March 12, 2019 Articles

New Jersey Court Puts Brakes on Arbitration after Car Deals Are Called Off

Because the parties rescinded their purchase agreement, their agreement to arbitrate all disputes is rescinded too.

By Shira Forman

Your new car may be returnable, but are you stuck with the arbitration agreement you signed when you bought it?

This was the question confronted by the Appellate Division of the Superior Court of New Jersey in a recent set of appeals involving car purchases that were rescinded, leaving confusion about the enforceability of the arbitration agreements signed by the buyers and sellers: Goffe v. Foulke Management  Corp., and Robinson v. Mall Chevrolet, Inc., Nos. A-2658-16T4, A-2659-16T4 (N.J. Super. Ct. App. Div. Apr. 24, 2018). 

New Cars . . . and Second Thoughts

The appeal encompassed two separate cases with similar facts. In the first, Sasha Robinson purchased a 2016 Chevrolet Malibu from her local Chevrolet dealer. As part of the purchase, she traded in a vehicle she owned jointly with her mother and was told that her mother would have to co-sign the paperwork to complete the purchase. Robinson signed a sales agreement that included an arbitration provision stating that both parties have an absolute right to demand that any dispute be submitted to arbitration. Robinson paid her security deposit, took home the car, and was told to return with her mother to complete the paperwork.

Robinson returned with her mother—not to sign the papers but to return the car, which she decided was too expensive. The dealership at first told Robinson it would not take back the car and then tried to discourage the return, first by threatening to retain the security deposit and the traded-in car, and next by offering to reduce the monthly charges on the car. Ultimately, the dealership returned the trade-in but refunded the deposit only after Robinson filed a lawsuit.

The second case involved Janell Goffe, who bought a 2013 Buick Verano from her local Mitsubishi dealership, also on a trade-in. She was told at the dealership that financing for her car was approved, and she made an initial payment before leaving with the Buick. Goffe signed the same sales agreement as Robinson, with the same arbitration provision. When she returned two weeks later to pay the rest of her down payment, she was told that financing had not been approved and she could keep the car only if she agreed to an increased down payment and higher monthly payments. Goffe decided to instead return the car. The dealership initially refused to return her down payment and did so only after she filed a lawsuit.

The Arbitration Question

Both Robinson and Goffe sued their respective dealerships for fraud and violations of various New Jersey consumer protection statutes, and the dealerships moved to compel arbitration based on the arbitration provisions in the sales agreements. Both cases were dismissed on the grounds that the plaintiffs’ claims were arbitrable.

On appeal, the plaintiffs argued that the sales contracts—and the arbitration provisions within them—are no longer applicable. That is to say, when the parties reached an agreement to rescind the car sales, the arbitration provisions they had previously signed were also rescinded.

“Return to Square One”

The court agreed with the plaintiffs’ argument and concluded that, as a general rule, when parties to a contract that contains an agreement to arbitrate later agree to rescind that contract, they cannot be compelled to arbitrate disputes that grow out of the agreement to rescind. The legal effect of the rescission, according to the court, is a “return to square one—in legal terms, the status quo ante—defendants implicitly agreed to rescind all plaintiffs’ obligations just as plaintiffs agreed to a rescission of all defendants’ promises.” Just as the rescission nullified the parties’ obligations concerning the car purchase, “there can be no doubt that the arbitration provisions were discarded in the process.”

The court also held that, in each case, there were disputes as to whether the parties ever reached an enforceable sales contract (for reasons including the allegation that neither dealership provided the plaintiffs with a copy of the sale agreement, which is required under state law). If there was no contract, the parties cannot be said to have agreed to arbitrate disputes coming out of said contract. The court concluded that the question of whether a contract was formed is not arbitrable.

Next Steps

Both cases were remanded to the trial court for limited discovery and, possibly, evidentiary hearings, to determine whether the plaintiffs pleaded claims based on the sales agreement and related negotiations or based on the defendants’ performance of the agreements to rescind. The court noted that it “sense[d] the possibility that plaintiffs may have pleaded causes of action that would include arbitrable claims if the preliminary factual questions we have recognized are resolved in defendants’ favor.” Only once these determinations were made could arbitrability of the plaintiffs’ claims be decided.

Shira Forman is an employment attorney at Sheppard Mullin Richter & Hampton LLP and a mediator and arbitrator in New York City, New York.

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