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Appellate Division Supports the Use of Arbitration Provisions in Form Contracts

October 30, 2016

The Appellate Division recently held that arbitration clauses contained in secured loan agreements were enforceable even though they precluded class certification of claims relating to the sale of credit insurance. The Appellate Division's opinion further supports the use of arbitration provisions in form contracts, as well as provides guidance on how to draft an enforceable arbitration provision.

Plaintiffs in Gras v. Associates First Capital Corp., were debtors of defendant Associates First Capital Corp. or an affiliate ("Associates"). Each loan transaction involved the purchase by the debtor of credit life insurance that was provided by defendant Union Security Life Insurance Company ("Union"). The loan agreements that plaintiffs signed stated that the debtors agreed to arbitrate any dispute or claim in connection with the loans, including any claims or disputes involving: (1) any insurance purchased in connection with the loan or (2) any claim or dispute based on federal or state statutes. Further, the arbitration provision prohibited arbitration on a class-wide basis.

Plaintiffs brought a putative class action against Associates and Union. Plaintiffs alleged that the credit life insurance provisions violated New Jersey's Consumer Fraud Act ("CFA") N.J.S.A. 56:8-1, et seq. Defendants filed a demand for arbitration with the American Arbitration Association. Plaintiffs moved to stay the arbitration; defendants cross-moved for a stay of the litigation pending arbitration. The trial court granted defendants' motion to stay the action pending arbitration and dismissed plaintiffs' complaint.

On appeal, plaintiffs argued that the arbitration provisions in the loan agreements were void as against public policy because they prohibited class actions. Plaintiffs also argued that the arbitration provisions were not enforceable because they had not knowingly waived their right to pursue a class action. The Appellate Division rejected both arguments and affirmed the dismissal of the complaint.

The Appellate Division relied upon federal precedent that held that arbitration provisions were enforceable even where they deprived plaintiff of the right to pursue a class action under a statute. For example, in Johnson v. West Suburban Bank, 225 F. 3d 366-368 (3d. Cir. 2000), cert. denied, Johnson v. Tele-Cash Inc., 531 U.S. 1145 (2001), the Third Circuit held that claims under the Truth in Lending Act and the Electronic Funds Transfer Act were subject to arbitration even where the plaintiff had sought to bring the claims on behalf of a class. Similarly, in Randolph v. Green Tree Financial Corp., 244 F. 3d 814 (11th Cir. 2001), the Eleventh Circuit Court of Appeals held that a contractual provision to arbitrate claims was enforceable despite the fact that it precluded plaintiffs from utilizing class action procedures authorized by the Truth in Lending Act.

The Appellate Division further found that there was no "inherent conflict" between arbitration and the underlying purpose of the CFA. It held that the purposes of the CFA to: (1) compensate a victim of consumer fraud for his or her actual loss; (2) punish wrongdoers through the award of treble damages; and (3) by way of counsel fee provisions to attract competent counsel to handle consumer fraud claims, could be accomplished in arbitration and a successful plaintiff could achieve all statutory remedies in arbitration.

Finally, the Appellate Division held that the arbitration provisions were enforceable as knowing waivers of plaintiffs' right to bring a class action. The Court stated that, to be enforceable, an arbitration provision must, at a minimum, provide that it applies to any "claim or any dispute" that the parties might have. The Appellate Division held that the subject arbitration provisions easily met that standard in that they specifically provided that they would apply to claims or disputes that plaintiffs had concerning insurance and to claims or disputes under any federal rule or state statute. The Court stated that it was not necessary to specify what federal or state statute might apply and, hence, be subject to arbitration.

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