Writing That One Must Arbitrate May Not Be Enough To Require Arbitration

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We’ve written about arbitration a few times and made reference to this alternate dispute resolution process in several blog postings over the years. [For example, click: HERE or HERE.] Those who read our Ruminations may remember that we are somewhat ambivalent about its general use and a little more inclined toward its use for specific, discrete disputes, such as battles over operating expenses.

Today, for the benefit of those who like the concept and who use provisions such as: “All disputes hereunder will be resolved by arbitration,” we have a new warning. [Perhaps, we should write, “alert.”] When we first heard about an Appellate Division ruling from a New Jersey Court, one that threw out a contract’s “must arbitrate” that read as follows:

Any and all claims or controversies arising out of or relating to [plaintiff’s] employment, the termination thereof, or otherwise arising between [plaintiff] and [defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration. This agreement to arbitrate includes all claims whether arising in tort or contract and whether arising under statute or common law including, but not limited to, any claim of breach of contract, discrimination or harassment of any kind.

we said (to ourselves), “That must be wrong.” After all, doesn’t the quoted provision clearly and unequivocally say that any and all claims have to be arbitrated? But, after reading the decision itself, we switched sides. That’s not to say that New Jersey’s Supreme Court won’t reverse the ruling, because it might. After all, courts just seem to “love” arbitration and seem to bend over backward to validate every agreement to arbitrate. On the side agreeing with the Appellate Division, however, is a (previously unknown to us) 2009 Mississippi Supreme Court decision eerily similar to this month’s New Jersey decision.

Here is a “baseline” principle about agreements to arbitrate. In the words of the United States Supreme Court as rephrased by a New Jersey court:

“[A] state cannot subject an arbitration agreement to more burdensome requirements than” other contractual provisions. An arbitration clause cannot be invalidated by state-law “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

Arbitration’s favored status does not mean that every arbitration clause, however phrased, will be enforceable. . . . Section 2 of the FAA [The Federal Arbitration Act] “permits agreements to arbitrate to be invalidated by `generally applicable contract defenses.’” Accordingly, the FAA “permits states to regulate . . . arbitration agreements under general contract principles,” and a court may invalidate an arbitration clause “‘upon such grounds as exist at law or in equity for the revocation of any contract.’”

Basically, this principle means that contract provisions calling for arbitration are to be interpreted and enforced just like any other contract provision – courts are directed to view them in a content-neutral way. There should be no bias in favor of, or against, an arbitration provision.

Many Ruminations blog postings have distinguished between ambiguous contract provisions and vague contract provisions. In short, a provision is ambiguous if the contract suggests two or more interpretations. In such cases, courts divine which of the choices was intended. They are even permitted to reach outside of the four corners of the document in a search for “intent.” Vague provisions are different. They are ones where there is no clue, no choice to be made. They give a court no guidance. Such provisions are ignored as if they were never in the contract to begin with. Though the New Jersey court did not explain its ruling in that way, it is the underlying basis for what it ruled:

Though the contract it looked at clearly said: “Any and all claims or controversies … shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration,” the parties would have to resolve their disputes in court.

How could that be? Was it just because the arbitration provision didn’t name the arbitrator or provide a means for selecting an arbitrator? No, both New Jersey and The Federal Arbitration Act seem to cover that “deficiency.” Here’s what New Jersey law says:

 If the parties to an agreement to arbitrate agree on a method for appointing an arbitrator, that method shall be followed, unless the method fails. If the parties have not agreed on a method, the agreed method fails, or an arbitrator appointed fails or is unable to act and a successor has not been appointed, the court, on application of a party to the arbitration proceeding, shall appoint the arbitrator. An arbitrator so appointed has all the powers of an arbitrator designated in the agreement to arbitrate or appointed pursuant to the agreed method.

And here’s what federal law says:

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.

So, what was the problem? Shouldn’t the New Jersey Court have selected an arbitrator and moved on? That’s “kind of” what the lower court did when it ruled the employee had the right to choose the arbitration organization. [We won’t explain that; you’ll have to read the Appellate Court decision to learn why.]

The problem is that failing to name the arbitrator is different than failing to name the arbitration forum or not describing a way to choose such a forum. According to the New Jersey court, this is an important distinction. So, what is a “forum” in the sense being used? Here is how the court described it:

In general, a forum is the mechanism-or setting — that parties use to arbitrate their dispute. They could have designated an arbitral institution (like the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Services (JAMS)), or they could have communicated a general method for selecting a different arbitration setting.

