Case Law Summaries

Gras v. Associates First Capital Corp.

• Opinion Date: December 20, 2001
• Business Law
• E-Mail

ARBITRATION; CONSUMER FRAUD ACT—Matters cognizable under the Consumer Fraud Act may be dealt with in arbitration and an arbitration agreement can preclude class action claims.

A borrower entered into a series of five secured loan transactions, each accompanied by the purchase of credit life insurance. The loan documents required the borrower to arbitrate any dispute, including “any claim or dispute based on a federal or state statute.” Finally, the arbitration agreement prohibited the borrower from pursuing a class action in arbitration. The borrower filed suit alleging, among other claims, that the credit life insurance provisions of the loan agreements violated the Consumer Fraud Act (CFA). In response, the lender filed demand for arbitration and, when the matter reached the Appellate Division for the first time, the Court stayed the arbitration pending appeal. After reviewing the matter, however, the Appellate Division rejected the borrower’s claim on appeal that the arbitration agreement was void because it contravened public policy “by precluding class actions and, if not void, the agreement [could not] be enforced since [the borrower] did not knowingly waive [its] rights to pursue such action.” Each loan agreement was accompanied by a separate arbitration agreement carrying a legend at its beginning, reading as follows: “READ THIS ARBITRATION AGREEMENT CAREFULLY. IT LIMITS CERTAIN OF YOUR RIGHTS, INCLUDING YOUR RIGHT TO MAINTAIN A COURT ACTION.” The arbitration agreement described the process in detail, and specifically stated that it governed any insurance purchase in connection with a loan. The borrower alleged that it never negotiated or discussed these provisions with the lender. It further alleged that the agreements were presented as part of a “stack” of closing papers. As a consequence, the borrower argued that the arbitration agreements signed in connection with the loans were contracts of adhesion. The Court first pointed out that a contractual arbitration agreement involving interstate commerce is subject to the Federal Arbitration Act. Such agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court had little reservation concluding that the loan contracts were ones of adhesion, but pointed out that a “finding of an adhesive contract is not dispositive of the issue of enforceability.” Instead, the Court considered “the subject matter of the contract, the relative bargaining powers of each party, the degree of economic compulsion motivating the adhering party, and the public interests affected by the contract.” After reviewing a large number of cases addressing these issues, the Court found no factors mitigating against the strong public policy in favor of arbitration. It also specifically focused on whether there was an inherent conflict between arbitration and the underlying purpose of the CFA. It concluded that there was no such inherent conflict. One reason was that the CFA does not specifically create a private right to bring a class action and that the borrower could vindicate its statutory rights in the arbitration forum. Attorney’s fees were awardable under the rules set forth in this particular contract, the arbitrator had the power to assess fees, expenses, and compensation, including interest and attorney’s fees if they are requested or authorized by law or agreement. Further, the CFA provides the successful complainant with other remedies that can also be granted by an arbitrator. According to the Appellate Division, the New Jersey Supreme Court has stated three main purposes of the CFA. They are “to compensate the victim for his or her actual loss, to punish the wrongdoer through an award of treble damages, and, by way of counsel fee provision, to attract competent counsel to counteract the community scourge of fraud by providing an incentive for an attorney to take a case involving a minor loss to the individual.” According to the Court, all three of the objectives could be vindicated in the arbitration forum and a successful complainant could achieve all statutory remedies in the same forum.

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