Attempts To Contractually Alter Statutory Arbitration Rights And Limitations May Not Be Successful

The recent New Jersey Appellate Division’s decision in Strickland v. Foulke Management Corp. raises an interesting question of whether parties can contractually expand the scope of judicial review of an arbitration award beyond the minimal requirements of the Federal Arbitration Act (FAA).

In Strickland, the plaintiffs purchased a car, with documents that provided for arbitration, specifically stating that “[t]he Federal Arbitration Act applies to and governs this agreement with the exceptions provided for in this agreement,” and “[i]f any term of this agreement is unenforceable, the remaining terms of this agreement are severable and enforceable to the fullest extent permitted by law.”

The agreement also contained the following language:

THE ARBITRATOR SHALL RENDER HIS/HER DECISION ONLY IN CONFORMANCE WITH NEW JERSEY LAW. IF THE ARBITRATOR FAILS TO RENDER A DECISION IN CONFORMANCE WITH NEW JERSEY LAW, THEN THE AWARD MAY BE REVERSED BY A COURT OF COMPETENT JURISDICTION FOR MERE ERRORS OF NEW JERSEY LAW. A MERE ERROR IS THE FAILURE TO FOLLOW NEW JERSEY LAW.

Having been unsuccessful in the arbitration, the plaintiffs moved to vacate, arguing that the arbitrator’s award violated New Jersey law in various respects.

The Appellate Division rejected plaintiffs’ contention, holding that the parties’ agreement to apply the Federal Arbitration Act limited the grounds to vacate the arbitration award to those limited bases specified in the FAA. As a mistake of law is not one of the grounds for vacatur, the court determined that the award must be confirmed.

As to the parties’ agreement that an award could be reversed for non-compliance with New Jersey law, the court held that “[t]he FAA does not allow the parties to contractually expand judicial authority to review an award.” Consequently, the arbitration agreement’s purported expansion of the grounds of vacatur was clearly inconsistent with the FAA and, therefore, unenforceable.

The court’s decision in Strickland highlights an important point: as a trade off for arbitration’s ability to offer a faster and more cost-effective method of dispute resolution, it also comes with the potential loss of certain legal rights and protections.

Parties who are considering arbitration should be aware of the potential trade-offs and carefully review the arbitration agreement before signing. They should pay particular attention to any language that limits or expands the scope of judicial review, as this can have a significant impact on their ability to challenge an arbitration award in court.