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July 10, 2019 Practice Points

New Jersey Court Applies Severability Principle

This principle holds that an agreement to arbitrate is a separate agreement from the contract in which the arbitration clause is contained.

By Joel Levine

In Goffe v. Foulke Management Corp., 2019 WL 2361490 (June 5, 2019), plaintiffs challenged the formation and validity of their sales agreements with car dealerships. They claimed that the dealerships’ fraudulent practices and misrepresentations induced them to sign the transactional documents which required arbitration of “all claims and disputes arising out of . . . [the] purchase of any goods,” including disputes as to “whether the claim or dispute must be arbitrated.”

In two separate cases, the plaintiffs sought to have the court, rather than the arbitrator, invalidate their contracts. The trial courts determined that the arbitration clauses within the plaintiffs’ contracts were enforceable and entered orders compelling plaintiffs to litigate their fraud and other claims in the arbitral forum. New Jersey’s Appellate Division reversed that decision, but the New Jersey Supreme Court reversed the appellate court and reinstated the orders compelling arbitration.

The New Jersey Supreme Court based its decisions on U.S. Supreme Court precedent holding that when a party attacks the validity of a contract in its entirety (and not just the specific arbitration clause), that party’s claims must be resolved in arbitration, not in court.  

One of the U.S. Supreme Court cases cited by the New Jersey court was Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967), which held that:

if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the 'making’ of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language [of the Federal Arbitration Act] does not permit the federal court to consider claims of fraud in the inducement of the contract generally.

The New Jersey Supreme Court also cited Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) where the U.S. Supreme Court held that “as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract,” and that “unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.” Id. at 445-46.

The decision of the New Jersey Supreme Court is another example of the application of the “severability” or “separability” principle. That principle holds that an agreement to arbitrate is a separate agreement from the contract in which the arbitration clause is contained. As a result, unless the party challenging arbitration attacks the validity of the arbitration agreement itself, the disputes arising from the contract are to be decided in arbitration and not in a court of law.  

Joel Levine is an experienced arbitrator and mediator in the Phoenix/Scottsdale, Arizona area.

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