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Legal Memorandum: Enforceability of Arbitration Agreements

Issue: Is an arbitration agreement unenforceable if it is part of a contract of adhesion?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Arbitration agreements; Contract of adhesion
Jurisdiction: Federal, New Jersey
Cited Cases: None
Cited Statutes: 9 U.S.C. §2
Date: 02/01/2009

Arbitration agreements are subject to all defenses to enforcement that apply to contracts generally.  9 U.S.C. §2.  

Under New Jersey law, an automobile policy containing an underinsured motorist provision with an arbitration provision is a “contract of adhesion.”  Allgor v. Travelers Ins. Co., 654 A.2d 1375, 1378 (N.J. Super. Ct. App. Div. 1995).  A contract of adhesion is not entitled to be enforced where: (1) the parties are in substantially unequal bargaining positions; (2) there is a degree of economic compulsion motivating the “adhering” party; and (3) the public interest is not advanced by enforcing the provision at issue.  Rudbart v. N.J. Dist. Water Supply Comm’n, 605 A.2d 681, 687 (N.J. 1992).

Indeed, virtually all insurers offering UM/UIM coverage in New Jersey, include an arbitration provision.  United Serv. Auto Ass’n v Turck, 721 A.2d 1, 4 (N.J. 1998).

Finally, on balance, public policy does not favor enforcement of the arbitration provision at issue here.  Although it is routinely said that public policy favors arbitration generally, that notion is qualified by the prerequisite that both parties must first choose arbitration.  See Keymer, 169 F.3d at 504.  As the New Jersey Supreme Court observed, “[i]n the absence of a consensual understanding, neither party is entitled to force the other to arbitrate their dispute.”  Grover v. Universal Underwriters Ins. Co., 403 A.2d 448, 452 (N.J. 1979).  Arbitration was simply thrust upon them, not presented as an option to accept or reject as they chose, and certainly not part […]

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