Inspired by Gary Born’s lecture on Pathological Arbitration Clauses, as well as the discussion in his International Commercial Arbitration (3rd ed. 2021), I recently challenged CCA Fellows to nominate troublesome clauses that came to their attention this past year. Before announcing the winner, though, a word or two on the criteria for the challenge.
As described in Frédéric Eisemann, La Clause D’arbitrage Pathologique [in COMMERCIAL ARBITRATION: ESSAYS IN MEMORIAM EUGENIO MINOLI 129 (1974)], and subsequent sources, a pathological clause is one that fails of its essential purpose, i.e., is not enforced by a court because of ambiguity, inherent contradictions or a similar structural flaw that makes it impossible to discern the parties’ intent. Brevity is not necessarily pathological: In a given context, as it turns out, a shorthand directive — such as “Arbitration: London” — may be enforced based on industry or parties’ custom and practice; the Seventh Circuit enforced: “Arbitrat[ion] in the usual manner,” Schulte & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709 (7th Cir. 1987). In the non-commercial context, an adhesion contract, or one with an unsophisticated party, that shorthand likely would not pass muster. Margaret Moses suggests a few more specific categories:
“Many kinds of defects can render a clause pathological. For example, the clause may be ambiguous or equivocal, or it may contain mistaken information. The clause may use the wrong name for an arbitral institution or its rules, resulting in the choice of a nonexistent institution. Clauses may provide for choosing a specific arbitrator, who may be deceased by the time an arbitration commences. Parties may state in one clause that disputes will be resolved by arbitration, and in another clause in the same contract may state that a particular court will have exclusive jurisdiction of any dispute. Even if not pathological, the clause may not provide a process that is efficient or beneficial to the parties.” Margaret L. Moses, “Drafting the Arbitration Agreement (2017),” Principles and Practices of International Arbitration (3rd ed., Cambridge University Press, 2017) (https://ssrn.com/abstract=3663468 or http://dx.doi.org/10.2139/ssrn.3663468 ).
Other contract clauses, such as indicating “no third-party beneficiaries,” may have the same unintended effect. On the other hand, statutes such as the Uniform Commercial Code, the Federal Arbitration Act, or state arbitration acts (such as the Revised Uniform Arbitration Act) may contain gap-fillers that allow a court to step in and, essentially, save the parties from themselves.
Nominees: A Sampler
To get Fellows’ creative juices flowing, I suggested a few candidates from cases in 2021. In Cottrell v. Holtzberg, 468 N.J. Super. 59 (App. Div. 2021), a general statement that all disputes should be arbitrated for any admission to a health care facility was undone by a later reference to “the stay…including all prior stays” at the facility, without mentioning future stays, where the injury allegedly occurred during a later stay for which no separate arbitration agreement was signed. In Wollen v. Gulf Stream Restoration & Cleaning, LLC, 468 N.J. Super. 483 (App.Div. 2021), arbitration based on a web site “click” icon was denied to a home repair referral service where the icon said “View Matching Pros” rather than words that would create an expectation of entering into a contract. It did not help that the link to the contract terms that included an arbitration clause was after this icon. Although published in 2020, Knight v. Vivint Solar Developer, LLC, 465 N.J. Super. 416 (App. Div. 2020), was denied Supreme Court review in 2021, so I include its “belt and suspenders” addition of a box to check to confirm plaintiff’s agreement to arbitrate; had that extra step not been offered, the contract language could have been sufficient to require arbitration and delegate to the arbitrator questions such as arbitrability and jurisdiction.
Without discounting other nominees, the following were particularly interesting. Richard Mainland nominated a clause he encountered several years ago that set an unseasonably short period to complete an award and then mooted one of the advantages of arbitration by requiring adherence to the Federal Rules of Civil Procedure regarding discovery.
“All disputes shall be submitted to arbitration before a panel of three arbitrators. As time is of the essence, a final award shall be issued by the arbitrators no later than 30 days after the claim is filed with the American Arbitration Association. Discovery shall be conducted pursuant to the Federal Rules of Civil Procedure.
Thankfully, the parties ignored these limitations. Carl Ingwalson, who has a program on the issue, reported a similar clause that had only 15 days to run after his appointment; amazingly, he was able to complete the task. He also referred to clauses that use the word “may” rather than shall or must, which has led to confusion and litigation. I particularly liked Michael Diamant’s nomination: a clause for a three-person panel that required agreement to the appointment of the chair; but, if agreement could not be reached within seven days, the “wings” were removed and the process started anew. I gather it took extra effort to gain the parties’ agreement to extend the seven-days limit until a chair could be selected (on a second cycle).
