One-Sided Arbitration Clauses Are Still Contracts—and Contracts Require Fairness

Businesses increasingly rely on mediation and arbitration provisions to resolve disputes efficiently and privately. As a commercial litigator, I routinely advise clients on drafting dispute resolution provisions and litigate their enforceability when relationships break down.

A recent published decision from the New Jersey Appellate Division serves as an important reminder that while New Jersey strongly favors arbitration, courts will not enforce contract provisions that unfairly tilt the playing field in favor of one party. In Lahoud v. Anthony & Sylvan Corp., the Appellate Division considered whether an arbitration clause remained enforceable when the company reserved the unilateral right to sue in court for money it claimed was owed under the contract while requiring the customer to arbitrate every claim the customer might have.

Arbitration Is Favored—but Mutuality Still Matters

The underlying dispute involved the construction of a swimming pool. The contract required virtually every dispute to proceed first through mediation and then binding arbitration. It also contained all the language New Jersey courts generally require under Atalese v U.S. Legal Servs. Grp., L.P. 219 N.J. 430 (2014), clearly informing the parties that they were waiving their right to have disputes decided in court.  Had the agreement stopped there, the arbitration clause likely would have been fully enforceable. It didn’t.  Buried within the dispute resolution provision was language giving only the contractor the option to bypass arbitration and file a lawsuit to collect money allegedly owed under the contract. The homeowner had no corresponding right. The Appellate Division concluded that this reservation of rights provision lacked mutuality and was unconscionably one-sided. The Court Drew an Important Distinction The court did not invalidate the entire arbitration agreement. Instead, it held: the arbitration provision itself was valid;  the waiver of a jury trial satisfied New Jersey law;  mediation and arbitration remained enforceable; but the contractor’s exclusive right to sue in court while forcing the customer into arbitration could not stand.  Because the agreement contained a severability clause, the court simply struck the offending language and enforced the balance of the arbitration agreement.

Why This Decision Matters to Businesses

Many businesses use standardized contracts that have evolved over years of revisions. Often provisions are copied from older agreements or national templates without considering whether they comply with New Jersey law. This decision demonstrates that courts will closely examine whether dispute resolution provisions provide a fundamentally fair process. Businesses sometimes believe they can draft arbitration clauses that preserve maximum flexibility for themselves while limiting their customers’ or counterparties’ options. This case illustrates the risk of that approach. When one party reserves litigation rights that the other party does not have, a court may refuse to enforce that portion of the agreement.

The Lesson Extends Far Beyond Consumer Contracts

Although Lahoud involved a consumer contract, its reasoning has implications for many of the matters I handle.

1. Shareholder and LLC Agreements

Many shareholder agreements, operating agreements, and partnership agreements contain mandatory arbitration provisions. When these agreements are drafted, owners sometimes attempt to carve out special rights for controlling shareholders or majority members while restricting minority owners to arbitration. If those provisions become overly one-sided, they may invite challenges similar to those raised in Lahoud. The better practice is to draft dispute resolution provisions that apply equally to everyone bound by the agreement.

1. Employment Agreements

The same principles frequently arise in executive employment contracts and restrictive covenant agreements. Employers often want the ability to seek immediate injunctive relief in court to enforce non-compete, non-solicitation, or confidentiality provisions while requiring employees to arbitrate other disputes. Those provisions can certainly be enforceable when carefully drafted. However, Lahoud reminds us that courts will scrutinize whether contractual exceptions create an unfair imbalance or undermine the mutual nature of the parties’ agreement.

1. Commercial Contracts

Business owners frequently enter supply agreements, purchase agreements, franchise agreements, construction contracts, and service agreements containing arbitration clauses. Before relying on those provisions in litigation, businesses should evaluate whether the dispute resolution language would withstand judicial scrutiny if challenged. A defective arbitration clause can create unnecessary motion practice, delay resolution of the dispute, and increase litigation costs.

1. Careful Drafting Prevents Expensive Litigation

One of the more interesting aspects of Lahoud is that the contractor likely accomplished very little by including its unilateral litigation carve-out. Rather than giving the company an advantage, the provision generated additional litigation over enforceability before the merits of the parties’ dispute were ever addressed. Thoughtful drafting at the outset often avoids these costly preliminary battles.

The Bottom Line

The Appellate Division reaffirmed New Jersey’s strong public policy favoring arbitration. But it also emphasized an equally important principle: arbitration agreements remain contracts, and contracts must satisfy basic principles of fairness and mutuality. A party generally cannot require its adversary to arbitrate every dispute while reserving exclusive access to the courthouse for itself.

For businesses, this decision is a good opportunity to revisit existing contracts. Whether you are drafting shareholder agreements, operating agreements, employment agreements, or commercial contracts, dispute resolution provisions deserve careful attention. A well-drafted arbitration clause can provide significant advantages. A poorly drafted one can become the first—and most expensive—fight in the litigation.