New Jersey and Pennsylvania Courts: Enforcement of Arbitration Clauses in Residential Contracts of Sale

New Jersey
Since March 2005, the New Jersey Appellate Division has made it clear that statutory claims (e.g. consumer fraud claims) against contractors are not governed by the standard American Institute of Architects (“AIA”) arbitration clause. In standard AIA contracts, the dispute resolution clause states: “all claims or disputes between the Contractor and the Owner arising out of or relating to the Contract, or breach thereof, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association ….”
In the 2005 case, the plaintiff homeowner executed a standard AIA residential construction contract for the construction of a substantial residential addition. The contract included the above referenced, standard dispute resolution clause. The Court held that all statutory claims arising out of the construction dispute, including contract claims for which the arbitration clause was specifically intended, must be decided in Court if the homeowner chooses that forum. However, the Court also appeared to conclude that it would uphold a residential arbitration clause  when the language of the clause clearly and unambiguously states that the homeowner waives his/her right(s) to prosecute statutory claims in Court.
The dispute resolution clause need not specifically refer to a particular statute or list every imaginable statute, but it should reflect a homeowner’s clear understanding of the type of claims included in the waiver of such statutory claims. Simply, the arbitration clause should be phrased  in unambiguous terms with a clear waiver of statutory rights.
Therefore, to avoid a homeowner selecting a Court as the forum for all claims, contractors, and residential developers, should modify and curtail their arbitration clauses to clearly and unambiguously establish that a homeowner waived his/her right(s) to prosecute statutory claims in Court.
In August 2005, I represented a large, regional homebuilder and its parent corporation defending a consolidated action consisting of two separate plaintiff homeowners against the homebuilder. The homebuilder had appealed a trial court’s decision denying it’s motion to compel arbitration pursuant to the arbitration clause. The subject contracts included the following dispute resolution clause language: “[a]ny controversy, claim or dispute arising out of or relating to this Agreement or purchase of the Home (except for claims subject to the Limited Home Warranty) shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [“AAA”] ….”
In September 2006, the Superior Court of Pennsylvania (appellate division) held that statutory claims did not take the homeowners’ complaints out of the domain of the arbitration agreements and the inclusion of an alleged parent corporation did not take the case out of the arbitration clause.
The holdings and rulings in this case became the law across the state of Pennsylvania. The Court reasoned that homeowners cannot attempt to defeat an arbitration clause simply by adding fraud allegations to what is essentially a contract claim. They also cannot add a principal corporation as a defendant who is not a party to the agreement. The gist of the homeowners’ actions are in contract and, therefore, the parties are bound by their arbitration agreements.
Unlike New Jersey Courts, Pennsylvania Courts are now willing to force homeowners to prosecute their contractual and statutory claims in AAA arbitration proceedings pursuant to arbitration language similar, or more inclusive than, the language stated in the homebuilder’s residential purchase agreement. Therefore, to avoid a homeowner selecting adjudication in Court of all claims, contractors and residential developers must modify and curtail their arbitration clauses to include language at least as inclusive as the homebuilder’s arbitration clause, which clause and contracts can be reviewed by this office.
While the above analyses apply to residential contracts of sale, arbitration clauses are also contained in many, if not almost all, commercial construction contracts throughout New Jersey and Pennsylvania. Careful drafting and incorporation of certain, necessary language is also recommended with commercial construction contracts.
For more information regarding review of arbitration clauses, commercial construction contracts and other construction industry matters, contact Stanley Gentile, Esquire at 856-354-2309, or
DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal advice, and may not be used and relied upon as a substitute for legal advice regarding a specific legal issue or problem. Advice should be obtained from a qualified attorney licensed to practice in the jurisdiction where that advice is sought.

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