Supreme Court Strikes Down Arbitration Provision as Inadequate

Jan 14, 2019

In a case involving an arbitration provision in a consumer contract, the Supreme Court recently held that the arbitration provision was invalid because it was buried in a section labeled “mediation;” it was confusing and written in small font text; and it invoked commercial mediation rules which do not govern arbitration.  Kernahan v. Home Warranty Administrator of Florida, Inc. – N.J. – (2019).

Plaintiff, Amanda Kernahan, entered into an agreement with defendants for a home maintenance warranty.  She became dissatisfied and filed a complaint in Superior Court seeking statutory and common law relief.  Defendants moved to dismiss based upon the contract’s alternative dispute resolution provision which was labeled “MEDIATION”. 

The alternative dispute resolution section of the agreement was labeled “MEDIATION”.  It provided that the parties agreed to mediate in good faith before resorting to mandatory arbitration in the State of New Jersey and indicated that any and all disputes would be resolved exclusively by the American Arbitration Association in the State of New Jersey under its commercial mediation rules.  The Supreme Court invalidated the provision and held that plaintiff was entitled to proceed in Superior Court.

The Supreme Court invalidated the agreement on numerous grounds.  The court first noted that the provision failed to comply with the Plain Language Act at N.J.S.A. 56:12-1-13 which is applicable to all consumer contracts.  The agreement was not written in a simple, clear, understandable and easily readable way and was even in the wrong sized font.  The court then noted that the agreement was confusing because it referred to mediation and mediation rules when it apparently intended the consumer to submit to binding arbitration.  The court pointed to the stark differences between mediation and arbitration – mediation is a process which intends to facilitate a voluntary agreement between the parties while arbitration is a process which results in a final disposition of the matter. 

The court concluded that the provision as a whole was simply too confusing to bind the plaintiff to the arbitration process.  It mixed mediation with arbitration.  It contained small type face, confusing sentence order and a misleading caption.  In sum, the court held that it was unreasonable to expect a lay consumer to unravel the agreement and understand that she was bound to arbitrate her complaint rather than seek redress in Superior Court.