And, why is it important (or, to the New Jersey court, imperative) that our agreements name a forum or provide a mechanism for selecting one? That’s because:

The mechanism or setting for the proceeding is important because the rights associated with arbitration forums may differ depending on which forum the parties choose, or on how they define the arbitral process. Here, the agreement ignored the subject altogether.

We hold that the parties lacked a “meeting of the minds” because they did not understand the rights under the arbitration agreement that ostensibly foreclosed plaintiff’s right to a jury trial.

The quoted statutes cure the situation where no arbitrator has been named or the chosen one is not available, but not where the arbitration “rules” are omitted. It isn’t really that the employment agreement in front of the court failed to name an arbitration organization. It is because by failing to do so (or providing a mechanism for doing so), the parties have not reached a “meeting of the minds” as to how the arbitration was to be conducted as a substitute for well-known court rules. By selecting an arbitration forum or individual arbitrator, the parties are either agreeing to an organization’s “rules” or on an arbitrator who they “trust” to make the rules.

So, while it seems pretty clear that the parties before the New Jersey court (and the 2009 Mississippi court) had agreed to forgo the court process in favor of mandatory arbitration, by failing to select an arbitration forum (or describe a process for doing so), their contract’s arbitration requirement was a nullity.

Perhaps, this text from the New Jersey court will make it clear:

We do not mean to imply that there must be certain “talismanic words” in the agreement as to the rights that replace the right to judicial adjudication. Imposing such a requirement would upset the “equal footing” that arbitration contracts enjoy with all other contracts. But, as explained by [an earlier case], it is important that the arbitration agreement reflect a “clear mutual understanding of the ramifications” of the parties’ mutual assent to waive adjudication by a court of law. …. In some fashion, the agreement must communicate that.

So, here is what we all need to do. Search for the word “arbitration” in all of our form agreements and make sure that those forms provide for a forum. It could be any one of the many ones available. We won’t furnish a list. We all have the “web” for that.

Over time, Ruminations has backed away from offering lease provisions, but we’ll make an exception today. Here is a long-form arbitration provision. It is far more than the minimum needed. It isn’t offered as the “perfect” provision. Write your own. Its usefulness may be that it will help readers identify some of the possible issues an agreement to arbitrate will raise.

ARBITRATION

             Section XX.01. If at any time, or from time to time during the Lease Term, any dispute occurs between Landlord and Tenant pursuant to any provision of this Lease with respect to a matter which this Lease provides will be settled by arbitration, such dispute will be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association and the law of the State of [State], and judgment upon the award rendered in such arbitration may be entered in any court having jurisdiction thereof; provided, however, that in any arbitration proceeding conducted pursuant to this Section, the arbitrators must be an attorney at law, admitted to practice in the State of [State]. In any such arbitration, the determination of such dispute, controversy or claim by such arbitration will constitute the final determination thereof and will be binding and conclusive upon the parties to such arbitration, and judgment upon the award rendered in such arbitration may be entered in any court having jurisdiction thereof.

Section XX.02. The arbitrator or arbitrators may not change any of the provisions of this Lease or deprive any party to this Lease of any right of remedy expressly or impliedly reserved under this Lease.

Section XX.03. If the terms of this Article XX differ from or conflict with the then rules of the American Arbitration Association, the arbitrators will be chosen and the arbitration will be governed in accordance with and pursuant to the terms and provisions of this Article XX. The Party desiring arbitration of such dispute, controversy or claim will, in the notice setting forth its request that such dispute, controversy or claim be submitted to arbitration, set forth with particularity the dispute, controversy or claim sought to be arbitrated, and will, in addition, comply with any applicable requirements of the then applicable commercial arbitration rules of the American Arbitration Association, which requirements supplement, without conflicting with the foregoing requirements in this sentence regarding such notice.

Section XX.04. If the American Arbitration Association or any successor thereto with similar function is not then in existence, the parties to an arbitration of which the arbitration rules of the American Arbitration Association (or any successor thereto with similar function) would otherwise apply under this Article XX will seek to agree, during the 15 day period following the giving of the notice referred to above, upon an appropriate body of rules to govern arbitration to be conducted pursuant to this Section XX.04, and such rules so agreed on will be the then applicable arbitration rules; provided that if the parties fail to so agree within such 15 day period, such arbitration will be governed by, and the then applicable arbitration rules will be, the rules then applicable of the entity most commonly utilized in the [metropolitan area] for the arbitration of commercial disputes.

