Failure of Parties to Identify an Arbitration Forum Can Invalidate an Arbitration Agreement for Lack of Mutual Assent
In a recent appellate court opinion of first impression in New Jersey, the Appellate Division reversed a trial court’s order compelling arbitration and found the parties’ failure to identify any arbitration forum or the process for choosing that forum was not a “meeting of minds.” Pursuant to basic principles of contract law, the Appellate Division invalidated the arbitration clause.
In Flanzman v. Jenny Craig, Inc., an 82-year-old plaintiff’s employment was terminated with the defendant, Jenny Craig, Inc. The plaintiff filed a claim alleging harassment, discrimination, and aiding and abetting in violation of the New Jersey Law Against Discrimination. The defendant filed a motion to compel arbitration relying on the parties’ arbitration agreement that the plaintiff executed 20 years after she was hired.
The arbitration agreement required, among other things, that “[a]ny and all claims or controversies arising out of or relating to [the plaintiff’s] employment, the termination thereof, or otherwise arising between [the plaintiff] and [the defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration.” However, the agreement said nothing about what forum would generally replace the plaintiff’s right to a jury trial.
In reversing the trial court’s order compelling arbitration, the Appellate Division found that arbitration agreements are placed on the same footing as other contracts, and therefore, the parties are required to reach an agreement by mutual assent and a meeting of the minds to have an enforceable agreement. Relying on well-settled case law, the Appellate Division confirmed that the “party from whom an arbitration clause has been extracted, must ‘clearly and unambiguously’ agree to waive his or her statutory rights” and must have a “clear mutual understanding of the ramifications of that assent.”
In this particular case, the arbitration agreement did not identify any arbitration forum, nor did it identify any process for conducting the arbitration. In fact, the agreement “ignored the subject altogether.” Without a clear understanding of the plaintiff’s rights under the agreement that “ostensibly foreclosed” her right to a jury trial, therefore, the Appellate Division found no mutual assent and therefore, no enforceable contract.
Of significance, the Appellate Division emphasized that their opinion should not be misread to hold that the parties’ failure to identify a specific arbitrator renders the agreement unenforceable. The court also emphasized that there are no “magic words” that must be included in the agreement. Naming the institution is also not necessary. Rather, it is sufficient to merely set out the process for the selection of an arbitrator. The court contrasted this case to a situation where the parties addressed arbitration but failed to identify a specific method for selecting an arbitrator. If that were the case, the parties could have agreed on a method for appointing an arbitrator, or apply to the court for aid in selecting an arbitrator. That arbitration agreement may still have been enforceable. Here, instead, in the Flanzman case, the agreement was devoid altogether of any arbitration forum or the process of selecting an arbitrator. Without basic information specifying what rights the parties were giving up, the Appellate Division found no meeting of the minds and therefore, no enforceable arbitration clause.
Overall, the court’s opinion appears to caution parties that in order to establish a “clear mutual understanding of the ramifications’ of the parties’ mutual assent to waive adjudication by a court of law,” the parties must specify as clearly as possible that the parties are waiving their right to a jury trial in exchange for another set of rights. While the court emphasized it is not necessary to include “magic” words or identify the arbitrator, the parties should identify the forum and the process for selecting that arbitrator whenever possible in order to avoid any argument regarding lack of assent.