Businesses Should Review Arbitration Clauses in Light of Recent NJ Supreme Court Decision

Businesses should review their contracts to determine if their arbitration clauses pass muster in light of a recent court decision.

The New Jersey Supreme Court held that arbitration clauses in consumer contracts must explicitly express that the party is forfeiting the right to sue in court. If not, the agreements will not be enforced.

While the justices acknowledged that parties agreeing to arbitration, by definition, waive their right to have their claims decided in court, it found 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.”

The Facts of the Case

In Atalese v. U.S. Legal Services Group, Patricia Atalese, entered into a service contract with defendant, U.S. Legal Services Group, L.P. (USLSG), for debt-adjustment services. The contract contained an arbitration provision for the resolution of any dispute between the parties, which stated that “any claim or dispute … shall be submitted to binding arbitration upon the request of either party.”  It did not explain that plaintiff is waiving her right to seek relief in court, what arbitration is, or how arbitration is different from a proceeding in a court of law.

After becoming dissatisfied with USLSG’s efforts to resolve her debts, Atalese brought a lawsuit against USLSG alleging violations of the Consumer Fraud Act (CFA) and the Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA). USLSG moved to compel arbitration based on the arbitration provision in the service contract.

The Appellate Division affirmed the trial court’s ruling that the contract was enforceable, finding that “the lack of express reference to a waiver of the right to sue in court or to arbitration as the ‘exclusive’ remedy” did not preclude enforcement of the arbitration clause. It further found that the arbitration clause gave the “parties reasonable notice of the requirement to arbitrate all claims under the contract,” and that “a reasonable person, by signing the agreement, [would have understood] that arbitration is the sole means of resolving contractual disputes.”

The Court’s Decision

The state Supreme Court reversed the Appellate Division’s decision, finding that the contract did not sufficiently express that the consumer was waiving her “time-honored right to sue.”

“An arbitration provision—like any comparable contractual provision that provides for the surrendering of a constitutional or statutory right—must clearly and unambiguously notify the consumer that he or she is waiving the right to seek relief in a court of law,” the court held.

“We do not suggest that the arbitration clause has to identify the specific constitutional or statutory right guaranteeing a citizen access to the courts that is waived by agreeing to arbitration. But the clause, at least in some general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute,” Justice Barry Albin clarified.

According to the court, no magic words are required. However, contracts must be written in a “simple, clear, understandable and easily readable way,” the court explained.