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:

DISPUTES: With the exception of warranty claims, any dispute arising in connection with this Agreement or in relation to any amendments to this Agreement, either before or after closing of title, shall be heard and determined by arbitration before an arbiter of the American Arbitration Association in [ --- ] County. The decision of the arbiter shall be final and binding on all parties. Costs of arbitration shall be borne equally between the Seller and the Buyer. This clause shall survive closing of title.

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...