It is a fundamental principle of law that arbitration is a creature of contract. Without the requisite agreement to arbitrate a dispute, parties are left to litigate their claims in a court of competent jurisdiction. Moreover, since parties may have a right to a jury trial, any waiver must be knowing and voluntary. For these reasons, courts nationwide scrutinize arbitration clauses in contracts carefully before enforcing them and depriving parties of their right to a jury trial.

An intermediate appellate court in New Jersey recently put such a clause on the “chopping block” in the context of a consumer dispute over the construction of an in-ground swimming pool.

In Lahoud v. Anthony & Sylvan Corp., No. A-3049-23, 2025 WL 409387 (N.J. App. Div. Feb. 6, 2025), the Superior Court of New Jersey, Appellate Division considered a “novel issue” in New Jersey: “[I]s an alternative dispute resolution (ADR) provision enforceable if the party who drafted the contract reserves the right to file certain claims in court while the other party does not?” Lahoud, 2025 WL 409387, at *1. 

The facts are undisputed. The owner entered into a written contract with the contractor to build a swimming pool at the owner’s beachfront home. The contract included an ADR clause which provided in part:

“You and we agree that any controversy, dispute, or claim, including but not limited to any claim for consumer fraud or any other statutory claim, (collectively ‘claim’) arising out of or relating in any way to this agreement or its breach that cannot be settled through direct discussions should be submitted by the claimant to nonbinding mediation, administered by a mediator mutually selected and agreed to by the parties, or if the parties cannot agree on a mediator, by a mediator with the American Arbitration Association (‘AAA’) pursuant to its Commercial Mediation Rules … . 

“If the parties are unable to resolve the claim through mediation, the claim shall be submitted by claimant for and resolved by binding arbitration pursuant to the AAA Commercial Arbitration Rules and administered by an arbitrator mutually selected and agreed to by the parties, or if the parties cannot agree then one assigned by the AAA... You and we are choosing mediation and arbitration instead of litigation to resolve our claims and voluntarily and knowingly waive a right to a jury trial … . 

“Notwithstanding the foregoing, we reserve the right and may at our discretion exercise the right to commence legal action in any court of competent jurisdiction to collect monies you owe under this agreement, in which you agree to waive the right to mediation or arbitration.”

Lahoud, 2025 WL 409387, at * 1 (emphasis added) (italicized language referred to as “Reservation of Rights Provision.”)

Sometime after pool excavation work had started and after a series of delays, the contractor’s excavator failed to return to the jobsite. The owner declared the contractor in “material breach” of the contract and terminated it. The contractor agreed to refund the owner some of the money paid. However, the owner claims that the contractor failed to perform under the agreement and made false representations in violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -20 (CFA). 

The owner filed a three-count complaint in the Superior Court of New Jersey, alleging breach of contract, violation of the CFA, and a declaration that the arbitration provision in the parties’ contract was unenforceable since the Reservation of Rights Provision violated public policy. Lahoud, 2025 WL 409387, at *2. The contractor filed a motion to dismiss in response, citing the parties’ agreement to arbitrate. 

The owner cross-moved, arguing that the arbitration clause violated public policy and was therefore unenforceable. The trial court found in favor of the contractor, and the owner appealed. Lahoud, 2025 WL 409387, at *2.

Appeal: ‘one-sided nature’

On appeal, the owner’s main argument was that the ADR provision in the parties’ agreement is unenforceable and unconscionable because it is so “one-sided” in favor of the contractor. Specifically, the owner contended that the parties did not have a valid arbitration agreement because it failed to impose a “mutual obligation to arbitrate.” Lahoud, 2025 WL 409387, at *4. 

After analyzing the subject matter of the agreement, the parties’ relative bargaining positions, the degree of economic compulsion motivating the owner and the public interests affected by the agreement, the appellate court agreed that the “contract is so oppressive or inconsistent with the vindication of public policy, that it would be unconscionable to permit its enforcement.” Lahoud, 2025 WL 409387, at *5 (citations omitted).

“We are satisfied the one-sided nature of the reservation of rights provision here can be cured by striking it from the contract based on the severability clause. Striking the reservation of rights provision would leave behind a ‘clear residue that is manifestly consistent with the central purpose of the contracting parties, and that is capable of enforcement.’”

Lahoud, 2025 WL 409387, at *7 (citations omitted).

While this was a novel issue in New Jersey, courts in other jurisdictions have analyzed the unconscionability of “one-sided” Reservation of Rights clauses and applied their own analyses to the facts on hand. See Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 690-94 (Cal. 2000) (“[A]n arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.”) 

However, see In re FirstMerit Bank, N.A., 52 S.W.3d 749, 757 (Tx. 2001) (“[A]n arbitration clause does not require mutuality of obligation, so long as the underlying contract is supported by adequate consideration. In any event, the basic test for unconscionability is whether, given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.”)

Takeaways

While it is important to point out that different courts decide cases differently, the Lahoud decision offers some noteworthy guideposts. First, businesses should be mindful of any procedural unfairness in their consumer contracts regarding arbitration. As an attorney representing both types of clients (consumer and business), I typically caution against a one-sided arbitration clause. The clause seems oppressive, and I am hard-pressed to identify the benefit to the company by having such a clause in its agreements. 

I encourage my corporate clients to “pick their poison” for binding dispute resolution — arbitration or litigation. Arguments may be made in favor of either approach, and I often liken the selection to choosing between Coca-Cola and Pepsi: Different clients have different personal preferences. 

Regardless of the approach selected, corporate parties would do well to ensure their agreements for binding dispute resolution are fair, balanced and clearly communicated to consumers. By carefully drafting arbitration clauses and ensuring they are mutual and fair (i.e., not unconscionable), businesses will avoid satellite litigation about the enforceability of such clauses (and the additional legal fees that come with such litigation).

Disclaimer

 This article is for informational purposes only and not for the purpose of providing legal advice. Nothing in this article should be considered legal advice or an offer to perform services. The application and impact of laws may vary widely based on the specific facts involved. Do not act upon any information provided in this article, including choosing an attorney, without independent investigation or legal representation. The opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of his firm.