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The New Jersey Supreme Court has ruled that a provision of a consumer contract requiring arbitration of disputes is unenforceable because it used confusing and contradictory language.

In Kernahan v. Home Warranty Administrator of Florida, the defendant-appellant asked the justices to find that the arbitration clause was enforceable under the U.S. Supreme Court's 2017 ruling in Kindred Nursing Centers v. Clark. That was after a trial judge and an appellate panel ruled the Home Warranty Administrator arbitration clause was unenforceable, relying on Atalese v. U.S. Legal Services Group, a 2014 New Jersey Supreme Court ruling that declined to enforce an arbitration provision.

Home Warranty Administrator asked the justices to find that the Kindred Nursing case, which upheld a mandatory arbitration clause in a consumer contract, dictated that the New Jersey Supreme Court reverse its 2014 ruling in Atalese.

The lawyer for Home Warranty Administrator conceded at oral argument that Atalese and Kindred Nursing were not in conflict. But even if the defendant maintained that argument, the justices said, the court would not need to address any perceived conflict between those cases because the threshold issue of whether the arbitration provision's language is clear enough to form an agreement about arbitration is easily answered.

The justices said the mandatory arbitration clause was confusing because of the way it used the terms arbitration and mediation interchangeably, and that the clause was easy to overlook because it was printed in a small font.

Justice Jaynee LaVecchia/photo by Carmen Natale

“The provision does not fairly convey to an ordinary person that arbitration would be the required method of dispute resolution. Accordingly, for the reasons expressed herein, we concur in the judgment that declined to enforce this provision as an understandable mutual agreement to arbitrate disputes, which, thereby, allowed plaintiff to proceed with her claims in the action she filed in court,” Justice Jaynee LaVecchia wrote for the court.

Justice Barry Albin issued a concurring opinion in which he said the defendant's concession should not prevent the court from addressing the question of continued vitality of Atalese. Several amicus curiae briefs addressed that question forcefully from various viewpoints, he said.

“That issue will not go away. Tomorrow is not a better time to resolve an issue on which courts need emphatic guidance. In my view, our jurisprudence, including Atalese, conforms to the FAA, and Kindred Nursing has not altered that equation. Indeed, the Court reaffirms the fundamental principle animating Atalese—an arbitration clause in a consumer contract is unenforceable unless the contract's language conveys in some manner 'that there is a distinction between agreeing to resolve a dispute in arbitration and in a judicial forum,'” Albin wrote.

Plaintiff Amanda Kernahan paid $1,050 for a home service agreement from the defendants, who agreed to provide repairs or replace appliances and mechanical systems in her home. She became dissatisfied and canceled the contract. She later filed a complaint that raised claims under the state Consumer Fraud Act and the Truth in Consumer Contract, Warranty and Notice Act.

John Keefe Jr., who represented Kernahan and a putative class of consumers, said, “Our view of it is, as plaintiffs, this is a really good decision for consumers who have these arbitration clauses buried in a contract.”

The New Jersey State Bar Association submitted an amicus curiae brief in which it took the position that, applying general principles of contract, the language in the arbitration clause at issue was not clear and that there was no mutual assent of the parties, a necessary precursor to a valid contract.

Keefe, who is president of the New Jersey State Bar Association, said he recused from the association's decision to submit the amicus brief, preparation of the brief and the selection of a lawyer to present it.

Lori Grifa of Archer & Greiner in Hackensack, who represented defendants Home Warranty Administrator of Florida Inc. and Choice Home Warranty, said she and her clients are reviewing the decision and considering their options.

James Barry of Locks Law Firm in Cherry Hill argued for the amicus curiae New Jersey Association for Justice, which argued that Atalese was not effected by Kindred Nursing. He said the Supreme Court correctly concluded the defendant's contract did not comply with New Jersey law.

David Kott of McCarter & English in Newark, who represented the amici curiae New Jersey Business and Industry Association, Commerce and Industry Association of New Jersey and New Jersey Chamber of Commerce, had argued that Kindred Nursing overruled Atalese.

“We look forward to raising the issue again before the New Jersey Supreme Court in a future case,” Kott said.