NJ Court Voids Arbitration Clause Without a Designated Provider
Businesses that have revised their arbitration contracts to distinguish arbitration from a court and jury trial should take heed from another special requirement for arbitration in New Jersey.
Now, they need to identify the arbitration provider (such as the American Arbitration Association) or means for selecting the arbitrator and the rules under which the arbitration should be conducted.
In Flanzman v. Jenny Craig, Inc., __ N.J. Super. __, 2018 N.J. Super. LEXIS 142 (N.J. Super. Ct. App. Div. Oct. 17, 2018), an 82-year-old, long-time employee in Paramus sued her employer in Bergen County Superior Court for wrongful termination under the New Jersey Law Against Discrimination. The employer moved to dismiss the litigation, based on a contract the employee signed in 2011 requiring arbitration in California. Importantly, the clause explained that arbitration was “in lieu of a jury or other civil trial,” as would be required by the New Jersey Supreme Court three years later in Atalese v. United States Legal Services Group, L.P., 219 N.J. 430 (2014), and explicitly covered statutory claims of discrimination. The standardized clause called for arbitration in California no doubt because that is the location of the employer’s headquarters and Human Resources Department. According to the trial court, the defendants offered to conduct the arbitration at a “place closer to New Jersey.”
Among other arguments, the plaintiff opposed arbitration because the clause did not designate the provider forum or procedures for conducting the arbitration. The trial court noted that the absence of a designated provider forum or rules did not render the agreement unenforceable, but “in the interest of fairness” the plaintiff could herself select the AAA or other forum. California law and location would govern, though. The plaintiff appealed, and the Appellate Division reversed. ;
Until now, courts have not required parties to designate the arbitration provider or arbitrator in a pre-dispute arbitration clause, and to my knowledge the absence of such a designation has not been a basis for refusing to enforce an otherwise valid agreement. The lack of such a case is hardly surprising, since section 5 of the FAA explicitly provides a remedy: “if no method [for selecting the arbitrator] be provided therein” the court will appoint someone. New Jersey’s version of the Revised Uniform Arbitration Act, N.J.S.A. 2A: 23B-11(a), similarly contemplates the lack of a designation and grants the court that authority. In the Third Circuit, unless a particular forum—no longer available—was integral to the parties’ agreement to arbitrate, section 5 has been relied on to find that the court may make a substitute designation.
Neither the trial court, nor the Appellate Division, or even the parties’ briefs, referred to these controlling statutes. Instead, the appeals panel held that the choice of a provider was an important part of the character of an arbitration; because of the differences between the rules for each, the parties had not reached an understanding of the nature of the alternative to a jury trial they ostensibly had chosen. In the language of contract formation, there was no mutual assent or a meeting of the minds.
Because this opinion is precedential, binds lower courts and is couched in broad general terms not limited to the employment case or context at issue, it may well be used in the context of commercial contracts. Contract clauses, bills of sale or standard terms and conditions should be checked to be sure they do not raise an issue.