New Jersey Appellate Division Holds Rescission of Contract Also Rescinds Agreement to Arbitrate Contractual Disputes

In a recent published opinion, the New Jersey Appellate Division held that an arbitration provision will not survive rescission of the contract in which it is contained unless the parties expressly agree otherwise, and that the issue is properly decided by the trial court and not the arbitrator. This opinion marks one more step in New Jersey’s evolving landscape regarding questions of arbitrability.

In Goffe v. Foulke Management Corp., the panel considered two actions consolidated on appeal. Both actions involved consumers who attempted to purchase cars from two separate dealerships. Both consumers signed some of the initial paperwork (which contained an arbitration provision), accepted possession of the vehicle, but returned the vehicles after a few days for different reasons. When their respective security deposits for the vehicles were withheld, they each brought suit claiming wrongful conduct on the part of the dealerships. The defendant dealerships successfully moved to dismiss, asserting that plaintiffs were contractually required to arbitrate their pleaded claims. Plaintiffs appealed.

After determining that issues of fact as to whether valid sales contracts had been formed and were enforceable should have prevented dismissal of the actions, the Appellate Division addressed whether the arbitration provisions in the contracts were rescinded when the sales contracts were rescinded.

Specifically, the Appellate Division considered “whether an arbitration provision may survive and govern disputes arising from the parties dealings after they mutually agreed to rescind the very sales contract that contained an arbitration provision.” The panel concluded that the parties agreed to return to square one, i.e., the “status quo ante,” which shows that defendants implicitly agreed to rescind all of plaintiffs’ obligations and plaintiffs agreed to the rescission of all of defendants’ promises. As a result, the panel held that the arbitration provision did not survive rescission of the agreement, noting that if the parties had wanted the arbitration to survive such rescission, they were required to manifest their intent to do so.

The panel also considered whether the parties agreed to have the court or an arbitrator determine the question of arbitrability. Because the panel identified factual questions that must be decided before determining whether the parties entered into enforceable contracts that contained arbitration provisions, the panel held that the trial court must consider which claims, if any, were arbitrable. In so doing, the Appellate Division recommended that the trial court require limited discovery to address the arbitrability issues, and reminded the trial court of its ability to require that the parties amend their pleadings to make clear which claims were based on which agreements or which were arbitrable.

The opinion is also notable for the Appellate Division’s holding that a violation of N.J.S.A. § 56:8-2.22 (which requires a seller to provide a consumer purchaser with a copy of the signed sales contract), renders an agreement that is subject to the statute (and any arbitration provision contained therein) unenforceable. The panel held that “[t]o have an enforceable contract with an included enforceable arbitration provision, a seller—like defendants here—must provide to a consumer the contract documents they signed.”

While New Jersey courts of late have closely scrutinized the language of arbitration provisions, the Appellate Division here found no issue with the content of the arbitration provision or the manner in which that content was conveyed to consumers. Similarly, the Appellate Division in Perez v. Leonard Automotive Enterprises, Inc. considered an arbitration provision in a motor vehicle sales contract that stated “either you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial.” The panel declined to consider the plaintiff’s argument, raised for the first time on appeal, that there was no meeting of the minds and therefore no enforceable contract. The panel also rejected the plaintiff’s argument that the arbitration agreement was unenforceable because it did not clearly inform or explain to plaintiff that she waived her right to have disputes related to the contract resolved in court, and held that the arbitration fully satisfied the Atalese standard, which continues to be the law of the land in New Jersey for arbitration provisions.

Caroline E. Oks is an Associate in the Gibbons Commercial & Criminal Litigation Department.
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