Clearly Worded Contracts Should Be Enforced

Freedom of contract—the right of individuals to manage and govern their own affairs—is a basic and necessary liberty. The appropriate role of the government in contract-law disputes is to hold parties to their word, not to enforce its own policy preferences.

The New Jersey Supreme Court recently struck a blow against that basic freedom, however, in ruling that clearly worded arbitration provisions—one of the most common parts of consumer contracts—are unenforceable unless the parties comply with multiple superfluous formalities. The case arose when Patricia Atalese retained a law firm, U.S. Legal Services Group, to negotiate with creditors on her behalf. Atalese signed a retainer agreement with a standard arbitration provision: she checked a box that unambiguously indicated that she read and understood that all disputes would be settled via arbitration. Then, after a dispute over legal fees, Atalese disregarded the arbitration agreement and filed a lawsuit in state court.

The trial court dismissed her complaint and compelled arbitration, a ruling that was affirmed by the intermediate appellate court. But instead of letting that decision stand, the New Jersey Supreme Court broke from years of tradition and federal precedent found the arbitration provision unenforceable because it lacked certain magic words stating, in addition to all disputes being resolved by arbitration, that the parties were waiving their right to a civil jury trial.

Cato, joined by the National Federation of Independent Business, has filed an amicus brief urging the U.S. Supreme Court to review the case. We make three key points. First, the New Jersey court’s proposed requirement—that contracts with an arbitration provision include belt-and-suspenders-and-drawstring language regarding jury-trial waiver—is redundant. Agreeing to submit a dispute to an impartial arbitrator instead of going through the expense of litigation is the very essence of an arbitration agreement.

Second, the ruling is contrary to federal law. The Federal Arbitration Act, which has been in place for nearly 100 years, affords arbitration agreements certain protections. Specifically, it demands from the states a certain amount of even-handedness: states can’t nullify or refuse to enforce such agreements for reasons other than those that would invalidate any contractual provision (e.g., coercion, fraud, illegal subject matter, etc.). Since New Jersey law doesn’t require parties to state clearly that they understand the legal consequences of other contractual provisions (since a signature is accepted as evidence that the agreement was read and understood), applying that additional standard to arbitration agreements alone would violate federal law.

Finally, this ruling threatens to upset the business world by calling into question the validity of millions of contracts to which parties have mutually and unambiguously agreed. The vast majority of arbitration provisions, including many of those featured in previous Supreme Court cases, don’t include the explicit language mandated by the New Jersey ruling.

In short, the value of contracts lies in the certainty they create while enabling mutual gains. By creating substantial uncertainty about the enforceability of tens of thousands of arbitration agreements, the New Jersey Supreme Court will force businesses, litigants, and the taxpayers who fund the court system to waste time and money litigating disputes that would be more appropriately resolved by arbitration—as all the parties agreed in the first place.

The Supreme Court will decide whether to take up U.S. Legal Services Group v. Atalese this spring.