March 23, 2017
On March 9, 2017, the Supreme Court of New Jersey delivered a significant victory to consumers against an auto dealership attempting to use an arbitration agreement to obstruct claims from being heard. Roach v. BM Motoring, LLC shows a strategy for overcoming delay tactics in arbitration so that consumer protection claims can be considered on the merits. Arbitration clauses appear in all sorts of contracts all over the country, including many real estate and construction matters. BM Motor Cars put a clause in its contracts requiring that disputes be decided under the rules of the American Arbitration Association. The AAA is a commonly used alternative dispute resolution service. After the consumers submitted their cases to the AAA, BM refused to pay its $3,200.00 portion of the arbitration fees required for them to proceed. Consequently, the AAA dismissed the claims. When the consumers filed lawsuits, the court referred the case back to AAA. BM used this revolving door tactic to continuously delay hearing of the consumers claims by a judge or arbitrator. Finally, the Supreme Court of New Jersey short-circuited these tactics, finding that BM breached the arbitration agreement by failing to pay the required fees. The opinion provides insights on how arbitration clauses may expand or restrict a party’s substantive rights under an agreement.
Arbitration clauses find their way into all sorts of contracts these days, in employment, consumer, HOA, condominium and many other matters where industries find themselves in risk of litigation. Many consumer advocates have a low opinion of arbitration clauses, and for good reason. Before diving into an analysis of the BM case, let’s first consider how arbitration differs from litigation.
- Cost to Initiate. To get into court, the consumer may have to pay an attorney but the court fees are low. The operational costs of the judiciary are subsidized by the government. To get a case heard by an arbitrator, someone must also pay the AAA (or another arbitration agency) and the arbitrator. AAA arbitrators are typically experienced attorneys who charge the parties by the hour. If the defendant refuses to pay the fees required by the AAA, the consumer is forced to up-front those costs herself, file a lawsuit in court to compel arbitration or abandon the case.
- Fewer Procedural Rules. In arbitration, there are fewer procedural rules. The overall expense of the process can be lower because of reduced discovery, depositions, motions practice, disclosures, appeals, etc. However, if the consumer or small business finds themselves unable to initiate the proceeding, it does not offer much value. Because arbitration clauses are created by contract, there is potential for creativity in the agreed dispute resolution procedures. However, detailed arbitration clauses tend to work against the interests of the party to the contract most likely to find themselves trying to bring claims. Often, consumers do not understand how arbitration clauses may practically limit their right to a fair hearing.
- Does Arbitration Save Money Overall? Some people say arbitration clauses “save” consumers the cost and trouble of a lawsuit. However, arbitration can also be time consuming and expensive. The claimant or her attorney must prepare a detailed written claim and file it with the arbitration agency and maintain momentum.
- Do Arbitrators Suffer from Bias? The next step is the selection of the arbitrator from a panel of experienced lawyers and retired judges. The AAA will send the parties a list of potential arbitrators narrowed by geographic area and subject matter experience. The risk of bias is mitigated by the opportunity to cross names they don’t like off of the list. There are other arbitration agencies which cater to specific industries. Some providers have arbitrators who never attended law school or passed the bar exam. Parties are wise to consider whether an arbitration company functions as a vendor for their opponent.
- Hearing or Meeting? Once the arbitrator is determined the parties will receive a schedule of deadlines in preparation for the arbitration hearing. In a court trial, there are all sorts of formalities required for parties to make motions, disclosures and objections. In arbitration, there are few rules of evidence. The parties sit in a conference room instead of going into a courtroom. There are no juries.
- Judicial Review Strictly Limited. If the arbitrator makes a monetary award, the prevailing party can then go to court to get the result confirmed as a judgment. Unless there is fraud or other extreme irregularities, there is no judicial review of the merits of the arbitration result.
