Supreme Court Finds Waiver of Right to Arbitrate by Failure to Pay In Tahisha Roach v. BM Motoring, LLC

Bruce M. Gorman, Jr.

In Tahisha Roach v. BM Motoring, LLC (077125) (A-69-15), the New Jersey Supreme Court held that a used car dealership’s knowing refusal to cooperate with plaintiffs’ arbitration demands, filed in reasonable compliance with the parties’ agreement, amounts to a material breach, barring the breaching party from later compelling arbitration.

The decision stemmed from two separate litigations involving a used car dealership’s dispute resolution agreement (“DRA”). Plaintiffs had separately purchased used cars from two used car dealerships (operating under the same name), which turned out to be lemons. Plaintiffs’ respective efforts to file an arbitration before the AAA were met by the dealer’s refusal to advance its arbitration fees, and the AAA’s subsequent dismissal of the petition. Efforts to file in court were met by motions to dismiss in favor of arbitration, which the lower courts granted. Ultimately, a joint action was filed, and the lower court directed the plaintiffs to attempt to refile before the AAA, and dismissed their complaint with prejudice. An appeal was taken, and the Appellate Division affirmed.

The DRA provided that “[t]he arbitration shall be conducted in accordance with the rules of the American Arbitration Association before a single arbitrator, who shall be a retired judge or attorney.”

Defendant contended that it did not contemplate using the AAA as the forum because of the excessive filing and administrative fees.

The Court first held that the filing of an arbitration claim with the AAA was not inconsistent with the DRA, since the AAA maintains a national roster of arbitrators which includes retired judges and attorneys. Further, the DRA required the parties to arbitrate “in accordance with the rules” of the AAA. Moreover, AAA Commercial Arbitration Rule R-2 specifies that parties who agree to arbitrate in accordance with AAA rules consent to AAA-administered arbitration.

The Court further noted that “[b]y requiring that arbitration be conducted pursuant to the AAA’s rules, defendants reasonably should have expected that customers would file claims directly with the AAA.”

The Court went on to hold that the dealer committed a material breach of the DRA by refusing to advance arbitration fees: “The benefit expected under an arbitration agreement is the ability to arbitrate claims. A failure to advance required fees that results in the dismissal of the arbitration claim deprives a party of the benefit of the agreement … [and thus] ‘goes to the essence’ of the DRA and amounts to a material breach.”

The Court also held that defendants’ failure to pay also violated the standards of good faith and fair dealing.

A case of first impression in New Jersey, the Court relied upon cases from the Ninth and Tenth Circuits which also frowned upon the “perverse incentive scheme” that permitting such behavior would make possible.

The Court, however, declined to adopt a bright-line rule. Instead, whether a refusal or failure to respond to a written arbitration demand constitutes a material breach, precluding later enforcement by the breaching party, would have to be determined on a case-by-case basis.

The dealer’s arguments were not entirely without merit, given the wording of the DRA, and the cost of arbitrating before the AAA. The Court’s decision, however, was probably influenced by the dealer’s unappealing tactics of refusing to pay the fee on the one hand, while moving to compel arbitration on the other. The ping-ponging of the plaintiffs that resulted smacked too much of bad faith to let stand.

The BM Motoring case is also a reminder to drafters that one should take care not to refer to the AAA, or its rules, in an arbitration agreement, unless the client really wants to arbitrate before the AAA.

 

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