A recent unreported Appellate Division decision highlights the importance of clarity in drafting binding arbitration clauses.

In that case, Vill. Courtyard Condo. Ass’n, Inc. v. 68-72 Franklin Place, LLC, 2024 N.J. Super. Unpub. LEXIS 1184, the bylaws of a residential development contained the following arbitration clause: “In the event of internal disputes arising from the operation of the condominium among unit owners, associations, agents, and assigns, there shall be voluntary, binding arbitration conducted under New Jersey law. The decision of the arbitrator shall be final.”

When the association sued the real estate development company that served as the development’s sponsor for various construction defects, the development company moved to dismiss for failure to state a claim and to compel arbitration. The court denied the motion, finding that a) the arbitration clause only applied to “internal disputes” regarding the operation of the condominium, and b) the presence of the word “voluntary” in the arbitration clause meant that the clause was not meant to prevent a party from bringing their own claims rather than pursuing binding arbitration. The association appealed, and the Appellate Division affirmed.

In upholding the denial, the Court first noted that arbitration clauses are regulated according to general contract principles. Therefore, to be enforceable, such clauses must be the product of mutual assent, and their terms must clearly explain that the agreement waives a party’s right to have their claim tried in court. The court found that to be enforceable, an arbitration clause must state its purpose “clearly and unambiguously.”

The Court reasoned that here, the arbitration clause did not clearly inform the parties that they were waiving their right to seek relief in a judicial forum. In slightly circular reasoning, the Court found that the parties’ dispute over whether arbitration was voluntary was evidence that the arbitration clause did not state its purpose clearly and unambiguously. This lack of clear and unambiguous language notifying the parties that they were waiving their right to sue rendered the arbitration clause unenforceable.

Parties who wish to include an enforceable, binding arbitration clause in any type of contract should ensure that such clauses are drafted in a manner that clearly and unambiguously states the clause’s purpose.