Muhammad v. Cty. Bank of Rehoboth Beach, Del. - 189 N.J. 1, 912 A.2d 88 (2006)

Rule:

The Federal Arbitration Act (FAA), 9 U.S.C.S. § 2, provides that arbitration agreements covered by the Act shall be valid, irrevocable, and enforceable save upon grounds as exist at law or in equity for the revocation of any contract. In enacting § 2 of the FAA, the United States Congress declares a national policy favoring arbitration and withdraws the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. The FAA does not preclude an examination into whether the arbitration agreement at issue is unconscionable under state law.

Facts:

Jaliyah Muhammad received a short-term, single advance, unsecured loan of $200. The principal plus a $60 finance charge was due, with an annual percentage rate of 608.33 percent. Muhammad extended the loan twice, resulting in a total of $180 in finance charges. To receive a loan, Muhammad had to complete and sign three pages of standard form contracts, which form contained the arbitration agreement at issue that called for binding individual arbitration, not class arbitration. Muhammad argued that the arbitration agreement was unconscionable based on the class-action waiver.

Issue:

Is a provision in an arbitration agreement that is part of a consumer contract of adhesion unconscionable and therefore unenforceable because it forbids class-wide arbitration?

Answer:

Yes.

Conclusion:

The court agreed that the presence of the class-arbitration waiver in the consumer arbitration agreement rendered it unconscionable as it was unconscionable for County Bank of Rehoboth Beach, Delaware to deprive Muhammad of the mechanism of a class-wide action. The court held that the public interest at stake in denying the ability of consumers, such as Muhammad, to effectively pursue their statutory rights under the state's consumer protection laws overrode defendants' right to seek enforcement of the class-arbitration bar in their agreement. The unconscionable provision was severable, with the remaining, valid portions enforceable.