New Jersey Supreme Court Weighs in on Arbitration Clauses in Consumer Contracts

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On January 10, 2018, the New Jersey Supreme Court decided a case involving the enforceability of mandatory arbitration agreements in consumer contracts. In Kernahan v. Home Warranty Administrator of Florida, the Court held that a mandatory arbitration agreement in a home warranty contract was unenforceable because it lacked mutual assent.

The consumer sued her home warranty administrator and the home warranty administrator moved to dismiss, citing the mandatory arbitration provision in the parties’ contract. The trial court denied that motion and held the arbitration provision was unenforceable. The Appellate Division affirmed the trial court. The New Jersey Supreme Court affirmed the Appellate Division and held that the agreement was too contradictory and confusing to create mutual assent.

The legal framework is nothing new. Under the New Jersey Arbitration Act, N.J.S.A. § 2A:23B-1 et seq., arbitration agreements are entitled to the “equal-treatment principle,” which requires courts to interpret arbitration agreements like any other contract. Thus, traditional contract law requires that the parties to a contract manifest mutual assent to the agreement. Without mutual assent, there is no “meeting of the minds” required to create a contract. In other words, an arbitration agreement is enforceable only if the parties manifested an agreement to arbitrate.

Applying this framework, the Court noted three “shortcomings” with the arbitration clause:

  1. “the inconspicuous location of the agreement to arbitrate under a section labeled ‘MEDIATION’”;
  2. “its small-font text and confusing ordering of sentences”; and
  3. “the invocation of the Commercial Mediation Rules.”

For example, despite the nominal reference to “mediation” (a nonbinding dispute resolution mechanism), the agreement proposed a two-step resolution process culminating in arbitration (a binding dispute resolution mechanism). Moreover, the two-step process was broken up by language purporting to waive a party’s right to file a class action. In addition, the provision was written in less than 10-point font and inconsistently referred to “awards,” on one hand, and “Commercial Mediation Rules,” on the other. Taken together, the Court concluded that “more [must] be done in the setting of consumer contracts to make them understandable for a lay person.”

Although the Court ruled on one arbitration agreement in one consumer contract, the issues in Kernahan v. Home Warranty Administrator of Florida are not going away any time soon. Therefore, counsel should review arbitration agreements in light of this decision to ensure those agreements are prominently displayed and worded without ambiguity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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