I believe that parties ought to be able to contract for whatever alternative dispute resolution provisions of their own choosing. However, the devil is in the details of the arbitration clause language and the rules of the arbitration forum. The arbitration process works well for wealthy parties looking to reduce their annual legal expenses and keep their disputes out of the public eye. Consumers are better off with the judiciary, especially with juries or in small claims court.
Consumers often sign arbitration agreements for economic reasons, lack of consumer choice or by ignorance. Because parties often find themselves bound by arbitration clauses, the victory won by Mmes. Jackson & Roach is significant. These women (separately) purchased used cars from BM Motor Cars in Rahway, New Jersey. The Dispute Resolution Agreement provided for arbitration in accordance with the rules of the AAA before a single arbitrator who shall be a retired judge or attorney. The DRA also require that, “Dealership shall advance both party’s (sic) filing, service, administration, arbitrator, hearing or other fees, subject to reimbursement by decision of the arbitrator.” They subsequently submitted demands for arbitration against BM with the AAA. They asserted claims under consumer protection statutes. Ms. Jackson alleged that BM refused to sell the car for the advertised price, overcharged from title and registration and misrepresented the terms of the extended warranty. Ms. Roach also sued under consumer protection legislation. The AAA repeatedly requested that BM pay the arbitration fees required by its rules. The AAA suggested to the consumers that they simply pay BM’s fees and later seek recovery of them from BM in the arbitral award. After BM ignored these requests, the AAA dismissed the consumer’s cases. The AAA became so fed up that it sent BM a letter instructing it to remove the AAA arbitration language from its agreements. Undeterred, the consumers filed lawsuits in court. The judges granted BM’s motions to dismiss the cases and compel arbitration. The court wanted the plaintiffs to go back to AAA and for BM to pay the fees. When the women went back to the AAA, the arbitration company dismissed their claims again because BM failed to pay the fees. As you can see, BM was trying to deny the consumer a decision on the merits of their claims by leading through the revolving door from court to the AAA and back again.
At the Supreme Court of New Jersey, BM Motor Cars argued that the contract did not, “contemplate using AAA as the forum and venue for arbitration” and that it, “consistently not arbitrated disputes with its customers by utilizing AAA . . . because of the excessive filing and administrative fees charged by AAA.” However, BM never asserted this argument before the case reached the Supreme Court. The justices asked some pointed questions to BM’s lawyer about this at the January 3, 2017 oral argument. It sounds like they found BM’s belated objection to AAA as the arbitral forum to be disingenuous. The consumers responded to this by pointing to AAA’s rules which provide that if the contract requires that arbitration be conducted under AAA rules, then the AAA is a proper venue for the case.
The consumers argued that the requirement to advance the fees was a material term of the Dispute Resolution Agreement. By breaching that term, BM Motor Cars precluded itself from the right to force arbitration. BM waived its right to deny the consumers the ability to go to court instead. Roach & Jackson argue that BM should not profit from its own breach of the arbitration agreement’s language. The court rejected BM’s argument, finding that the consumer’s filing with the AAA was consistent with the terms of the arbitration clause.
In its opinion, the Supreme Court of New Jersey mentions that judges have not always been so inclined to enforce arbitration clauses. Under the common law, judges were averse to arbitration. Courts strictly construed these clauses as like they would with restrictive covenants or covenants not to compete. To encourage arbitration, congress and the states enacted legislation to place arbitration agreements upon the same footing as other contracts. Now a court cannot subject an arbitration agreement to more burdensome requirements than ordinary contract law doctrine. But the Supreme Court doesn’t end its analysis by affirming pro-arbitration public policy. Roach v. BM Motor Cars illustrates that ordinary contract law doctrine provides protections against abusive practices. Generally applicable contract law defenses can be applied in proper cases. Ambiguous provisions may be construed against the drafter of the agreement, especially in a take-it-or-leave-it consumer contract. Under contract law, breach of a material term relieves the non-breaching party of its obligations. The court observed that the federal Ninth and Tenth Circuit Courts of Appeal previously held that a party’s failure to pay required fees constitutes a material breach of an arbitration agreement.
