Parties Must Clearly Agree to Delegate Arbitrability to an Arbitrator, Says the NJ Supreme Court

In its most recent pronouncement on arbitration clauses, the New Jersey Supreme Court confirmed that it is for the Court, and not an arbitrator, to determine whether the parties have agreed to arbitrate consumer fraud claims in the absence of a clear delegation clause to the contrary. In Morgan v. Sanford Brown Inst., the New Jersey Supreme Court reversed an order of the Appellate Division holding that arbitrability was for the arbitrator to decide, finding that under Atalese v. U.S. Legal Servs. Grp. and First Options of Chi., Inc. v. Kaplan, the agreement to delegate arbitrability to an arbitrator must, as with the other arbitration provisions, clearly inform the average consumer of the rights he or she is giving up.

In Sanford Brown, the Court reviewed an arbitration provision contained in enrollment agreements for admission into an ultrasound technician program which read, in part: “Any disputes, claims, or controversies . . . arising out of or relating to (i) this Enrollment Agreement; (ii) the Student’s recruitment, enrollment, attendance, or education; (iii) financial aid or career service assistance by SBI; (iv) any claim . . . or (v) any objection to arbitrability . . . shall be resolved pursuant to this paragraph.” The Court held that the provision was unenforceable under Atalese and First Options, because the enrollment agreement failed to explain that an arbitrator would decide whether the parties agreed to arbitrate legal claims or that arbitration was a substitute for the right to bring a claim before a court or jury. As with the arbitration provision in Atalese, inclusion of this minimal information regarding arbitration was deemed necessary to establish a meeting of the minds sufficient to form a valid contract.

Acknowledging that under Rent-A-Ctr. W., Inc. v. Jackson, parties are permitted to agree to delegate arbitrability to an arbitrator, the Court emphasized that these delegation clauses, like the arbitration agreement itself, must satisfy the elements necessary to form a contract. The Court explained that under First Options, “there must be ‘clea[r] and unmistakabl[e]’ evidence that the parties agreed to arbitrate arbitrability” to overcome the presumption that arbitrability is for the court to decide. The Court explained that silence or ambiguity in an agreement does not overcome the presumption that a court decides arbitrability.

The Sanford Brown Court was also careful to explain that the obligation of a party to mount a specific challenge to the validity of a delegation clause when opposing a motion to compel arbitration, as is required by Rent-A-Ctr., “presuppose[s] a clearly identifiable delegation clause that would be apparent to the parties.” In this regard, the Court found that the plaintiff could not be faulted for failing to object to the delegation clause in the enrollment agreements because it bore no resemblance to the one in Rent-A-Ctr. and was not clearly identifiable. The Court also found it significant that the defendants there had not raised the issue of the delegation clause below.

With Sanford Brown in mind, businesses opposing the enforcement of an arbitration agreement should heed the Court’s advice and “lodge a specific challenge to the delegation clause” because “failure to do so will require that the issue of arbitrability be determined by the arbitrator.” On the other hand, parties wishing to ensure that all potentially arbitrable disputes, including arbitrability, are resolved by an arbitrator and not a court should, at a minimum, clearly explain that agreeing to arbitration is a waiver of one’s right to have disputes resolved by a judge or jury and also explain what appellate rights, if any, a party has to review an unfavorable arbitration decision.

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department. Kate E. Janukowicz, an Associate in the Gibbons Business & Commercial Litigation Department, co-authored this post.
Print