New Decision: Failure to Pay Arbitration Fees Voids Arbitration Agreement

On March 9, 2017, the New Jersey Supreme Court issued a unanimous decision holding that the failure to advance arbitration fees, as required in an arbitration agreement, voids the arbitration agreement and renders it unenforceable. The case Roach and Jackson v. BM Motoring, LLC at al. is the first time the Supreme Court has taken on this issue. It represents an important development in contract and arbitration law in the State of New Jersey.

The plaintiffs purchased used cars from BM Motoring LLC and Federal Auto Brokers Incorporated. Each of the plaintiffs signed an identical agreement to resolve all the disputes arising from the transaction in accordance with the rules of the American Arbitration Association.

After purchasing the car plaintiff Jackson filed an arbitration demand against the dealer. Despite being asked to pay the arbitration filing fees on multiple occasions by the AAA, the dealer did not and the AAA eventually dismissed the arbitration.

Plaintiff Roach initially filed a complaint in the Superior Court against the defendants. However, the Court granted the defendant’s motion to dismiss and compelled arbitration. Plaintiff Roach filed for arbitration but once again the AAA dismissed the arbitration claim because the dealer refused to comply with the AAA rules and procedures including advancing the filing fee. After the dismissals of the arbitrations, plaintiffs filed actions in the Superior Court. At that time the defendants once again moved to dismiss the cases and compel arbitration. The Trial Court granted the motion to dismiss and the Appellate Division affirmed.

On certification granted the New Jersey Supreme Court unanimously reversed the lower courts and reinstated the plaintiffs’ complaints.

In New Jersey, arbitration is a favored method of dispute resolution. That is codified in a New Jersey Arbitration Act N.J.S.A. 2A:23B1-32.  In keeping with long standing New Jersey principles, agreements to arbitrate are considered contracts and are governed by principles of contract law. Further, the Court held generally applicable contract defenses may be applied to invalidate arbitration agreements.

Citing Nolan v. Lee Ho 120 N.J. 465 (1990) the Court held that as a matter of contract law upon the “breach of a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement,” Nolan at 472.

Prior to the Roach decision, the New Jersey Supreme Court had never decided the issue of whether or not the failure to pay arbitration fees constitutes a material breach of an arbitration contract. The New Jersey Supreme Court reviewed the laws of other jurisdictions on this issue before addressing the positions of the parties. The Court held that the primary focus of an arbitration clause is to compel both parties to arbitrate claims. The Court reasoned that failing to pay fees in order to facilitate the arbitration worked to materially frustrate and deprive the other party of the benefit of their bargain and thus the Court concluded that the failure to advance fees did in fact constitute the material breach of the arbitration agreement with the plaintiffs in this case.

Having found that the failure to pay arbitration fees constitutes a material breach of the agreement the Court then held that such a breach bars the defendants from later compelling arbitration and enables the plaintiffs to file an action in Superior Court.

The New Jersey Supreme Court however did not establish a bright line rule for all cases. Rather at the end of the opinion, the Court clearly states that these determinations are to made on a case by case basis taking into consideration the course of conduct of the parties and the language of the arbitration agreements.

Now having guidance from the New Jersey Supreme Court, it would well serve those individuals and corporations who utilize arbitration agreements to reexamine the text of the agreement so that the arbitration agreements will be enforceable. Further, those using arbitration agreements should also be conspicuously aware of their rights and obligations in the process as the failure to honor obligations in the process could lead to the invalidation of the arbitration agreement and lead to costly and expensive court proceedings. This case continues the New Jersey Supreme Court’s trend of strictly construing arbitration agreements and cautioning those who draft them to be precise with their language and fair in their dealing.

Author: James A. Paone, II