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May 24, 2018 Articles

New Jersey Holds That Rescission Defeats Arbitration

By Robert E. Bartkus

The New Jersey Appellate Division recently issued a for-publication opinion, Goffe v. Foulke Mgmt. Corp., ___ N.J. Super. __, A-2658-16, 2018 N.J. Super. LEXIS 61, 2018 WL 1915860 (App. Div. Apr. 24, 2018), holding that the rescission of the underlying contract containing an arbitration clause is a sufficient basis for denying a motion to compel arbitration. The decision is both interesting and troublesome—especially because it is precedential and binds lower courts.

Absent broader authorizing language, such as for particular statutory claims, arbitration typically is restricted to claims relating to the contract that contains the arbitration clause. In New Jersey, these limits are discussed in cases such as Spathos v. Smart Payment Plan LLC, No. 15-8014, 2016 WL 3951672 (D.N.J. July 21, 2016). There, the parties continued to work together under an oral contract after their agency agreement containing an arbitration clause had expired. When a dispute arose regarding performance under the oral agreement, the court declined to order arbitration since the clause in the written agreement covered only disputes related to that written agreement. In a similar vein, it has been held that a dispute regarding one credit card is not subject to arbitration based on the arbitration clause in the agreement for a different credit card. Katsil v. Citibank N.A., No. 16-3694, 2016 U.S. Dist. LEXIS 169560, 2016 WL 7173765 (D.N.J. Dec. 8, 2016). Likewise, the arbitration clause applicable to one visit to the gym cannot be the basis for arbitration of an accident claim during a second visit, where the first clause does not cover the second visit to the gym. Weed v. Sky NJ, LLC, No. A-4589-16, 2018 N.J. Super. Unpub. LEXIS 410 (N.J. Super. Ct. App. Div. Feb. 22, 2018).

New Jersey decisions also distinguish between the right of an original contracting party to compel arbitration, and the right of an assignee to rely on the arbitration clause in the assigned contract. See, e.g., Foti v. Toyota Motor Sales U.S.A., Inc., No. A-5251-15, 2017 N.J. Super. Unpub. LEXIS 1001 (N.J. Super. Ct. App. Div. Apr. 24, 2017) (arbitration denied); Dreier and Bartkus, N.J. Arbitration Handbook, §25:5 at 94 (2018 ed.) (collecting cases).

The Goffe case presents a different theory by which an arbitration clause may "lose" its effect. Janell Goffe's complaint alleged that she purchased a used car in October 2016, gave a trade-in, and paid a $250 deposit on a required $1,000 down payment. However, upon returning to the dealer to pay the balance of the down payment, later that month, she was told that her application for financing was not approved and that she would have to pay additional sums or return the car. She returned the car and took back her trade-in. However, the dealer refused to return the $250 initial deposit. The complaint alleged violation of the state Consumer Fraud Act, common law fraud, the state Truth in Consumer Contracts Act and the federal Truth in Lending Act. The dealer and other defendants successfully moved to compel arbitration, and the plaintiff appealed.

On appeal, the Goffe case was consolidated with another case, in which the plaintiff Robinson asserted similar claims against a different dealer (which the trial court also sent to arbitration). The Appellate Division's opinion noted that the arbitration clauses in both contracts contained enforceable waivers of the right to have a court or jury decide their claims. In addition, the claims to be sent to arbitration apparently included "all claims and disputes."

One might have understood that the broad "all disputes" language in the arbitration clauses would have covered both disputes—the ones concerning the original car sales and the ones concerning the return of the cars. After all, the one contract supposedly contained a right to return the car; the other said the car must be returned if financing could not be obtained. Returning the deposit or trade-in were foreseeable events relating to the sales contracts and thus within the broad scope of the arbitration clauses.

But this reasoning did not prevail. In each instance, the Appellate Division saw the original sales contract and its rescission as two separate agreements, only the first of which contained an arbitration clause. Once the sales contract was rescinded, all of its terms were said to have been "tor[n] up" and the parties returned to the status quo ante. Relying on New Jersey cases involving abandonment (as analogized to rescission), the court held "there can be no doubt that the arbitration provisions were discarded in the process just as the promises [regarding the underlying transaction] were also discarded." 2018 N.J. Super. LEXIS 61, at *17 (emphasis added).

This rather draconian—and unexpected—holding comes with a further burden on enforcing arbitration clauses. Although the New Jersey rescission cases refer to the possibility that terms within a writing may be severable, see County of Morris v. Fauver, 153 N.J. 80, 97 (1998), citing Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 612 (1989) (remanding to determine severability), the Goffe opinion did not discuss whether the severability principle regarding arbitration clauses might be applicable as a matter of law.

Instead, Goffe held that the moving party must come forward with evidence of a "manifest intention to retain that particular aspect of the rescinded agreement." 2018 N.J. Super. LEXIS 61, at *17. Here the defendants were said to have offered no evidence to support severance of the arbitration clause. This part of the opinion seems particularly odd. The Appellate Division found comfort in a Connecticut arbitration case,Smith v. DeLuca, 36 Conn. App. 839, 844, 654 A.2d 368 (1995), in which arbitration was denied where the parties had declared that their prior agreement (containing the arbitration clause) was "null and void." However, the Connecticut court specifically distinguished the explicit nullification of all prior provisions in the case before it, with a situation where the nullification was implied by conduct. Although the Appellate Division in Goffe said the parties had "implicitly agreed to rescind all plaintiff's obligations…," 2018 N.J. Super. LEXIS 61, at *16 (emphasis added), it did not mention the distinction drawn in Smith between explicit and implicit rescission and the different burden that might be applicable in each regarding severability of an arbitration clause.

Either as a matter of law, or based on the nature of the transaction and the overall circumstances, the Appellate Division should have given greater attention to this distinction. After all, the right to return the purchased auto was said to have arisen from the underlying contract, and the arbitration clause was written broadly to cover "all disputes."

The addition of rescission to the quiver of parties seeking to avoid an arbitration clause in NJ, especially important in auto dealer cases, does come with an important caveat. For apparently the first time, the Appellate Division has adopted the rule set out in Guidotti v. Legal Helpers Debt Resolution, LLC, 716 F.3d 764 (3d Cir. 2013), that if a motion to compel arbitration cannot be resolved as a matter of law based on the pleadings (including the arbitration contract), then the parties should be given time to conduct limited discovery on any factual issues raised in opposition to the motion—such as whether the parties received copies of the contracts as might be required by NJ law—after which the court would adjudicate the renewed motion to compel arbitration using a summary judgment standard. The Goffe cases were remanded for such a factual determination and the application to those facts, as needed, of the newly-announced rescission rule.

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