Opinion
DOCKET NO. A-3531-14T2
02-16-2016
GARY DVORAK AND LINDA DVORAK, Plaintiffs-Appellants, v. AW DEVELOPMENT, LLC, t/a SUPREME MODULAR, Defendant-Respondent.
Fred S. Dubowsky, attorney for appellants. Joseph A. Lombardo, attorney for respondent.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Ostrer and Haas. On appeal from the Superior Court of New Jersey, Law Division, Ocean County, Docket No. L-1799-14. Fred S. Dubowsky, attorney for appellants. Joseph A. Lombardo, attorney for respondent. PER CURIAM
Plaintiffs Gary and Linda Dvorak appeal from the Law Division's January 14, 2015 order granting defendant's motion to dismiss their complaint pending completion of non-binding arbitration. Plaintiffs also appeal from an order denying their motion for reconsideration. Because the arbitration provision here is not enforceable, we reverse and remand.
On April 15, 2013, plaintiffs entered into a contract to purchase a manufactured home from defendant AW Development, LLC, t/a Supreme Modular (Supreme). Defendant agreed to construct and install the two-bedroom ranch home on plaintiffs' existing lot in Little Egg Harbor, Ocean County. The contract price was $135,179, including $1500 earnest money previously paid and $12,000 paid upon execution. The contract included a mortgage contingency and a three-day attorney review provision. Closing was estimated to occur in September 2013, after substantial completion of construction.
The contract included a clause providing for non-binding arbitration of any claim:
ARBITRATION; WAIVER OF JURY TRIAL. Any claim arising out of or related to this Agreement shall be subject to non-binding arbitration, unless the parties mutually agree otherwise, in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect. The demand for arbitration shall be filed, in writing, with the American Arbitration Association, and a copy shall be delivered to the other party(ies). The right to file a legal or equitable proceeding is specifically reserved to all parties hereto if any party to this Agreement is not satisfied with the results of arbitration. The parties hereby agree that the arbitration will take place in Gloucester County, New Jersey. Notwithstanding anything to the contrary herein, this paragraph does not preclude Supreme from seeking prejudgment remedies and/or emergency relief from a court of
equity or other court of competent jurisdiction. Buyer may not seek such prejudgment/emergent relief under any circumstances. EACH PARTY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE, SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR OTHERWISE RELATING TO THE RELATIONSHIP OF THE PARTIES, WHETHER IN CONTRACT, TORT OR OTHERWISE.Preceding this paragraph was a choice-of-law provision stating that the contract should be governed by New Jersey law.
In June 2014, plaintiffs filed a seven-count complaint, asserting claims of fraudulent inducement, breach of contract, tortious interference, and a violation of the Consumer Fraud Act, N.J.S.A. 56:8-1 to -20. Plaintiffs alleged they had paid defendant over $152,000, but the house was not timely delivered. The new house was allegedly intended to replace the plaintiffs' house, which was "dramatically impacted" by Superstorm Sandy. Plaintiffs asserted the contract was drafted entirely by defendant and was non-negotiable, and that they signed the contract without consulting an attorney. Plaintiffs sought rescission, return of the purchase price, compensatory and punitive damages, and attorney's fees and costs.
Defendant filed its answer and counterclaim on August 19, 2014, "without waiving any contractual provisions, including the arbitration clause." Defendant alleged plaintiffs requested multiple change orders and denied defendant access to the property. Among other affirmative defenses, defendant asserted plaintiffs' complaint was "barred due to an applicable arbitration clause . . . ." Defendant asserted counterclaims of breach of contract, unjust enrichment and abuse of process, for which it sought consequential, compensatory and punitive damages, and attorney's fees and costs.
Modest discovery ensued. With its answer defendant served requests for admissions on plaintiffs. Gary Dvorak answered, denying all requests. Defendant asserts Linda did not respond. Plaintiffs served interrogatories and document requests on September 18, 2014, to which defendant did not respond. Instead, on November 5, 2014, defendant filed a motion to dismiss, based on the arbitration clause.
The trial court granted defendant's motion, finding the arbitration provision was unambiguous and not unconscionable. Although the provision did not state when arbitration must be completed, the court directed that it be completed in a reasonable time.
Plaintiffs filed a motion for reconsideration reiterating their earlier arguments, but also arguing for the first time that defendant waived the arbitration provision by participating in the litigation instead of seeking arbitration at the outset. The court denied the motion, relying on its previous opinion granting the motion to dismiss. With respect to waiver, the court held defendant did not inordinately delay in pursuing arbitration, noting that defendant raised the arbitration clause as an affirmative defense in its answer.
