United States: NJ Court Rules Arbitration-Only Dispute Resolution Provisions In Real Estate Purchase-Sale Agreements Unenforceable Without Notice That Buyers Give Up Relief In Judicial Forum

In a significant, published decision issued on November 21, 2014, the New Jersey Superior Court, Appellate Division, held that an arbitration provision in a condominium purchase-sale agreement that failed to provide any notice to the buyers that they were giving up their right to seek relief for claims or disputes in a judicial forum constituted a fatal deficiency that rendered the provision unenforceable. The agreement, between the plaintiff-buyers and defendant-builder developers, thus did not require or compel the buyers to arbitrate their claims.

This decision, DiSpenziere, et als. v. Kushner Companies, et als., Docket No. #A-3022-12T4, portends to have a profound, wide-ranging and immediate effect on builders who are involved in, or vulnerable to, construction defect or other claims asserted against them by aggrieved home buyers or homeowners, and even in pending arbitration of such claims.

Typical purchase-and-sale agreements, especially for multifamily, condominium and/or townhouse real estate developments, contain a dispute resolution procedure that obligates buyers to resolve disputes exclusively through a mandated arbitration proceeding, either with the American Arbitration Association (AAA) or similar alternate dispute resolution (ADR) program, as opposed to the courts. An example of the oft-used provisions seen in such agreements is:

While arbitration through the AAA or other ADR programs is intended to provide a swifter, more cost-effective means to resolve disputes – and gives finality since an arbitration decision is binding and non-appealable – there are inherent risks and problems with this process:

• The process is often not as swift or cost-effective as purported. 
• An arbitrator is not necessarily bound by the rules of evidence to adjudicate disputes in an arbitration proceeding.
• There are always issues over what is or is not an "arbitrable" claim – e.g., whether a claimant can assert violations of state statutory protections and consumer-oriented remedies such as those afforded under the New Jersey Consumer Fraud Act (CFA) (which accords compensatory damages, treble damages and attorneys' fees if a violation of the act is proven), the New Jersey Planned Real Estate Development Full Disclosure Act (PREDFDA) (with compensatory damages, double damages and attorneys' fees awardable if a violation is proven) and so on. 

Toward the latter end, the issue of whether a homeowner's claim is "arbitrable" within the meaning and intention of the parties' arbitration agreement has to be resolved before getting to the merits and resolution of the claim, meaning more time delays and expense. Even if a claim is deemed "arbitrable," the parties to the dispute run the significant risk of having a legal determination made by an appointed arbitrator who may not be a lawyer. A single arbitrator or a three-member panel of arbitrators (for more complex disputes) could be comprised of an engineer, architect, contractor or builder depending on who the AAA appoints for the particular dispute. And if the arbitrator or arbitration panel makes a ruling that misapplies the law asserted in support of the claim or defense being adjudicated, it is binding and non-appealable (unless a claimant or respondent is able to show fraud, corruption or evident partiality committed by the arbitrator in the process, which is a rarity and hard to prove). 

Put simply, builders include these types of provisions in their purchase-and-sale agreements to confine their buyers (and ultimately their own potential exposure) to a non-appealable process they can better control and that arguably further limits the theories of liability a claimant can assert against them. From the aggrieved buyer's perspective, however, there are co-extensive remedies available under the New Homeowner's Warranty, which builders are required to deliver to buyers at closing, as well as contract-mandated arbitration, or, in actions instituted in the courts, buyers have the option and flexibility to have disputes adjudicated in the courts.

Unlike arbitration decisions, which are not required to be supported by a written opinion and/or legal analysis (unless the parties at the outset consent and require one from the arbiter), court rules require a trial court to provide opinions or a written statement of reasons for their rulings. If adverse, the decision is appealable by the non-prevailing party to the intermediate Appellate Division and, thereafter, the Supreme Court. A judicial action takes longer, and for this reason, builders seek to avoid the interminable path through the courts over homeowner construction defect disputes. By mandating arbitration as the dispute resolution forum, builders are also attempting to insulate themselves from liability under the array of state statutory protections otherwise available. The mere specter of being subjected to multiple lawsuits from homeowners may incentivize builder-developers (and their insurance carriers) to settle claims quickly, which saves and minimizes the expense of legal defense that would normally be incurred, as well as mitigates the uncertainties and delays associated with litigation.

