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NJ Judge Reinforces Elevated Standard for Arbitration Clauses & Other Important Lessons.

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You may have heard that less than 5% of cases go to trial. The different sides in a case may settle on their own, the judge might dismiss the case, or the sides could seek out alternative resolution methods like "arbitration."

Arbitration is an alternative way to resolve a case, without a judge and jury. A successful arbitration will issue a legally binding decision without the 2 or more sides ever setting foot in a courtroom. In arbitration, an independent retired judge or lawyer knowledgeable about the area of law in question meets with the parties, reviews evidence and hears testimony to resolve their legal dispute.

Arbitration has several advantages - it is generally faster, and less contentious than court. It also has a degree of flexibility that may be essential for a complex business dispute, for example. And the arbitrator may specialize in your area of conflict, unlike a judge or a jury.

Finally, it's important that arbitrations are closed to the public. A private dispute resolution lets you proceed with the same rights as going to court, but without public disclosure. The private nature of arbitration often allows individuals and commercial businesses to protect their interests without simultaneously risking long term business relations.

With all these inherent advantages to a business, it's not surprising that contracts mandating arbitration are on the rise. But business owners need to be careful about how they implement arbitration policies.

A New Jersey court recently dealt with the practice of businesses inserting arbitration clauses into their standard "merchant agreements." If you're unsure of what a "merchant agreement" is you're not alone.

The merchant agreement is a business dealer's iTunes terms and conditions. The merchant agreement is a long, fine print (think size 6-8 font) agreement that is packed with legalese. The party who is asked to sign the agreement usually plays no role in preparing it, but accepts it without true consideration of its terms.

But the full terms of the merchant agreement are often enforced between commercial business dealers. Their enforcement arises from an implicit, heightened obligation for commercial businesses to both understand and abide by fine print contracts.

For example, in Winters v. Electronic Merch Sys., a recent case dealing with the enforceability of an arbitration clause, the Bergen County Law Division noted that "contractual agreements between merchants may be allowed more leeway [in using fine print] contracts. . ."

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But the judge was uneasy about businesses attempts to implement arbitration clauses through fine print merchant agreements.

The court was clear on the law: an arbitration clause "[still] must be a clear product of the parties' mutual assent. . ." The party seeking to enforce it must unambiguously establish that both parties intended to use arbitration in resolving future disputes.

In this case, however, the arbitration clause was lurking within a long, fine print merchant agreement. The court referred to it as "illegible, small, dense, and indecipherable."

The judge went on to say that "a contract provision with these defects cannot be said to be a product of mutual assent . . ." Thus, the court in Winters was unwilling to enforce the arbitration clause.

The bottom-line is that business owners must understand that arbitration clauses are subject to higher contract standards. "Gotcha" clauses which are hard to find and hard to read ikely have no place in the fine print text of contracts.

Some other thoughts about business to business contracts with arbitration clauses:

1. As a practical matter, why would the other side in Winters dispute the arbitration clause? Isn't arbitration cheaper, faster, and better than "normal" litigation?

The use of arbitration is growing, because businesses and individuals value its inherent advantages. But arbitration does have downsides.

For example, when you agree to arbitration, you also lose your right to a jury trial. A jury trial may be beneficial, or even strategically desired depending on your case. Also, an arbitration has a limited right to appeal. There is less chance of succeeding if you have to appeal an unfavorable arbitration decision.

Finally, you might "contract away" your right to choose the arbitrator. The power to decide where and how future disputes will be resolved can be central to a successful claim or defense.

So, while arbitration may have clear strengths, it's not something you should agree to without careful consideration.

2. What amount of legal consequence is "too much" for the fine print portion of your business' standard agreement?

Well, that's what we all want to know. Unfortunately, we cannot generalize that certain clauses as inherently unenforceable. Arbitration clauses hold grave consequences regardless of the underlying transaction (see question 1). Thus, enforceable arbitration clauses might not be found in the 4th page of a 6 font size contract.

Conclusion

As you can hopefully see, arbitration can be a very powerful tool in making your case. If you're unsure about arbitration enforcement, placement, or general contract strategy, your best bet is to present the situation to an experienced attorney. But he or she can only give you good advice after careful consideration of the unique facts that surround your case. John Kundradt, a recent graduate of Rutgers Law School, who received a BA from Fordham University, researched and contributed to this blog.

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