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Faherty v. Faherty

Decided: July 19, 1984.


On certification to the Superior Court, Appellate Division.

For modification and affirmance -- Chief Justice Wilentz and Justices Clifford, Schreiber, Pollock, O'Hern and Garibaldi. Opposed -- None. The opinion of the Court was delivered by Garibaldi, J.


[97 NJ Page 101] The question posed in this appeal is whether an arbitration provision in a separation agreement, entered into by the parties prior to their divorce and incorporated in their divorce judgment, is enforceable. The Chancery Division and the Appellate Division enforced the arbitration provision. We granted certification, 94 N.J. 616 (1983), and now modify and affirm, as modified, the Appellate Division's judgment.


Susan Faherty (Susan) and J. Roger Faherty (Roger) were divorced in 1977 after seventeen years of marriage. At that time, they had four dependent children. Prior to their divorce, the parties, both of whom were represented by counsel, negotiated and executed a Property Settlement Agreement (Agreement). The trial court incorporated the Agreement in the final judgment of divorce, which expressly recited that the court had made no "findings as to the reasonableness thereof."

The Agreement is detailed and governs equitable distribution, spousal support, child custody, and child support. Paragraph 25 of the Agreement provides that any financial dispute arising out of the Agreement must be arbitrated as a condition precedent to court action; the arbitration must be conducted under the rules of the American Arbitration Association (AAA); and the arbitrator's decision is binding on the parties. Paragraph 20 permits modification of payments due to changed circumstances but, in the event of a dispute over the necessity for such modification, requires arbitration as a condition precedent to judicial relief.

The Agreement also contains several paragraphs dealing with the equitable distribution of the parties' assets. Under the terms of the Agreement, Roger transferred the marital home in Summit, New Jersey to Susan, who also retained all the tangible personal property in the home and a Jeep. Paragraph 7 required Roger, over a ten-year period, to pay Susan ten promissory notes totalling $165,000 as "an adjustment of accounts as part of the division in lieu of statutory equitable distribution of marital assets."*fn1 In the event of Roger's death,

the notes were to be treated as a debt of his estate. As security for the payment of the notes, Roger was required to furnish stock to be held in an escrow account and to secure a $100,000 term life insurance policy.

Paragraph 29 provides for adjustment of support under certain circumstances. Roger was a successful investment banker employed by his closely-held family corporation. The parties recognized that Roger's ability to meet his spousal-support obligations under the Agreement was contingent on his company's earnings. To avoid the possibly unjust consequences of requiring Roger to pay the full support required in the Agreement in years when his company did not make a profit, the parties in paragraph 29 provided:

29. (a) The parties to this Agreement recognize that the husband's obligation provided for in paragraph 2 may, under the circumstances that his employer, Faherty & Swartwood, Inc., may not have substantial pre-tax earnings, be difficult for him to perform.

(b) Any arrearages which may develop in payment of the obligations provided for in paragraph 2 shall be weighed in connection with the amount of his fixed annual salary and the fiscal year-end pre-tax earnings of the said employer, since a distribution of said earnings or a loan on the basis of such earnings is expected to be the sole way in which the husband could meet the said obligations, or make up any arrearages which may accumulate thereunder.

(c) Nothing in this paragraph shall be deemed to apply to, modify or limit any portion of this Agreement with the exception of the said paragraph 2. [Emphasis added.]

Further, the Agreement included the following clauses: a release by each party of all equitable division of marital assets and all community property interests except for those provided in the Agreement; an integration clause stating that the Agreement represented the parties' entire understanding and that "there are no representations, promises, warranties, covenants or undertakings other than those expressly set forth herein"; a

default clause, whereby Roger agreed that if he should default in performing any obligation under the Agreement, he would pay to Susan counsel fees she reasonably incurred to enforce her rights under the Agreement; and a provision that the Agreement shall be governed by the laws of New Jersey.

The present case arose when Susan moved in the Chancery Division for an order fixing past-due alimony and child support and compelling discovery of defendant's business records. Susan claimed that Roger was in arrears of $25,400 in support payments and had defaulted on one of the equitable-distribution promissory notes of $25,000. Roger cross-moved, seeking to compel arbitration of the arrearages pursuant to paragraphs 20 and 25 and seeking arbitration as to the amounts of future payments because he claimed significantly changed circumstances. The Chancery Division issued an order compelling arbitration of arrearages of alimony and child support as well as the issue of modification of future payments of alimony and child support in accordance with the Agreement.

Subsequently, the parties selected an arbitrator according to the rules of the AAA. The issues submitted to arbitration were Susan's claims for arrearages in alimony and child support, for future alimony and child support, as well as Roger's claim that both the arrearages in alimony and child support ...

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