This appeal followed. Plaintiffs present the following points for us to consider:
POINT I
THE ARBITRATION CLAUSE ISOLATED FROM THE BODY OF THE CONTRACT IS UNCLEAR AND UNCONSCIONABLE.
POINT II
EXAMINATION OF THE ENTIRE CONTRACT, INCLUDING, IF NECESSARY, RECEIPT OF EVIDENCE, WAS NECESSARY TO PROPERLY EVALUATE AND APPLY THE ARBITRATION TERM.
A. STANDARD OF REVIEW
B. CONTRACTS OF ADHESION AND CONSUMER CONTRACTS REQUIRE HEIGHTENED SCRUTINY FOR ENFORCEMENT OF AN ARBITRATION CLAUSE.
We review de novo the trial court's dismissal order. Rezem Family Assocs. v. Borough of Millstone, 423 N.J. Super. 103, 114 (App. Div.), certif. denied, 208 N.J. 368 (2011). We also exercise plenary review regarding whether there is a valid and enforceable arbitration agreement. Hirsch v. Amper Fin. Servs., LLC, 215 N.J. 174, 186 (2013); Barr v. Bishop Rosen & Co., 442 N.J. Super. 599, 605 (App. Div. 2015).
Though the Federal Arbitration Act and New Jersey Arbitration Act reflect a preference for arbitration, "[a]rbitration's favored status does not mean that every arbitration clause, however phrased, will be enforceable." Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 441 (2014), cert. denied, ___ U.S. ___, 135 S. Ct. 2804, 192 L. Ed. 2d 847 (2015). We apply state contract law to determine whether a valid agreement to arbitration exists. Ibid. (internal citations omitted).
Recently, Judge Fisher succinctly reviewed the principles governing enforceability of arbitration contracts:
An agreement to arbitrate "must be the product of mutual assent, as determined under customary principles of contract law." Atalese, [supra, 219 N.J. at 442]. Mutual assent requires that the parties understand the terms of their agreement. Ibid. In considering whether an agreement includes a waiver of a party's right to pursue a case in a judicial forum, "clarity is required." Moore v. Woman to Woman Obstetrics & Gynecology, L.L.C., 416 N.J. Super. 30, 37 (App. Div. 2010). That is, the waiver "must be clearly and unmistakably established," Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 132 (2001), and "should clearly state its purpose," Marchak v. Claridge Commons, Inc. 134 N.J. 275, 282 (1993). And the parties must have full knowledge of the legal rights they intend to surrender. Knorr v. Smeal, 178 N.J. 169, 177 (2003). Although an arbitration clause need not identify "the specific constitutional or statutory right guaranteeing a citizen access to the courts"
that are being waived, it must "at least in some general and sufficiently broad way" convey that parties are giving up their right to bring their claims in court or have a jury resolve their dispute. Atalese, supra, 219 N.J. at 447.
[Barr, supra, 442 N.J. Super. at 605-06.]
Applying these principles, the arbitration provision did not clearly and unmistakably waive plaintiffs' right to file a lawsuit. First, the provision is ambiguous with respect to whether a party must resort to non-binding arbitration as a precondition to filing suit in court. The statement that claims "shall be subject to non-binding arbitration" contemplates non-binding arbitration only if a party files for it, but the provision does not expressly or clearly bar a party from first filing suit. Nor does the provision expressly empower a party to shift the forum to an arbitrator after a lawsuit has been filed.
Persuasive federal authority is in accord that non-binding arbitration "is not a condition precedent to litigation absent explicit intent to the contrary." See Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 941 F. Supp. 2d 513, 517-18 (D.N.J. 2005) (citing Bombardier Corp. v. AMTRAK, 298 F. Supp. 2d 1, 3 (D.D.C. 2002)). "[T]he parties must not only agree to submit the dispute to a third party, but also agree not to pursue litigation until the process is completed." Id. at 518 (internal quotation marks and citation omitted); see also Shook of W. Va., Inc. v. York City Sewer Auth., 756 F. Supp. 848, 851-52 (M.D.Pa. 1991) (stating that "language in a contract not clearly identified as a condition precedent is presumed not to be one," particularly where the condition "would divest a party of the right to have a court hear its claims"). Here, the provision's reservation of the right to litigate in court does not clearly and unambiguously require arbitration as a precondition to filing suit. Consequently, such a condition precedent should not be presumed.