I thank these and other Fellows who contributed their favorite pathological arbitration clauses to this year’s contest!
However, a recent entry from New Jersey is the hands-down winner (in the unchallengeable decision of the undersigned). Kopec v. Moers, __ N.J. Super. __, No. A-2551-18, 2022 N.J. Super. LEXIS 3 (N.J. Super. Ct. App. Div. Jan. 13, 2022) (approved for publication), posed a special problem: how to reconcile the ethical obligations under the ABA Model Code with New Jersey’s mandatory offering of court-annexed fee arbitration? Well, not this one.
The dispute resolution paragraph begins by a clear statement that disputes are to be subject to binding arbitration. It goes on to require the client to agree to otherwise voluntary fee arbitration under the Court Rules—a process that is not only meant to offer a voluntary system of arbitration to clients but also is only applicable to fee disputes and is reviewable solely by a disciplinary board, without any court appeal (other than to enter judgment). Next, the clause refers to arbitration (in the traditional sense) pursuant to a statute that was amended in 2003 to apply only to certain labor matters and not to issues such as attorneys’ fees and malpractice claims that would be relevant to this arbitration clause; and it says an award “shall” be confirmed rather than referring to the process in the current arbitration statute allowing limited court review.
“You agree that should any dispute between you and the firm arise as to its representation of you, the matter shall be submitted to binding arbitration. As such, you agree to file the applicable papers with the appropriate Fee Arbitration Committee within 30 days of your receipt of a Pre-Action Notice pursuant to R. 1:20A-6 in order to have such issue resolved in that forum. Should you fail to submit the fee dispute to fee arbitration within the specified time, or should the Fee Arbitration Committee refuse to accept jurisdiction, or the differences between you and the firm involve a matter other than fees and costs, you or the firm may submit the dispute to binding arbitration governed by the New Jersey Uniform Arbitration Act, N.J.S.A. 2A:24-1 et seq. An arbitrator shall be chosen by consent or in accordance with N.J.S.A. 2A:24-5, the fees for which shall be an issue to be determined by the arbitrator. Any arbitrator award shall be confirmed by the Superior Court of New Jersey in accordance with N.J.S.A. 2A:24-8, and a judgment entered in accordance with N.J.S.A. 2A:24-2 & 10. Signing of this Agreement will be deemed your consent to the method of alternative dispute resolution set forth in this Section, and constitutes a waiver on your part and on the part of the firm to have such dispute(s) resolved by a court.” [(Emphasis added).]
Later in the retainer agreement, the attorney inserted a further confusion by describing arbitration generally (from a court form applicable to post-dispute divorce arbitration) in which the parties could appoint the arbitrator (and similar traditional arbitration characteristics) rather than the first alternative, above, of fee arbitration that would be resolved by a court-appointed panel and the ethics authorities:
“In an arbitration proceeding, an impartial third part[y] decides issues in a case. The parties select the arbitrator and agree on which issues the arbitrator will decide. The parties also agree in advance whether the arbitrator’s decisions will be binding on them or instead treated merely as a recommendation. While an arbitrator may decide issues within a divorce case, the judge would still make the final determination as to whether to grant the divorce.
As if the client were not sufficiently confused, once a dispute arose regarding fees, the firm sent the client a fee arbitration notice, as required by the Court Rules, but stated that failure to select fee arbitration would leave the firm “no alternative” but to file a “Complaint”. [Sounds like a waiver to me.]
The court, looking at a number of similar agreements for clients of the same firm, denied its motions to compel arbitration, finding: “we are convinced Paragraph Seventeen, when read in its entirety, contains vague, confusing and misleading language.” Moreover, since fee arbitration was supposed to provide the client with a choice of a special type of arbitration or Court, the initial mandate in the fee dispute paragraph was contrary to public policy and “unenforceable” as well as confusing and contradictory.
I loved the examples of clauses sent to me, typically in the commercial context, but the Kopec clause seems most directly relevant to attorneys such as ourselves who draft retainer agreements and are bound by ethical restrictions — which rules call out for full disclosure, clarity and avoidance of contradictions.
I hope this was helpful and interesting.
*The views expressed are those of the author and do not necessarily reflect the views of CCA or any other organization.