Arbitration Language Should Be Clear and Understandable

Insurance Law Alert

April 6, 2015

Related Services

In a unanimous decision, the New Jersey Supreme Court ruled that an arbitration provision in a consumer contract must be sufficiently clear and unambiguous to put the consumer on notice that she was waiving her right to sue in court and to have her case heard by a jury.  

The case, Atalese v. United States Legal Services Group, L.P., 219 N.J. 430, involved a service contract between Patricia Atalese and U.S. Legal Services Group, L.P. (“USLSG”) for debt-adjustment services. Atalese sued USLSG in Superior Court and USLSG moved to compel arbitration under a clause in the service contract that provided:

[i]n the event of any claim or dispute between Client and the USLSG related to this Agreement or related to any performance of any services related to this Agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request on the other party. The parties shall agree on a single arbitrator to resolve the dispute . . . . Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.

The trial court granted USLSG’s motion and the Appellate Division affirmed, concluding that the arbitration provision gave Atalese reasonable notice that the parties agreed to arbitrate all claims under the contract and that a reasonable consumer would have understood that arbitration would be her only means to resolve the dispute. The New Jersey Supreme Court disagreed and reversed. The Court ruled that the arbitration clause was unenforceable under New Jersey law because it was not written in plain language, did not explain the meaning of the term arbitration, and did not explain how arbitration differed from proceedings in court. The arbitration clause was therefore not clear and understandable to the average consumer.

While the Court did not provide a blue-print for an enforceable arbitration clause, it ruled that an effective clause would explain to the consumer that she is giving up her right to bring claims in court and to have a jury to resolve her dispute.

Arbitration clauses are common in insurance policies and related agreements. While the Atalese decision was focused on consumer contracts, insureds, particularly small businesses, may seek to extend the Court’s reasoning to challenge arbitration provisions similar to the one used by USLSG. Companies may wish to reevaluate their arbitration clauses used in New Jersey and take into account the Court’s admonition that an arbitration clause should clearly explain the distinction between proceedings before an arbitration panel and proceedings in court.