Section XX.05. The party desiring arbitration will appoint as arbitrator on its behalf, a disinterested individual having not less than 10 years’ experience relating to commercial real estate in New Jersey and give notice thereof to the other party or parties to the arbitration, who will, within 15 days thereafter, appoint as arbitrator on its or their behalf, a second disinterested individual having not less than 10 years’ experience relating to commercial real estate in New Jersey and give written notice thereof to the first party. The arbitrators thus appointed will, within 15 days following the appointment of the second arbitrator, appoint a third disinterested individual having not less than 10 years’ experience relating to commercial real estate in New Jersey, and the three arbitrators will, as promptly as possible (but in any event within 30 days following the appointment of the third arbitrator), determine the matter which is the subject of the arbitration, and whether any damages, costs or expenses are to be awarded in connection therewith.

Section XX.06. The decision of the majority of the arbitrators will be delivered to the parties by the arbitrators when made and will be controlling for all purposes under this Lease, immediately upon receipt by the parties of a copy of the decision. The effectiveness of such decision for such purposes will not be delayed or postponed pending confirmation of the arbitration decision or award or entry of judgment upon the decision or award, notwithstanding any challenge or contest by any of the parties with respect to the decision or award, and notwithstanding any application or other request by any of the parties that the arbitrators or any court or other body stay, set aside, nullify or otherwise change the decision or award. The parties will make no request or other application to the arbitrators or any court or other body for any injunction, stay or other relief which would be contrary to the provisions of the preceding sentence, and agree that the arbitrators, any court, and any other body will have no jurisdiction or other authority to consider any request or other application for, or to grant, any injunction, stay or other relief which would violate any provision of this Article XX. If any decision of the majority of the arbitrators will be set aside, nullified, modified or otherwise changed after the parties to the arbitration receive a copy of the original decision or award, the parties will thereupon comply with the action setting aside, nullifying, modifying or otherwise changing the original decision or award, with such changes and adjustments by the parties in actions taken pursuant to the original decision as may be necessary for such purpose.

Section XX.07. No arbitrator selected by any party to the arbitration will have any liability to any other party to the arbitration by reason of the arbitrator’s participation in any determination made under this Article XX, and each of the parties to the arbitration will indemnify and defend the arbitrators against any and all claims asserted against any of them by reason of their participation in any such determination.

Section XX.08. If a party to the arbitration having the right pursuant to Section XX.05 of this Article to appoint an arbitrator fails or neglects to do so, then in such event, the other party to the arbitration, or if the two arbitrators appointed by the parties to the arbitration fail, within 15 days after the appointment of the second arbitrator, to appoint a third arbitrator, then any of the parties to the arbitration may apply to the American Arbitration Association for the appointment of such arbitrator. In the event of the failure, refusal or inability of any arbitrator to act, his or her successor will be appointed within 10 days by the party or parties to the arbitration who originally appointed him or her, or in the event such party or parties fail to so appoint such successor, or in the case of the third arbitrator, his or her successor will be appointed as provided in the first sentence of this Section XX.08. No party to the arbitration may raise any challenge or objection as to the full power and jurisdiction of the American Arbitration Association to entertain such application and make such an appointment.

The term “American Arbitration Association” means the entity or body that administers the then applicable commercial arbitration rules, provided that if such entity or body is affiliated with or subject to control by any party to an arbitration, then for purposes of such arbitration will instead be the entity at the time most commonly utilized in the [metropolitan area] for the arbitration of commercial disputes and which is not so affiliated with or subject to such control.

Section XX.09. Except as otherwise determined by a majority of the arbitrators, whose determination will be binding and conclusive upon all parties to the arbitration, the expenses of arbitration will be shared equally by the parties, and each of the parties will be responsible for the fees and expenses of its own attorneys and other representatives.

Section XX.10. The arbitrators will apply the laws of the State of [State] without regard to conflicts of laws principles and will have no power to vary or modify any of the provisions of this Lease, and their powers and jurisdiction are hereby limited accordingly.

[To read the New Jersey court decision yourself, click: HERE.]

 

 

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