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Mandatory Arbitration Clauses… Not Always Mandatory!

Published On: December 9th, 2015Categories: Real Estate Law

A small business owner recently came to me for help collecting on an unpaid contract. The work was done, and the money was clearly due. Only one thing stood between us and our day in court: a flawed contract downloaded from the internet that contained an arbitration clause.

Arbitration clauses are everywhere these days. In arbitration, instead of filing a complaint in Court and going before a judge, an arbitrator hears the case and makes a decision. The arbitrator’s award can then be filed with the Court as a judgment. In order to file for arbitration, the American Arbitration Association charges an $800.00 filing fee and a $750.00 fee for the initial hearing. That $1,550.00 does not even include the arbitrator’s hourly fee, which could easily be double that amount. The cost of filing a Special Civil Division complaint in NJ (suing for an amount less than $15,000.00) is only $75.00. Filing a complaint in Law Division (suing for an amount more than $15,000.00) has a $250.00 fee. So arbitration can be significantly more expensive.

A mandatory arbitration clause can force a wronged party into paying the arbitration fees just to get their case heard by a third party. Fortunately, a generic contract with a “mandatory arbitration clause” may not necessarily be legally enforceable in New Jersey. The Supreme Court of New Jersey in 2014 found that the mutual assent required to make an arbitration clause enforceable requires that “the parties have an understanding of the terms to which they have agreed. ‘An effective waiver requires a party to have full knowledge of his legal rights and intent to surrender those rights.’ Knorr v. Smeal, 178 N.J. 169, 177 (2003) (citing W. Jersey Title & Guar. Co. v. Indus. Trust Co., 27 N.J. 144, 153 (1958)). “‘By its very nature, an agreement to arbitrate involves a waiver of a party’s right to have her claims and defenses litigated in court.’ But 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.” Atalese v. Legal Services Group, L.P., 219 N.J. 430, 442 (2014). The arbitration clause must explicitly advise that the signor is waiving his/her right to a trial.

In my small business-owner’s case, a mandatory arbitration clause was placing more than $2,000.00 in fees between my client and the money she was due. Fortunately the arbitration clause in her downloaded contract did not meet the criteria set forth by the New Jersey Supreme Court in Atalese. Her poorly drafted internet contract was so bad that in the end it worked out for her!

This is one reason internet contracts are often not worth the paper they are printed on. It is essential that you have an attorney review your contract to make sure that it protects your rights in your state. Every state has its own statutes and case law governing contracts. At least once a week I read a lease or contract that was downloaded from the internet which at best fails to protect my New Jersey client’s interests, and often compounds whatever legal problem my client has.

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