The N.J. Supreme Court held that BM’s refusal to comply with the arbitration procedures was a material breach of the Dispute Resolution Agreement. This breach prevents BM from later compelling arbitration if the matter is brought to court before a judge. The case will proceed in the courts. The Supreme Court reversed the previous decisions that the trial judge and intermediate appellate panel made in favor of BM. Consistent with its finding that arbitration clauses are subject to generally-applicable contract law defenses, the Court refrained from setting rules about refusal to pay arbitration fees that could be applied in every case:
Nevertheless, we establish no bright-line rule. The determination of whether refusal to respond to a written arbitration demand within a reasonable time period constitutes a material breach of an arbitration agreement that precludes enforcement by the breaching party must be made on a case-by-case basis after considering the agreement’s terms and the conduct of the parties.
If consumers encounter this obstructionist tactic in the wake of these appellate decisions, they must consider whether it is easier to simply up-front the defendant’s fees or to initiate court motions practice on whether the defendant’s breach waived their right to enforce arbitration. In the wake of these decisions in New Jersey and the federal courts, I expect that parties preparing arbitration clauses will react accordingly. Some will seek to specifically burden the complaining party with the burden of up-fronting the arbitration agency and arbitrator fees. Roach v. BM Motor Cars represents a balanced approach to judicial enforcement of arbitration clauses. Perhaps there are additional contract law doctrines that parties can assert to protect their interests? Often builder contracts or community association restrictive covenants are ambiguous, contradictory or unclear in whether the remedies provided are exclusive. Consumers, property owners and family-owned businesses should not rely upon their opponent or their opponent’s lawyers to give a fair assessment of how a judge or arbitrator would read the agreement. When one’s investment, home or business are on the line, a qualified attorney can help navigate a path to a solution that may not be immediately apparent.
Opinion and Video:
Jan. 1, 2017 Oral Argument Video: http://www.judiciary.state.nj.us/webcast/archive.html
March 15, 2017
Property owners frequently have complaints about construction contractors. Some of these complaints involve thousands of dollars in damage or serious infringement upon the use or value of property. These property owners (and their attorneys) want to know who to turn to. Should homeowners bring complaints against contractors before courts or regulators? This question raises issues about how the government ought to enforce its laws and resolve disputes. There is a perspective that regulatory boards ought to be a welcome forum for owners threatened or damaged by alleged contractor misconduct. In this blog post I will explain why I believe that, for all its imperfections, the judicial system is the best venue for vindication of legal rights in consumer disputes.
In 2015, the Court of Appeals of Virginia decided an illustrative case arising out of a complaint of a home purchaser about the seller’s contractor. Around 2002, Mark Holmes purchased an Alexandria, Virginia home, including an addition constructed by Culver Design Build, Inc. Mr. Holmes was unhappy about defective construction of the addition. He went to the city government, whom the General Assembly tasked with enforcing the building code in his locality. The City Code Administration found extensive water damage caused by construction defects and issued a Notice of Violation to Culver. Holmes was not satisfied with Culver regarding corrective work, so he filed a complaint with the Virginia State Board of Contractors. Holmes asked the Board to suspend Culver’s license until it corrected the violation. Culver Design Build, Inc. argued that Holmes did not have legal standing to seek judicial review of the Board’s ruling because this was a license disciplinary proceeding. The Holmes case also includes issues about how deferential the courts should be to a licensing agency’s administrative rulings. This case is unusual in that Mark Holmes represented himself in his appeal to the Court of Appeals of Virginia. Mr. Holmes acknowledged that unlike the seller, he lacked the privity of contract with the contractor which potentially could be used to go to court in breach of contract. The Court of Appeals agreed with Culver and the Board for Contractors.
