The inclusion of an arbitration clause in a contract is commonplace. In New Jersey, courts have a long-standing policy favoring arbitration as an efficient means of dispute resolution. As a result, when parties to a contract become engaged in a dispute and seek to invoke their right to arbitrate based upon the arbitration clause or provision rather than proceeding in court, judges will usually enforce the provision and divert the matter to arbitration. However, the situation becomes more complicated when a dispute involves more than two parties and not all of the parties have signed a contract agreeing to submit any disputes to arbitration. If one or more of the parties has no obligation to go to arbitration, what happens to the lawsuit?
When one lawsuit comes to involve some parties that are subject to an arbitration clause and some that are not, a court is likely to be confronted with a motion by one of those parties asking that the lawsuit be stayed pending the completion of the arbitration. Despite the statewide policy favoring arbitration generally, a court actually has discretion in deciding such a motion and must make the decision based upon equitable principles and the relevant facts.
After either 1) the court has already decided to enforce an arbitration provision and ordered some of the parties to submit to arbitration, or, 2) there is no dispute as to the enforceability of an arbitration clause, and the parties subject to an arbitration clause are cooperatively proceeding to arbitration, the following portion of the Uniform Arbitration Act, N.J.S.A. 2A:23B-7(g) addresses how the court is to determine whether to stay part or all of a pending lawsuit:
g. If the court orders arbitration, the court on just terms shall stay any judicial proceeding that involves a claim subject to the arbitration. If a claim subject to the arbitration is severable, the court may limit the stay to that claim.
N.J.S.A. 2A:23B-7(g). Notably, this provision requires a court to order a stay only on “just” terms and grants the Court discretion, to limit any such stay to the severable claims that are actually subject to arbitration. As the authoritative case law suggests, the questions of what is “just” and whether claims are severable are often intertwined.
Elizabethtown Water Company v. Watchung Square Associates, LLC, 376 N.J. Super. 571 (App. Div. 2005), is the authoritative decision on this issue. Elizabethtown describes the analysis a court should apply when determining whether or not to stay proceedings in which some claims are subject to arbitration and others are not. In Elizabethtown, citing a prior Appellate Division decision with approval, the court recognized the relevance of equitable principles to such determinations:
In Rosenthal v. Berman, 14 N.J.Super. 348 (App.Div.1951), which involved arbitral and non-arbitral claims, we noted that the question of whether the lawsuit should be stayed pending arbitration was a matter of discretion, adding that
[c]are must be taken to prevent a party who has agreed to arbitrate from avoiding his bargain by dragging in extraneous issues and unnecessary parties. On the other hand, a stay should not be granted as to any of the parties where the litigation cannot be severed without unduly increasing the cost of justice, or causing other hardship to the parties.
Id. (internal citations omitted).
In Elizabethtown, there existed a variety of complex claims involving multiple parties. In addition, all of the primary defendants were parties to contracts involving work on the same construction site. The resolution of both the arbitral and non-arbitral claims required determinations about which parties caused slope collapses at a construction site, when the slope collapses were the cause of the damages. The only primary party that was not subject to an arbitration agreement in any of its relevant contracts was the plaintiff, Elizabethtown Water Company (“EWC”). Nonetheless, it was EWC that sought to stay the litigation it had initiated in the Superior Court.
As the Elizabethtown court explained,
The purpose of Elizabethtown’s request for a stay, as we have noted, was to put off litigation of [a defendant’s] counterclaim in the Law Division pending the outcome of the arbitration. Elizabethtown hopes that the arbitrators will determine either that [the aforementioned counterclaimant] was responsible for all the slope failures, or that [the third-party defendant] caused all the slope failures while working for [the general contractor] and not while working for Elizabethtown. [The counterclaimaint], on the other hand, wants to pursue its slope failure claims against [the general contractor] and [the third-party defendant] in the arbitration, while at the same time pursuing in the Law Division its counterclaim that Elizabethtown, under its contract with [the third-party defendant], was responsible for the slope failure.
Particularly due to the existence and nature of the counterclaim and the fact that all of the parties were involved and potentially caused the slope failure at the same construction site, the danger of conflicting causation determinations clearly rendered the arbitral and non-arbitral claims inextricable and unseverable. Indeed, the Elizabethtown court reasoned, “since the arbitration may well resolve responsibility for all of the slope failures, the principle of conserving judicial resources is a weighty consideration that we believe the trial court improperly ignored [in denying Elizabethown’s motion for a stay].”
In other words, as would be appropriate pursuant to N.J.S.A. 2A:23B-7(g), because the claims in Elizabethtown subject to arbitration were not severable, and because staying the entirety of the proceedings was not unjust given the particular facts of the case, the Elizabethtown Court did not limit the stay of Superior Court proceedings solely to the non-arbitral claims.
For the parties that are subject to the arbitration clause, there is an inherent desire a stay of the pending litigation. By obtaining a stay of the lawsuit, the parties participating in arbitration may avoid expending potentially redundant legal fees and costs on two related proceedings at the same time. At the same time, like the counterclaimant looking to sue EWC in the Elizabethtown case, if your strategy involves laying blame at the foot of a party that is not participating in the arbitration, there might be a reason to proceed on two fronts despite the associated fees and costs.
As the facts of Elizabethtown again illustrate, depending on the exact situation, a party that is not subject to an arbitration clause also faces a challenging question. In Elizabethtown, EWC chose to seek a stay because it believed that a favorable ruling in the arbitration in which it was not participating could save it significant expense by potentially eliminating, indirectly, the counterclaim against it in the lawsuit. By obtaining a stay, EWC sought to sit back and conserve fees, time and energy while other parties indirectly fought a battle on its behalf. One might argue that such a strategy is only available when, under the law, the unseverability of claims demands the stay of the entire litigation.
Where claims are clearly severable, the parties subject to an arbitration agreement will likely seek to avoid dealing with both arbitration and litigation at the same time. However, depending on the circumstances, whether a party is subject to an arbitration or not, the advisability of supporting or opposing a stay of the litigation is fact sensitive. When faced with such a situation, parties should ask themselves:
The business lawyers of the Law Office of Bart J. Klein counsel clients regarding contract drafting and formation and as to commercial litigation disputes arising therefrom. We welcome you to contact us for further information.
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