From the desk of Justin Santagata, Esq.
Key takeaways:
• Failure to list potential arbitration in a R. 4:5-1(2)(b) certification will almost certainly be fatal to arbitration if arbitration is not immediately enforced
• New Jersey courts may continue to consider prejudice as a factor in waiver of arbitration clauses
• In order to establish prejudice for waiver, parties arguing for waiver of arbitration clauses by litigation conduct may compare what the party seeking arbitration has procured in litigation with what would be available under the respective arbitration process
| In Morgan v. Sundance, Inc., 596 U.S. 411, 418 (2022), the United States Supreme Court held that under the Federal Arbitration Act[1] the rule for waiver of an arbitration clause could not be different than the general rule for waiver of a contract under the applicable federal[2] or state law.[3] Morgan addressed a split in the federal circuits on whether prejudice was a factor in waiver of an arbitration clause under federal “procedural” law. Morgan rejected those federal circuits that considered prejudice as a factor because it was not a factor under the general rule for waiver of a contract. An arbitration clause had to be on equal footing with any other contract under the applicable law, applying generally applicable contract defenses, such as waiver, estoppel, and laches. “A court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation.” Waiver of an arbitration clause by litigation conduct is a common issue in New Jersey. In Cole v. Jersey City Med. Ctr., 215 N.J. 265, 280 (2013), the New Jersey Supreme Court set forth the factors for waiver of an arbitration clause, including prejudice. Cole preceded Morgan and for several years after Morgan it was unclear whether prejudice remained a factor under Cole. In Marmo & Sons Gen. Contracting, LLC v. Biagi Farms, LLC, No. A-3120-22, 2024 N.J.Super. LEXIS 43 (App. Div. May 24, 2024) [pending publication], the New Jersey Appellate Division held that Morgan did not supersede Cole and that prejudice remained a non-dispositive factor. However, in doing so, the Appellate Division made it much harder to enforce arbitration clauses later in litigation and expanded what “prejudice” could mean. In Marmo, a commercial construction contract contained an arbitration clause. The contractor sued to enforce a residential construction lien. The homeowner counterclaimed for consumer fraud, among other claims, and the parties litigated for approximately six months. The contractor procured extensive discovery and then, when forced to produce its own discovery, moved to compel arbitration. The contractor did not list arbitration in its R. 4:5-1(b)(2) certification or as an affirmative defense. The trial court held that Morgan superseded Cole and denied arbitration. The Appellate Division affirmed, but held that Morgan did not supersede Cole. Instead, the Appellate Division put great weight on the failure to list arbitration on the R. 4:5-1(b)(2) certification and as an affirmative defense, particularly where the contractor was the plaintiff and included claims beyond enforcement of the residential construction lien under the Construction Lien Act:[4] “judicial resources are wasted when a case is brought by a plaintiff and litigated in the Superior Court when it should have been pursued instead in arbitration.” While not a lot of time had elapsed in the litigation (at least in litigation time), the Appellate Division recognized that the plaintiff had procured discovery in the litigation and the homeowner had pending subpoenas for depositions when the plaintiff moved to compel arbitration. Under the applicable arbitration process, discovery would have been much more circumscribed and depositions were unlikely. This standard for “prejudice” is not nearly as high as had been set in pre-Cole precedent.[5] The overarching principle of Marmo is that a party with the right to arbitration should enforce it immediately and a party resisting arbitration can establish waiver if the litigation is pursued fast enough to render it different than how arbitration would have been conducted. The relatively short length of litigation will likely no longer be sufficient to defeat waiver.[6] [1] The Federal Arbitration Act applies to most contracts involving interstate commerce. [2] The Federal Arbitration Act could conceivably create a specific rule for waiver of an arbitration clause. A state law, however, could not unless that rule applied to all contracts equally. See e.g. Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 581 20 U.S. 246, 253 (2017). [3] Multiple state and federal courts after Morgan have held that it applies equally to state law. [4] See N.J.S.A. 2A:44A-14(d) (permitting a residential construction lien claimant to file a separate action other than for the lien). [5] See e.g. Angrisani v. Fin. Tech. Ventures, L.P., 402 N.J.Super. 138, 150 (App. Div. 2008); Spaeth v. Srinivasan, 403 N.J.Super. 508, 514, (App. Div. 2008). [6] The Appellate Division reinforced the Marmo holding the same day in Herrera v. Paramount Freight Sys., Inc., No. A-0424-23, 2024 N.J.Super. Unpub. LEXIS 951 (App. Div. May 24, 2024). |
