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Muhammad v. County Bank of Rehoboth Beach, Delaware

379 N.J. Super. 222, 877 A.2d 340 (App. Div. 2005)

ARBITRATION; UNCONSCIONABILITY; CONTRACTS OF ADHESION — A loan agreement may not be rendered unenforceable solely on the basis that it is a contract of adhesion.

A student was enrolled part-time at a local college. She needed extra money to purchase books for the semester, so she filled out a loan application with a bank. It contained a mandatory arbitration clause. The clause provided that all disputes arising out of the agreement would be governed by the Federal Arbitration Act (FAA). The application also contained a clause barring the applicant from filing a class action suit against the bank. The bank granted her the loan, and she subsequently applied for and was granted two payday loans from the bank. The payday loans were short term, unsecured consumer loans, where payment was due on the day the woman was issued a paycheck from her employer. The woman was unable to pay all of the loans in full, and filed a class action against the bank alleging, among other things, that the bank violated the New Jersey Consumer Fraud Act. The bank filed a motion to compel arbitration pursuant to the terms of the loan agreement. The lower court granted the motion and referred the matter to arbitration. The woman appealed the lower court’s ruling, contending that the matter should not have been sent to arbitration because the loan agreement was unconscionable and a contract of adhesion.

The Appellate Division affirmed the lower court’s ruling on the basis of state and federal public policy. It held that New Jersey has a strong public policy that favors arbitration as a means of dispute resolution. It further held that the FAA was enacted by Congress to establish a national public policy favoring arbitration. The Court also rejected the woman’s assertion that the loan agreement was unconscionable. In reaching its decision, it evaluated two factors: 1) whether unfairness was present in the formation of the contract; and 2) whether the terms of the contract were excessively disproportional. It found that neither of these two factors indicated that the loan agreement was unconscionable. The Court then addressed the woman’s contention that the loan agreement was a contract of adhesion. A contract of adhesion is an agreement presented on a take-it-or-leave-it basis, usually on a pre-printed form, where there is commonly no time for the adhering party to negotiate its terms before execution. The Court held that a contact may not be deemed unenforceable solely because it is a contract of adhesion. In order to determine whether to enforce a contract of adhesion, a court must evaluate the subject matter of the contract, the relative bargaining power of each party, the degree of economic compulsion motivating the adhering party, and the public interests affected by the contract. After the Court applied these factors, it decided that the loan agreement should not be rendered unenforceable due to its adhesive qualities. It found that the woman had the opportunity and ability to read the plain terms of the agreement, and was fairly informed by its terms that she was giving up her rights and agreeing to arbitrate. Accordingly, it concluded that the contract was enforceable and therefore properly referred to arbitration.


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