Furthermore, the jury waiver provision obscures which disputes are "subject to non-binding arbitration." The provision states, "Each party waives any right to trial by jury with respect to any dispute, suit, action or proceeding arising out of or relating to this agreement or otherwise relating to the relationship of the parties, whether in contract, tort or otherwise." This is broader than the non-binding arbitration clause, which only refers to "claim[s] arising out of or related to this Agreement." The omission of the "otherwise relating to the relationship of the parties" language from the non-binding arbitration clause implies these claims are subject to the jury waiver, but not to non-binding arbitration.
Also, the provision refers to "non-binding arbitration . . . in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [AAA] . . . ." However, the Construction Industry Arbitration Rules make no mention of a non-binding process. The AAA has promulgated separate rules for "non-binding arbitration," which the agreement does not reference. In sum, the agreement did not clearly and unambiguously require plaintiffs to arbitrate their claims before filing a lawsuit.
See Am. Arbitration Ass'n, Non-Binding Arbitration Rules for Consumer Disputes and Business Disputes (Apr. 15, 2009), http://www.adr.org/cs/idcplg?IdcService=GET_FILE&dDocName=ADRSTG_010623&RevisionSelectionMethod=LatestReleased.
Even if the provision were unambiguous, we part company with the trial court's assessment of unconscionability. At the outset, we note defendant does not dispute this was a contract of adhesion. However, that a contract is one of adhesion does not render it per se unenforceable. Rodriguez v. Raymours Furniture Co., 436 N.J. Super. 305, 318 (App. Div.), certif. denied, 220 N.J. 100 (2014).
To determine unconscionability in the context of an adhesion contract, we look at four factors: "[(1)] the subject matter of the contract, [(2)] the parties' relative bargaining positions, [(3)] the degree of economic compulsion motivating the adhering party, and [(4)] the public interests affected by the contract." Delta Funding Corp. v. Harris, 189 N.J. 28, 40 (2006) (internal quotation marks and citation omitted). In addition, we consider the "take-it-or-leave-it nature" of the contract. Ibid. We apply "a sliding-scale approach to determine overall unconscionability, considering the relative levels of both procedural and substantive unconscionability." Ibid.
Procedural unconscionability refers to defects in the contracting process, including "lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contract formation process." Raymours Furniture, supra, 436 N.J. Super. at 317 (internal quotation marks and citation omitted). Substantive unconscionability "generally involves harsh or unfair one-sided terms;" it "simply suggests the exchange of obligations so one-sided as to shock the court's conscience." Ibid. (internal quotation marks and citation omitted).
The Delta Funding factors point toward a finding of unconscionability here. It is apparent that defendant had greater bargaining power, given plaintiffs' position. Plaintiffs needed a new home to replace one significantly damaged by the storm. While they conceivably could have procured a home from another builder, they were nonetheless in a "seller's market."
Other parts of the contract reflect defendant's greater bargaining power. Defendant reserved for itself the right to cure any default, while denying plaintiffs a comparable right. Plaintiffs may not seek any consequential damages, yet defendant's right to do so is unfettered. We note that defendant seeks consequential damages in its counterclaim. These facts reflect the economic pressure on plaintiffs to accept the contract on defendant's terms.
Most important in our unconscionability analysis is the one-sided nature of the arbitration provision. Defendant reserved for itself the power to seek injunctive and emergent relief, while plaintiffs may not seek such relief "under any circumstances." Thus, defendant created an exception to arbitration only for itself, even as it contends that plaintiffs must complete arbitration as a precondition to seeking relief in court. This grossly imbalanced approach to the availability of interlocutory or emergent relief constitutes harsh and unfair one-sided terms that do not deserve judicial enforcement.
The one-sided nature of the provision cannot be cured by striking the unenforceable parts. The contract does not include a severability clause, and it is uncertain that striking the emergent relief language would leave behind a "clear residue that is manifestly consistent with the central purpose of the contracting parties, and that is capable of enforcement." See NAACP of Camden Cty. E. v. Foulke Mgmt. Corp., 421 N.J. Super. 404, 437-38 (App. Div. 2011) (declining to sever unenforceable parts of arbitration clause where doing so would "leav[e] uncertainty" regarding the reformed language) (internal quotation marks and citation omitted), certif. granted, 209 N.J. 96 (2011), appeal dismissed, 213 N.J. 47 (2013). --------
In sum, we conclude the arbitration provision did not clearly waive plaintiffs' right to bring suit, and in any event is unconscionable. Given our holding, we need not reach plaintiffs' argument that defendant waived its right to pursue arbitration.
Reversed and remanded. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION