Jacqueline Muttick

In an important clarification of contract and arbitration law, New Jersey’s Appellate Division recently confirmed that an arbitration agreement between sophisticated parties does not need to expressly waive the right to trial in order to bind the parties to arbitration. This ruling clarifies that while arbitration obligations contained in consumer and employment agreements continue to require express waivers, agreements between sophisticated parties do not require the same protections.

In County of Passaic v. Horizon Healthcare Services, Inc., __ N.J. Super. __ (App. Div. 2023), plaintiff County of Passaic (the “County”) contracted with defendant Horizon Healthcare Service, Inc. (“Horizon”) and a dispute arose under that contract. The contract required the parties “submit the dispute to binding arbitration under the commercial rules of the American Arbitration Association.” The trial court upheld the arbitration provision, finding the parties had agreed to arbitration. The County appealed, asserting that the arbitration provision was not binding under Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), which requires arbitration provisions include an express waiver of the right to seek relief in court.

In Atalese, the Supreme Court almost a decade ago held that the failure to include an express waiver of the right to trial in a consumer contract would not put consumers on notice that they were waiving a constitutional or statutory right to trial by agreeing to arbitrate disputes. The County sought to rely upon Atalese to avoid arbitration, as the arbitration provision of the contract it entered into with Horizon did not expressly waive the right to trial.

The Appellate Division, however, clarified that Ataleseapplies only to contracts between parties that have an unequal relationship, like consumer or employment contracts. Since consumers and employees generally are not versed in legal terminology, an express waiver of the right to trial is required before an arbitration provision will be found enforceable. This same requirement for an express waiver is not required, however, when the agreement to arbitrate is between sophisticated parties with “comparatively equal bargaining power”.

In negotiating the contract, the County and Horizon both were represented by counsel, had a long-standing relationship with each other, and understood the difference between binding arbitration and trial. Accordingly, the arbitration provision in the contract between the County and Horizon, even without an express waiver, was held to be binding on the parties.

In light of this ruling, enforceability of arbitration provisions going forward will depend upon not only the contract language utilized, but also the identity of the parties to the agreement. For existing contracts, parties should review the arbitration provisions with counsel; for future contracts, counsel may need to gauge the sophistication and relative bargaining power of the parties (perhaps even drafting relevant recitals for inclusion in the document). To mitigate the uncertainty and avoid this additional drafting, the arbitration clause template should include the Atalesewaiver language and be used in all agreements.