New Jersey businesses better pay their arbitration bills. In a precedential decision, the Supreme Court of New Jersey held that the failure to pay arbitration fees constitutes a material breach of contract and precludes the enforcement of an agreement to arbitrate.

Facts of the Case

Arbitration agreements are generally governed by traditional principles of contract law. Accordingly, if one party breaches a material term of an agreement, the other party is relieved of its obligations under the agreement. In Tahisha Roach v. BM Motoring, LLC, the New Jersey Supreme Court considered whether the failure to advance arbitration fees is a material breach of an agreement to arbitrate.

Plaintiffs Emelia Jackson and Tahisha Roach signed dispute resolution agreements (DRA) when they purchased used cars from BM Motoring, LLC, and Federal Auto Brokers, Inc., doing business as BM Motor Cars (collectively, BM). The identical DRAs required resolution of disputes through arbitration in accordance with the rules of the American Arbitration Association before a retired judge or an attorney. The plaintiffs filed separate demands for arbitration against BM with the AAA, asserting claims under the New Jersey Consumer Fraud Act (CFA). Despite repeated requests by the AAA, BM did not advance the filing fees that the DRA obligated it to pay or otherwise respond to the claim.

When the plaintiffs ultimately filed suit, the defendants moved to dismiss the complaint in favor of arbitration. In support, they argued that they did not contemplate using the AAA as the forum for arbitration, and consistently had not arbitrated customer disputes before the AAA due to the excessive filing and administrative fees that the AAA charged. In opposition to the motion, the plaintiffs alleged that defendants materially breached the DRA by failing to advance filing and arbitration fees, and waived their right to arbitration.

Failure to Pay Precludes Enforcement of Arbitration Agreement

The Supreme Court of New Jersey sided with the plaintiffs. “Defendants’ non-payment of filing and arbitration fees amounted to a material breach of the DRA,” the court held. “Defendants are therefore precluded from enforcing the arbitration provision, and the case will proceed in the courts.”

As a foundational matter, the court held that “the filing of an arbitration claim with the AAA is not inconsistent with the DRA’s requirement of arbitrating before a single retired judge or attorney,” noting that the DRA requires the parties to arbitrate in accordance with the rules of the AAA. The court further highlighted that a commercial arbitration rule of the AAA provides that parties who agree to arbitrate in accordance with AAA rules thereby consent to AAA-administered arbitration.

With regard to the defendants’ failure to pay the required AAA fees, the court held it constitutes a material breach of the arbitration agreement. In reaching its decision, the court noted that the Ninth and Tenth Circuit Courts of Appeals both have also held that a party’s failure to pay required fees constitutes a material breach of an arbitration agreement. It further explained:

The benefit expected under an arbitration agreement is the ability to arbitrate claims. A failure to advance required fees that result in the dismissal of the arbitration claim deprives a party of the benefit of the agreement. Therefore, the failure to advance fees “goes to the essence” of the DRA and amounts to a material breach.

Notably, the New Jersey Supreme Court declined to establish a bright-line rule for determining whether a refusal or failure to respond to a written arbitration demand, within a reasonable time, constitutes a material breach of an arbitration agreement that precludes its enforcement. “Such determinations must be made on a case-by-case basis, after consideration of the terms of the agreement and conduct of the parties,” the court stated.