Is your arbitration clause arbitrary?

Contracts permit a very broad range of promises to be made. But some things cannot be contracted away, or at least, not easily. Your right to go to court is one of those items.

Arbitration is a powerful and useful tool to resolve many of the disputes that arise in relation to contracts. In many commercial contracts, it has become virtually a standard feature to agree to arbitrate disputes.

And arbitration is not merely a preferred method for resolving contract disputes, but is more often than not mandatory. This is designed to minimize legal costs, as arbitration is generally believed to be more cost effective. This is because the arbitration clause typically imposes its own contractual requirements.

The agreement will typically indicate which set laws will apply, the rules that will be used to arbitrate, how the arbitrators will be chosen, and virtually any other requirements the parties may agree to.

This also works better when both parties have equivalent bargaining power, as with a developer of a large commercial-residential project and a large general contractor. They both come to the table with knowledgeable attorneys who understand intimately the arbitration process and how to use it to best protect their client’s rights.

However, a recent decision of the New Jersey Supreme Court has found that for consumer contracts, where there is typically no bargaining power on behalf of the consumer, the party drafting the contract needs to make explicit any use of binding arbitration.

The case involved a 23-page contract for debt relief services, which mentioned that all disputes would be subject to arbitration. Nevertheless, it did not explicitly note that the consumer was waiving all rights to access to court or waving any other rights.

A lower court found the provision “minimally, barely…sufficient” to provide notice of the waiver. The New Jersey Supreme Court disagreed, finding that the waiver of a right like that of seeking relief in a court of law must be done “clearly and unambiguously.”

Unlike a commercial contract, courts assume most consumer contracts will be read (courts can be remarkably optimistic at times) by non-lawyers, and most non-lawyers have no idea what the implications of binding arbitration are, or a waiver of their right to sue in court.

After all, many Americans could not even name the three branches of government., “Arbitration Clauses Must Be Explicit About Waiver of Suit,” Mary Pat Gallagher, September 23, 2014