arbitration-puzzle-piece

In the past few months, New Jersey courts have provided guidance to transactional lawyers drafting agreements with arbitration clauses. Employers cannot bury the arbitration provision, as part of a training program, that employees “acknowledge.”  Similarly, the section title cannot be misleading, and the font size must meet the standard of the Plain Language Act. Litigation waivers must be clear in consumer cases to meet Atalese standards.

Most recently, the Appellate Division has given the bar a “heads up” when drafting arbitration clauses. In a multi-contract relationship between sophisticated parties, language in the last contract saying the parties “may” arbitrate disputes using specified rules and other parameters was construed to mean that arbitration was permissive rather than mandatory. Medford Township School District v. Schneider Electric Buildings America's, Inc., A-5798-17, — N.J. Super. —, 2019 N.J. Super. LEXIS 54 (N.J. Super. Ct. App. Div. Apr. 26, 2019).

In Medford, the defendant contractor memorialized its winning bid in an energy services construction contract (the ESCC) drafted by the contractor. A prior services agreement between the parties (the PASS) mandated that disputes “shall” be resolved in a court “serving” the local county, and the bid proposal required that the successful bidder “shall agree” to litigate any dispute in Burlington County Superior Court. However, the final ESCC contained an arbitration clause stating, in part, that any dispute arising out of the contract “may be settled by binding arbitration…, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.” The PASS said that its provisions controlled over conflicting terms in any other agreement, but the later ESCC stated that its provisions governed over any prior oral or written agreements. Both the PASS and the ESCC were on Schneider forms.

When a dispute arose regarding payment and performance, the contractor filed an arbitration with the American Arbitration Association, listing the company's office in Rhode Island. The school district filed suit in New Jersey Superior Court seeking to enjoin and dismiss the arbitration and, instead, litigate the parties' disputes in the Superior Court in Burlington County. The trial court declined to compel arbitration, and the Appellate Division affirmed.

Schneider argued unsuccessfully that the clause was intended to allow either party to elect arbitration, in which case the other was bound to that election. Both courts disagreed with Schneider's argument that construing “may” to be permissive would make the clause “superfluous” since parties always “may” agree to arbitrate. The Appellate Division did not reject these arguments out of hand. As the court said: words such as “either party may demand arbitration” could more clearly have made arbitration mandatory. “Without any conflicting agreements executed between the parties mandating litigation, we might agree with Schneider's position.”

However, not only did the parties use “shall” in other contexts in the ESCC (for example, arbitration “shall be in the county in which the project is located”), but the two earlier contracts contained mandatory venue clauses for any litigation (without mention of arbitration) using the verb “shall.” While one might have excluded evidence of other contracts in light of the integration clause in the ESCC, the court viewed the other uses as helpful in understanding the meaning of “may” rather than disregarding the more recent arbitration clause. The requirement that arbitration clauses “evince a clear intent to waive the right to sue in court,” consistent with Atalese, did not help. Nor did it help that the contracts were drafted by Schneider who, it was said, could have made its intention to mandate arbitration “explicit[]”.

The deficiency identified in Medford may be easily remedied. The lesson is clear; if parties drafting contracts want to be able to compel arbitration involving any New Jersey party, the drafter should take the time to review its existing forms and make them as clear as possible.