Appellate Division Continues Trend of Limiting Enforceability of Arbitration Clauses in Residential New Jersey Construction Contracts

In October 2019, the Appellate Division of the Superior Court of New Jersey issued an opinion in the case of Becker v. Ollie Solcum & Son, Inc., examining the enforceability of an arbitration clause in a construction project.  The decision continued the trend in New Jersey of limiting enforcement of arbitration agreements, particularly where one party is a customer.

The case arose from a dispute over a residential construction project. Robert and Catherine Becker entered into a contract with Ollie Slocum & Son, Inc. (“Slocum”) to build a new home for them for $1,850,000.  Under the contract, the project was to be completed in no more than 52 weeks after excavation work started.  Substantial completion was actually about one and a half years late.  The Beckers sued Slocum in the Law Division of the Superior Court of New Jersey over the delay and alleged construction defects including water penetration and deterioration of the outdoor decking, siding, and finishing.

The contract, which contained a clause requiring arbitration of disputes, stated:

All claims and disputes relating to this contract shall be subject to arbitration at the option of either the [o]wner or the [g]eneral [c]ontractor, in accordance with the Arbitration Rules of the 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 [p]arties hereto in a prompt and timely manner.

Slocum filed a motion asking the court to dismiss the Becker’s suit and send it to arbitration.  The Law Division judge granted the motion, dismissed the lawsuit, and entered an order compelling the parties to resolve their dispute through arbitration.  The Beckers appealed to the Appellate Division of the Superior Court.  The Appellate Division reversed the trial judge, reinstated the case, and refused to compel arbitration.

The Appellate Division explained that the arbitration clause did not meet the requirements set forth in the New Jersey Supreme Court’s ruling in Atalese v. U.S. Legal Services Group, L.P.

First, the Appellate Division explained that the arbitration clause was invalid because it did not “state its purpose clearly and unambiguously.”  This was so because every agreement to resolve disputes by arbitration necessarily requires the waiver of the constitutional right to proceed in court.  Therefore,the arbitration agreement must state this waiver – and that it was knowing and voluntary – in clear and unambiguous language.  This arbitration clause didn’t, and thus it was not clear and “unmistakable” that the Beckers knowingly and voluntarily waived their right to file suit in court.  Precise language is not necessary, but some clear and unmistakable language is.

Second, the arbitration clause was also void because it did not “explain what arbitration is [and] how it differs from seeking judicial [ie., court] relief.”  Here, the clause was absent any such language, must less clear and unambiguous wording.

The takeaway is that when drafting contracts with an arbitration clause the drafter should be thoroughly familiar with the requirements of New Jersey construction law.  They must ensure that the arbitration clause clearly and unambiguously shows that both parties know what arbitration is, what rights they are giving up, and that they knowingly and voluntarily agree to arbitrate.  Otherwise the arbitration clause will be unenforceable.

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