of a trial in a judicial forum the aforementioned language is sufficient to explain to a sophisticated party that arbitration is a waiver of the right to a judicial determination.

Viewing R.16’s language in isolation supports a finding that the aforementioned language is enforceable. However, the Court is once again forced to consider the provision as it appears in the Rider. In doing so, questions of conspicuousness are once again raised. The fact that the operable language related to arbitration is intermingled with language unrelated to arbitration creates an ambiguity. This ambiguity is further complicated by the fact that R.16 does not denote the presence of an arbitration agreement with a heading or other descriptive designation. There is no reference to an arbitration provision in the table of contents. The arbitration provision is not contained in a stand-alone paragraph. Accordingly, when viewed in totality there is a question as to whether Brothers General had notice of this key provision that effects their rights.

Notwithstanding these deficiencies, the Court cannot turn a blind eye to the fact that Brothers General has already been joined to the AAA arbitration. Brothers General was properly served with Tocci’s Joinder Request pursuant to Rule 7 of the AAA’s Construction Industry Rules. Brothers General failed to timely object to same. Brothers General had a second opportunity to object to Tocci’s Joinder Request, but it once again failed to do so. Brothers General does not dispute receipt of Tocci’s Joinder Request or the subsequent communications from the AAA. Brothers is a party to the AAA arbitration and as such has waived its right to seek the instant relief. While Brothers is free to raise the aforementioned arguments before the AAA arbitrator, it is unclear that this Court has the authority to remove a properly joined party from an arbitration provision. The Court notes that Brothers General will be afforded every opportunity to litigate its claims in the AAA arbitration. In fact, AAA has incentive to do so as the sufficiency of its work has been called into question.

(Internal quotations and citations omitted) (emphasis added).

Complex commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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