When homeowners conclude that a state-licensed contractor or tradesperson committed a wrongful act depriving them of their home or damaging its value, it is easy to see why the aggrieved party would want a governmental agency to help them. Most people deal with governmental agencies much more than courthouses or law offices. Lawsuits require significant commitments to pursue or defend. Public resources go to supporting various agencies that have apparent subject-matter authority. This may appear to be a taxpayer-financed legal authority to go after the professional. However, this strategy often does little more than aggravate the licensed professional, the agency officials and the consumer. The Holmes v. Culver case illustrates one key weakness with homeowners pursuing consumer complaints through the professional licensure and disciplinary board process.
When consumers are harmed by unprofessional conduct, usually what they want is to have the defect corrected, an award of money or the transaction voided. These kinds of remedies are conventionally handled in the court system. The professional regulatory boards focus on licensure. They consider whether a business is properly licensed, should the license be suspended or revoked, should fines be assessed, and so on. Prominent members of the industry typically dominate these boards. For example, licensed contractors sit on the Board for Contractors. Initiating a professional licensure proceeding is a clumsy means of advancing the specific interests of the consumer having a transactional relationship with the business. It is the judiciary that can grant money damages or other remedies arising out of the formation and any breach of the contract. Regulators focus on whether disciplinary action is warranted regarding the registration or licensure of the business. In the Culver Design Build, Inc. case, the Board for Contractors and the Court of Appeals for Virginia agreed that Mark Holmes did not have standing to contest a regulatory decision in favor of the contractor. The board had authority to punish Culver for failing to abate a regulatory violation. However, the board had no authority to order the contractor to take any specific action at the job site. The board did not deny Homes any right or impose upon him any duty in its decision, because its authority revolves around Culver’s licensure. It is the State Building Code Technical Review Board that has the authority to review appeals of local building code enforcement decisions, not the Board of Contractors. One of the appeals judges suggested that if Holmes’ contentions were taken to a logical conclusion, the new buyer of the house could have greater leverage over a contractor than the previous owner, whose remedies may be limited by the contract. In his oral argument, Mark Holmes admitted that trying to resolve his complaints through the Board of Contractors complaint process was, “cumbersome and very long lasting.”
Even if the consumer unhappy with an adverse decision made by a regulatory agency in response to a complaint has standing, her appeal to the courts may encounter other obstacles. The licensure dispute is unlikely to starts afresh on appeal. The courts tend to be receptive to the agency’s interpretation of the legislature’s statutes. In Virginia, courts accord deference to an agency’s reasonable interpretation of its own regulations (as adopted by the board pursuant to the statutes). A consumer’s ability to raise new factual issues may be strictly limited in her attempts to get the courts to overturn the board’s decision. Judicial deference to agency rulemaking is not without controversy. Judge Neil Gorsuch, whom President Trump nominated for the U.S. Supreme Court is a high-profile critic of judicial deference to agencies. In his August 23, 2016 concurrence to a federal appeals decision Gutierrez-Brizuela v. Lynch, Judge Gorsuch explained that concentration of both legislative and judicial power in regulatory agencies creates constitutional problems. The constitution protects the public from authoritarianism by separating the government by the type of power, not the subject-matter. Under the constitution, the legislature prescribes new laws of general applicability. Taken to its logical conclusion, doctrine that courts should defer to agencies’ quasi-judicial determinations of what the statutes mean unconstitutionally undercuts the independence of the judiciary. The constitutional problems identified by Judge Gorsuch are illustrated in the arena of housing industry occupational regulation.
Where does this leave an owner when property rights are infringed by regulated professionals? Should everyone should go back to renting? Certainly not! This is what the independent judiciary is there for. Usually owners have privity of contract with the contractor and do not need to go to an agency. They can sue for remedies for breach of contract or deceptive practices. Consumer advocates with an interest in legislation should focus on increasing access to the court system and not promoting an administrative process that may not be a good fit for the homeowner. If you find yourself needing to bring or defend a construction claim, contact my office or a qualified attorney in your jurisdiction.