Arbitration clauses are a useful tool to resolve disputes without having to resort to litigation. Contractors and owners alike should be aware of these clauses to ensure they know how to enforce their rights in case something goes awry. The requirements for an enforceable arbitration clause in New Jersey are particularly strict. A recent NJ Appellate Court decision emphasized how specific a construction contract’s arbitration clause must be in order to be enforceable.
New Jersey arbitration in residential construction contracts
New Jersey law strongly favors arbitration over litigation, particularly in the construction industry. In fact, it’s a required step to the NJ residential mechanics lien process.
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But what about other construction-related claims? Most construction contracts contain some sort of arbitration agreement. Yet, even though the state favors arbitration, the New Jersey courts have repeatedly limited their enforceability in the realm of residential construction projects.
Residential construction contract with an arbitration clause
The case in question is Becker v. Ollie Slocum & Son, Inc.
- Owners: Robert & Catherine Becker (Becker)
- Prime Contractor: Ollie Slocum & Son, Inc. (Ollie)
Becker hired Ollie for the construction of a new home for $1.85M. Within the terms of the contract, there was an arbitration clause which read as follows:
All claims and disputes relating to this contract shall be subject to arbitration at the option of either the owner or the general contractor in accordance with the Arbitration Rules of American Arbitration Association for the construction industry in effect at the time of the arbitration. Written notice of demand for arbitration shall be filed with the other party to the contract and with the American Arbitration Association within a reasonable time after the dispute has arisen. The costs associated with the Arbitration Association shall be equally borne by the parties hereto in a prompt and timely manner.
The project was successfully completed, but it was completed almost a year and a half later than initially agreed upon. In addition to late completion, Becker later found a number of alleged construction defects, so the Beckers filed a complaint claiming breach of contract, negligence, and recovery of $35K in overpayment. In response, Ollie filed a motion to compel arbitration under the contract arbitration clause, which was granted. Becker appealed.
NJ Court: Contract arbitration clause unenforceable
The appellate division court analyzed this arbitration clause using the test set out in Atalese v. US Legal Serv. Group. In that case, the Supreme Court stated that an arbitration clause must be sufficiently clear and unambiguous to a reasonable consumer. It will be deemed unenforceable when there is an “absence of any language in the arbitration provision that a plaintiff is waiving their statutory right to seek relief in a court of law.”
The issue with the clause, in this case, was that it provides no explanation as to “how it serves as a replacement for judicial relief.” There is no indication that an average consumer would understand how arbitration works, and that they would no longer have the right to pursue legal action in court.
The court then compared the clause between Becker and Ollie with a clause that was deemed enforceable. The enforceable clause stated that arbitration was the exclusive forum for the resolution of any claims. It explicitly stated that they were prohibited from filing a lawsuit or any other proceedings, and that by signing the agreement, they’d be waiving any rights to a jury trial.
Ultimately, the clause was deemed unenforceable for two main reasons. The first being that the language wasn’t clear and unambiguous. Secondly, the clause failed to explain what arbitration is, and how it differs from normal legal proceedings.
Draft your arbitration clauses carefully
Whether drafting your own contract or signing one prepared by another party, you need to be sure that the arbitration clause meets the requirements under the laws of the state you’re working in. The clause must be drafted as clearly as possible so the parties are knowingly and voluntarily giving up their rights. It should also include an explanation of the arbitration process enough that the consumer can make an informed decision concerning their rights. There are no “magic words” to use that will make an arbitration clause enforceable. However, there needs to be enough information to convey a basic understanding that the signing parties are waiving the right to seek relief in court.