KERNAHAN AND JUDICIAL HURDLES TO ARBITRATION
By Jacqueline A. Muttick, Esq.
By Jacqueline A. Muttick, Esq.
New Jersey courts have continued the trend of applying an exacting reading to arbitration provisions, resulting in cases where such provisions have been struck down for failure to state clearly and unambiguously that the parties waive the right to seek relief in court and instead elect arbitration. A recent decision from late last year held an arbitration provision to be unenforceable when it did not set forth a specific arbitration forum (or a process for choosing an arbitration forum), and otherwise did not itemize the rights that replaced the right to proceed in court. Flanzman v. Jenny Craig, Inc., et al., 456 N.J. Super. 613 (App. Div. 2018). Likewise, the Court earlier this year struck down an arbitration provision that it similarly deemed ambiguous when, among other things, the provision itself was not labeled an “arbitration” provision and contained contradictory language that failed to inform the parties of the rights they were waiving. Kernahan v. Home Warranty Administrator of Florida, Inc., __ N.J. __ (2019).
In Kernahan, the parties entered into a consumer agreement and, after plaintiff consumer filed litigation, defendants moved to dismiss the complaint and enforce arbitration pursuant to the agreement. The Court found that the contract failed to inform consumers, including the plaintiff, that they were waiving their right to trial. Specifically, the arbitration provision was found in a section of the agreement labeled “Mediation,” the font size was small making the provision difficult to read, and the provision itself contained contradictory terms including requiring the arbitration to proceed under the AAA’s Commercial Mediation Rules. (Mediation and arbitration are vastly different, with mediation still providing parties with the opportunity to litigate while arbitration is a process that results in a final disposition.) The Plain Language Act, N.J.S.A. 56:12-1 to -13, requires consumer contracts be written in such a manner as to be understandable by a lay person, and the case law regarding arbitration provisions applies this standard as well. Since the provision in the Kernahan agreement failed to meet these requirement, there was no mutual assent to arbitration and the provision was deemed unenforceable. The Court again reaffirmed the position that “an arbitration agreement is clearly enforceable when its terms affirmatively state, or unambiguously convey to a consumer in a way that he or she would understand, that there is a distinction between agreeing to resolve a dispute in arbitration and agreeing to resolve that dispute in a judicial forum.” Id. slip op. at 24 (citing Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 442-444 (2014)).
The Kernahan decision is significant for its discussion of Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421 (2017). In Kindred Nursing, the United States Supreme Court reviewed a Kentucky case requiring a power of attorney agreement to explicitly state that the agent (the attorney-in-fact) held the authority to waive the principal’s right to a jury trial. The Supreme Court held that such a requirement contravened the Federal Arbitration Act, 9 U.S.C. §§ 1 to 16, by holding arbitration agreements to a more exacting standard than other agreements, and by adding an additional barrier to the enforcement of arbitration agreements. The Court in Kernahan was not asked to review whether Atalese and other New Jersey cases violated Kindred Nursing. Nevertheless the Court did note that such an analysis would not be required for Kernahan because the threshold issue of whether the arbitration provision was clear was easily answered, as the provision did not contain the clarity required for mutual assent. In his concurring opinion, Justice Albin directly addressed this issue and found that Atalese did not conflict with Kindred Nursing, as New Jersey's case law does not disfavor arbitration agreements, but instead only requires the same mutual assent for enforcement that is required of all contracts.
While the majority opinion avoided directly opining on whether Atalese and its progeny runs afoul of Kindred Nursing, it appears from Kernahan that the Court is poised to uphold current New Jersey case law. Given the Court’s ruling in Kernahan, it is anticipated that New Jersey courts will continue their reading of consumer arbitration provisions, which currently favors jury trial in the event there is any ambiguity regarding the mutual assent to arbitrate. At the moment, the Court requires an explicit waiver of jury trial (see, e.g, Atalese), selection of the specific arbitration forum, itemization of the rights replacing the right to proceed in court (see Flanzman), and observance of the Plain Language Act, including clarity in contract terms and headings.
-JAM 6/18/19
-JAM 6/18/19
First Department finds factual issues in §241(6) exclusion, and holds that claim by a lessee’s contractor triggers the lessor’s indemnity
PermalinkBy: Michael E. Kar, Esq.
Associate, N.Y.
Date: December 27, 2017
Synopsis:
Factual issue found in Labor Law §241(6) analysis:
At the Supreme Court below, Plaintiff’s claims under Labor Law §241(6) were dismissed. Section 241(6) imposes on property owners (and lessee’s under Article 10 of New York Labor Law) the duty to provide reasonable protection and safety for workers, and to comply with all Department of Labor regulations. The issue in application of §241(6) was, primarily, centered around the physical location at which the injury took place. The location was the 16th floor of the building in question. A portion of the 16th floor was XCEL’s in practice, an area where they would keep materials and tools used for renovations within the building. However, no personnel or office furniture existed in a permanent capacity, and XCEL had no lease and did not pay any rent for the space. XCEL maintains a separate permanent office and workshop in Queens.
In support of their motion for summary judgment as to the applicability of Labor Law §241(6), Defendant Cayre asserted that the 16th floor is a permanent workshop where “for the past 10 years, the… plaintiff reported to work each day….” Their argument concludes that due to these facts the 16th floor is not the statutorily protected “area[] in which construction, excavation or demolition work is being performed….” N.Y. Labor Law §241(6).