Enter DiSpenziere

The dispute underlying the Appellate Division's published decision in DiSpenziere, supra, arose from the construction of a condominium development in Perth Amboy by The Landings at Harborside, LLC (a Kushner company, the developer/redeveloper), known as "The Landings at Harborside" condominium. The plaintiff condominium buyer-unit owners instituted an action against the builder-developers alleging that when they purchased their units, they were led to believe they were to be part of "a large waterfront condominium community, which was to include diverse amenities including a Community Center, a Health Club, a waterfront esplanade, [three] parks and other recreational improvements, all of which were to be completed by 2012." In 2011, the project was scaled back as part of a proposal from the designated redeveloper, approved by the Perth Amboy Redevelopment Authority, to (1) alter the project and provide for rental housing instead of owner-occupied units in the residential component of the redevelopment plan, and (2) eliminate all of the proposed amenities.

The plaintiffs sued, contending they reasonably relied on these promises and representations when they purchased their units and also alleging the buildings containing the units they bought were negligently constructed. They sought damages and a myriad of other relief for claimed violations of the Consumer Fraud Act and asserted the standard array of theories (e.g., negligence, rescission, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of warranty, breach of the implied warranty of habitability, fraud and misrepresentation, promissory estoppel and unjust enrichment).

The defendant-developers moved to compel arbitration of the claims against them relying upon the arbitration-only provision contained in the unit purchase agreements. The trial court granted the motion and entered a memorializing order on February 11, 2014. The plaintiffs appealed arguing, among other things, that the arbitration provision was unenforceable. That provision read as follows:

In reversing the trial court, the Appellate Division found unenforceable and invalidated this arbitration-only dispute resolution provision that existed in each of the plaintiff-homeowners' purchase contracts.

The primary reason noted by the court was that there has to be a knowing waiver or relinquishment of the buyer's right to seek redress in the courts before an arbitration-only dispute resolution provision can be sustained and deemed enforceable to compel an aggrieved buyer to arbitrate his/her claims. The court relied on the recent New Jersey Supreme Court decision in Atalese v. United States Legal Services Group, L.P., 219 NJ 430 (2014), which held a contractual arbitration provision in a debt-adjustment services contract unenforceable because it lacked the necessary "clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief."  There must be evidence of mutual assent (i.e., a meeting of the minds) and "...because arbitration involves a waiver of the right to pursue a case in a judicial forum, courts take particular care in assuring the knowing assent of both parties to arbitrate, and a clear mutual understanding of the ramifications of that assent." As the court in Atalese explained, "a clause depriving a citizen of access to the courts should clearly state its purpose. We have repeatedly stated that [t]he point is to assure that the parties know that in electing arbitration as the exclusive remedy, they are waiving their time-honored right to sue."

Applying that holding to the analogous builder-seller/homeowner-purchaser context and the contracts in the condominium real estate development it was confronted with, the Appellate Division in DiSpenziere concluded:

Click here to view the decision.

Conclusion

• This decision will have a dramatic impact upon builder-developers who are currently facing, or even involved in, pending construction defect disputes or other types of claims of aggrieved homeowners arising from real estate development projects where arbitration, as an alternate dispute resolution forum, was mandated by contract as the exclusive remedy.
• Builder-developers and their legal counsel should immediately re-examine, reassess and inventory those purchase-and-sale agreements that they have,  may have used or may currently be using, in order to: 

• Builder-developers should immediately revise similar arbitration-only provisions in their standard form purchase-and-sale agreements to include a specific provision that explicitly informs the buyer, in a clear and conspicuous manner, that by agreeing to binding arbitration as an exclusive remedy, the buyer is knowingly and willingly waiving and relinquishing his/her rights to seek relief in a judicial forum in the event of claim or dispute, whether claims arise pre- or post-closing of title.
• New home buyers and real estate practitioners should be on guard and take immediate heed of this decision in order to be better prepared to negotiate the terms and conditions of new home real estate purchase-sale agreements, especially given the three-day attorney review period required in the residential multi-family and single-family home context.
• The court's holding in DiSpenziere will likely be applied in assessing or challenging the enforceability of arbitration-only alternate dispute resolution provisions contained in any type of commercial contract. Indeed, in this instance, the Appellate Division invalidated such a provision in the form of purchase-and-sale agreement between a builder-developer and new home buyers in the residential development context, relying upon the Supreme Court's decision in Atalese, where such a provision was deemed unenforceable and invalidated in a commercial debt-adjustment service agreement.

Finally, the court's decision in DiSpenziere will most certainly have a greater, far-reaching impact upon the manner in which commercial contracts of any type are now structured or negotiated. As a result, transactional attorneys are well-advised to take heed and closely scrutinize the details of the agreements they are called upon to draft for their clients, particularly when choosing dispute resolution mechanisms. Similarly, litigation counsel engaged to handle construction or commercial contract disputes need to be more circumspect in formulating pleading and litigation strategies in the event of a claim or dispute when counselling clients about the proper forum in which to seek, or defend against, legal or equitable relief.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.