May 27, 2020 Practice Points

Consumer Arbitration Clause Must Be Clear

In New Jersey, arbitration agreements must be clearly worded and demonstrate the consumer fully understands the implications of the agreement.

By Sadaf Ahmed

The New Jersey Supreme Court affirmed a ruling that the arbitration clause in a home warranty agreement was ambiguous and misleading, and therefore not enforceable. Kernahan v. Home Warranty Administrator of Florida, Inc., 236 N.J. 301, 308, 309-318, 322-324 (2019).

In Kernahan, the plaintiff purchased a “home service agreement” from the defendants that contained an arbitration clause. She filed a claim for the repair and replacement of certain home appliances, but the defendants denied that she was entitled to coverage. She then filed suit seeking statutory and common law relief.

The arbitration clause in the home service agreement was labelled “MEDIATION” and stated, in relevant part, that she was required to have her claims resolved through arbitration. She argued that the arbitration clause was not enforceable because it was misleadingly labelled “MEDIATION” and failed to adequately inform her that she was waving her right to a jury trial and additional remedies, including treble damages, punitive damages, attorney’s fees, and costs pursuant to her consumer fraud case. 236 N.J. at 308, 310.  

In Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), the New Jersey Supreme Court ruled that arbitration provisions must clearly and unequivocally inform the plaintiff that the provision is intended to be a waiver of her right to sue, concluding that mutual assent has not otherwise been achieved. The trial court held that the arbitration clause in question failed to meet these requirements, because it did not clearly inform the plaintiff that she was waiving her right to jury trial and agreeing to the arbitration of all disputes. Furthermore, the provision failed to inform the consumer that there was a difference between pursuing a claim through traditional litigation versus arbitration. The Appellate Division upheld the trial court’s decision of finding the alternative dispute resloution provision to be unenforceable, finding that the arbitration agreement did not support a showing of mutuality of assent to arbitrate between the plaintiff and the defendants. Kernahan, 236 N.J. at 309.

The Appellate Court held that the arbitration provision failed to meet the principles of the Atalese decision, because it did not effectively convey that the consumer was giving up her right to litigate and instead agreeing to arbitration. Although a “specific recitation of words to effect the meeting of the minds” is not required, the language of the arbitration provision must comply with the plain wording standards under consumer contracts. Furthermore, mislabeling of the arbitration provision under the heading “MEDIATION” and noncompliance with the font size requirements under the Plain Language Act also rendered the arbitration provision unenforceable. Id. at 322. 

This decision follows New Jersey’s pro-consumer approach and its insistence that, to be enforceable in the consumer context, arbitration agreements must be clearly worded and demonstrate that the consumer had “full knowledge of his legal rights and inten[ded] to surrender those rights.” Id.

Sadaf Ahmed is a 2020 JD candidate at DePaul University College of Law in Chicago, Illinois.


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