In granting Cayre’s motion for summary judgment below, the Supreme Court found that the 16th floor of the building “was a permanent workshop controlled by XCEL, not a temporary staging area ancillary to the Project and controlled by Cayre.” By extension, this also released Broadway under §241(6).
The First Department reversed and remanded for the court below, finding that “there are disputed issues of fact concerning whether the 16th floor space qualifies as a construction area.” In remanding, the Appellate Division cited such cases as Gerrish v. 56 Leonard, 147 A.D.3 511 (1st Dept. 2017) (factors for determining applicability of 241(6) are physical proximity, common ownership, and operation of off-site premises) and Gonnerman v. Huddleston, 78 A.D.3d 993 (2d Dept. 2010) (241(6) extends to areas where materials are being readied for use, contrary to areas where materials are merely stored for future use).
Binding Arbitration: A New Timebomb for Lawyer and Client, by Arthur Xanthos
PermalinkIt is customary to recommend to a range of clients that they agree to binding arbitration as a mechanism to resolve future disputes under an agreement. Arbitration is often regarded as a cheaper, quicker alternative to litigation. The typical arbitration clause reads as follows: "Any dispute arising under this agreement shall be resolved by arbitration before the American Arbitration Association in New York City under the commercial arbitration rules then in effect." It is just as customary in the same agreement to choose a particular State law, e.g., New York law, to govern the resolution of future disputes. A simple version of this choice of law clause reads as follows: "This agreement shall be governed by the laws of the State of New York."
Yesterday, the New York State Appellate Division, First Department, had the opportunity to consider a case involving an agreement containing both clauses. A limited liability company's operating agreement contained both an arbitration clause and a choice of law (New York) clause. But the commercial arbitration rules (mandated by the arbitration clause) conflicted with New York State law (mandated by the choice of law clause) in one important respect: commercial arbitration rules permit an arbitrator under some circumstances to assess punitive damages against a party to the arbitration. New York State law, on the other hand, does not permit an arbitrator to assess punitive damages. So when an agreement contains both clauses (commercial arbitration rules, and New York State choice of law), may an arbitrator award punitive damages?
Yes, said the Appellate Division in a sharply divided 3-2 decision. Matter of Flintlock Constr. Servs. LLC v. Weiss, 2014 NY Slip Op 05818 (8/14/2014). The majority held that the operating agreement's choice of law provision, in the absence of additional limiting language, "is insufficient to remove the issue of punitive damages from the arbitrator".
The Flintlock decision is problematic for two reasons: First, what do contracting parties do about their already executed agreements that now have conflicting clauses? It is barely overstatement to say that the overwhelming majority of shareholder agreements, operating agreements, asset sale agreements, and even employment agreements contain both of these clauses. Second, how should such agreements be drafted going forward? Pending an appeal of the Flintlock decision, attorneys should follow the First Department's direction and place limits on the arbitrator's power to impose punitive damages. The new clauses might read as follows:
"ARBITRATION. Any dispute arising under this agreement shall be resolved by arbitration before the [NAME OF ARBITRATION TRIBUNAL] in [LOCATION]. The arbitration shall be conducted under commercial arbitration rules then in effect, but the arbitrator(s) shall resolve the dispute in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. The arbitrator(s) shall have the limitations on his, her and their power and authority as are found in New York State law, including without limitation no power or authority to award or assess punitive damages."
"CHOICE OF LAW. This agreement, its validity, construction, and enforcement, shall be governed by the laws of the State of New York, without giving effect to principles of conflict of laws."
APX 8/15/14
Yesterday, the New York State Appellate Division, First Department, had the opportunity to consider a case involving an agreement containing both clauses. A limited liability company's operating agreement contained both an arbitration clause and a choice of law (New York) clause. But the commercial arbitration rules (mandated by the arbitration clause) conflicted with New York State law (mandated by the choice of law clause) in one important respect: commercial arbitration rules permit an arbitrator under some circumstances to assess punitive damages against a party to the arbitration. New York State law, on the other hand, does not permit an arbitrator to assess punitive damages. So when an agreement contains both clauses (commercial arbitration rules, and New York State choice of law), may an arbitrator award punitive damages?
Yes, said the Appellate Division in a sharply divided 3-2 decision. Matter of Flintlock Constr. Servs. LLC v. Weiss, 2014 NY Slip Op 05818 (8/14/2014). The majority held that the operating agreement's choice of law provision, in the absence of additional limiting language, "is insufficient to remove the issue of punitive damages from the arbitrator".
The Flintlock decision is problematic for two reasons: First, what do contracting parties do about their already executed agreements that now have conflicting clauses? It is barely overstatement to say that the overwhelming majority of shareholder agreements, operating agreements, asset sale agreements, and even employment agreements contain both of these clauses. Second, how should such agreements be drafted going forward? Pending an appeal of the Flintlock decision, attorneys should follow the First Department's direction and place limits on the arbitrator's power to impose punitive damages. The new clauses might read as follows:
"ARBITRATION. Any dispute arising under this agreement shall be resolved by arbitration before the [NAME OF ARBITRATION TRIBUNAL] in [LOCATION]. The arbitration shall be conducted under commercial arbitration rules then in effect, but the arbitrator(s) shall resolve the dispute in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. The arbitrator(s) shall have the limitations on his, her and their power and authority as are found in New York State law, including without limitation no power or authority to award or assess punitive damages."
"CHOICE OF LAW. This agreement, its validity, construction, and enforcement, shall be governed by the laws of the State of New York, without giving effect to principles of conflict of laws."
APX 8/15/14