Monday, May 22, 2017

NJ US District Court Upholds Arbitration Provision

Standard AIA Construction Contract Language Binds Homeowners to Arbitration

The New Jersey Courts have been struggling to determine when homeowners are required to participate in arbitration in residential construction disputes. The pandora's box was opened by the New Jersey Supreme Court in the case of Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 99 A.3d 306 (2014), when the Court found that a homeowner on a residential construction project had not agreed to arbitrate disputes because the arbitration clause did not sufficiently warn the consumer homeowner that it was waiving its right to litigate the dispute in court and the right to a jury trial: "The arbitration agreement here is unenforceable because its wording did not clearly and unambiguously signal to plaintiff that, by entering the agreement, she was surrendering her right to pursue her statutory claims in court." 

Despite this ruling, the NJ Supreme Court also stated that "The Court emphasizes that no prescribed set of words must be included in an arbitration clause to accomplish a waiver of rights. Whatever words compose an arbitration agreement, they must be clear and unambiguous that a consumer is choosing to arbitrate disputes rather than resolve them in a court of law." This has resulted in a field day for lawyers, and a headache for the court system. Unintentionally, the Supreme Court allowed an opening for forum picking, and potentially the ability of homeowners to challenge an arbitration award even after they participated in the arbitration. 

Such was the case in Tedeschi v. D.N. Desimone Constr., Inc., 2017 U.S. Dist. LEXIS 69695. In Tedeschi, prior to the start of the NJ residential construction project, the contractor mailed the homeowner AIA Form A101-2007, which was to be the contract between the parties. The first page of the AIA A101-2007 states that the AIA A201-2007, General Conditions of the Contract for Construction, is adopted in the Standard Form by reference.  At some point, the parties had a dispute and the contractor filed a notice of unpaid balance, and a demand for arbitration in accordance with NJ residential construction lien law, as well as a demand for arbitration in accordance with the contract between the parties. The arbitration took place, and the contractor prevailed in the arbitration. After the award was issued, the homeowner filed a lawsuit in federal court, claiming the award should be vacated because they did not agree to arbitrate, and were never properly informed that there was an arbitration provision in the contract.

A few important things the District Court pointed out in its analysis:
  • The first page of the Standard Form provides, "This document has important legal consequences. Consultation with an attorney is encouraged with respect to its completion or modification."
  • Contractor asked the homeowner to review the documents, and if they met with homeowner's approval, sign and return one copy to the contractor. 
  • Homeowner signed the contract.
  • Homeowner admitted it signed the contract without reading it, but were given the time and opportunity to review and read it.
With regard to the arbitration provision itself, the court noted that the contract offered three choices:
  1. "Arbitration pursuant to Section 15.4 of AIA Document A201-2007," 
  2. "Litigation in a court of competent jurisdiction," or 
  3. "Other." 
"The box next to the first choice — arbitration — was marked with an 'X.' The boxes next to choice two — litigation — and choice three — "other" — were left unchecked." According to the District Court, "Even under Atalese standard, the selection of arbitration over litigation clearly explains in a simple way that the parties' disputes must be resolved in arbitration instead of litigation."

The court also noted that the arbitration provision explained, "If the Owner and Contractor do not select a method of binding dispute resolution below, or do not subsequently agree in writing to a binding dispute resolution method other than litigation, Claims will be resolved by litigation in a court of competent jurisdiction."

Given this explanation, as well as the three choices provided in the AIA standard form, the Court found that a reasonable person would have been sufficiently informed of their right to a trial in a judicial forum, and upheld the arbitration clause and award. The ruling should settle the issue of whether the language used in the AIA form is sufficient to bind a homeowner to arbitration, and provides much needed guidance on the language issue itself.

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