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Preferred Warranties, Inc. v. Fialkowski


December 7, 2007


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, L-6958-05.

Per curiam.


Submitted November 13, 2007

Before Judges Weissbard and S.L. Reisner.

Defendant Edward Fialkowski appeals from a trial court order dated September 27, 2006, vacating an arbitration award and remanding the matter to the American Arbitration Association (AAA) for hearing before a different arbitrator.


The record reflects the following facts.*fn1 There is no dispute that Fialkowski, a New Jersey resident, purchased a used Mercedes Benz automobile from plaintiff Mario Lomedico Exotic Motor Sales, Inc. (Dealership) in New Jersey. When he purchased the vehicle, Fialkowski also purchased, through the Dealership, a service contract for the additional price of $1595. The document, which was signed by Fialkowski and Mario Lomedico of the Dealership, was captioned "Automobile Service Contract," but according to Fialkowski the Dealership marketed the contract to him as an extended warranty on the car. Boilerplate language in the agreement provided that "any controversy or claim arising out of or relating to this agreement, or the breach thereof . . . shall be settled by arbitration" and that disputes under the agreement would be "subject to the laws of the Commonwealth of Pennsylvania." The service provider under the contract was Preferred Warranties, Inc. (PWI), an entity located in Pennsylvania.

After PWI refused to make certain repairs which Fialkowski contended were covered by the service contract, Fialkowski served the Dealership and PWI with a demand for arbitration dated March 3, 2005. The demand requested $5145 in unpaid repair claims, $5600 in attorney fees, and $1595 as a refund of the purchase price of the "warranty." The demand also sought treble damages for violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL). In response to a July 27, 2005 letter from counsel for PWI and the Dealership, Fialkowski's counsel sent a letter dated August 2, 2005, clarifying that Fialkowski was claiming that the Dealership violated the UTPCPL by misrepresenting that the contract was a "warranty." In this letter, Fialkowski also withdrew his claim for repairs to the gas tank and struts.

The arbitration was held in New Jersey, before a New Jersey attorney, Allan Marain, Esq. In a post-hearing submission dated August 12, 2005, Fialkowski filed an itemized written statement of the monetary relief requested. This statement included a claim for $4226 for repairs, less certain itemized adjustments, and $11,600 in counsel fees. Fialkowski's attorney did not submit an itemized affidavit of services, but simply indicated that the fee was comprised of 58 hours at $200 per hour.

Arbitrator Marain issued an award on August 24, 2005, denying Fialkowski's claim against PWI, but granting his claim against the Dealership in the amount of $8559. The arbitrator did not explain how he arrived at that amount. He also awarded Fialkowski $5000 in counsel fees to be paid by the Dealership.

On September 25, 2006, PWI and the dealership filed a complaint in the Law Division to vacate or modify the award. According to the complaint, Fialkowski had presented proof of $2535 in unpaid claims under the service contract and had not presented proof of the amount of his counsel fees. The complaint contended, among other things, that the arbitrator had "refused to provide a computation of the amount awarded" and that there was no evidence to support a treble damage award against the Dealership.

Following a hearing on November 9, 2005, the Law Division judge directed the parties to submit briefs on the following issues: (1) whether the decision to set aside an arbitration award is a procedural or substantive issue; (2) a comparison of New Jersey and Pennsylvania law, particularly in regard to treble and exemplary damages and whether an arbitrator need provide an explanation,; and (3) whether "it was proper for defendant to submit additional evidentiary material regarding legal fees after the close of the arbitration hearing."

On May 18, 2006, the judge issued an oral opinion on the record. Addressing the issue of whether vacating an arbitration award is substantive or procedural, he noted that the contract was signed in New Jersey, and Fialkowski and the Dealership are both New Jersey citizens. Only PWI was located in Pennsylvania. Relying on Roadway Package Sys. v. Kayser, 257 F.3d 287 (3d Cir. 2001), the judge concluded that the issue was procedural and thus, New Jersey law would apply. On the other hand, Pennsylvania law would apply to the substantive issues. He went on to hold: absent a specific provision in the contract that says that both the substantive law and . . . the arbitration law applies[,] that the generic choice of law - - standing alone is insufficient to support a finding that contracting parties intended to opt out of the New Jersey default regime . . . Here, New Jersey was the arbitrating forum and so we're going to apply the New Jersey vacatur statute.

Applying New Jersey law, he concluded that if Marain awarded treble damages, he had an obligation to include his analysis and reasons. Otherwise, there was no way to know how Marain awarded over $8000 when the only damages claimed were around $2500. Accordingly, the judge determined that: the arbitrator's failure to submit - - to write out the reasons and then a refusal when he was asked to do so is a violation of his duty - - and his - - misconduct on his part and that the - - that the award was - - in terms of the statute produced for under -- undue means.

On the second issue, he concluded that Marain's award of counsel fees was improper because PWI and the Dealership did not have an opportunity to contest it. On these two grounds, the arbitration award was set aside and remanded back to the AAA for re-arbitration.

The next day, PWI and the Dealership submitted a proposed order which contained the following language: "the matter is REMANDED to the American Arbitration Association, where it will be assigned to a different arbitrator." By letter dated May 22, 2006, Fialkowski objected to this language, arguing that the matter should be heard by Marain because he was most familiar with the case. On May 31, 2006, the judge issued an order vacating Marain's arbitration award in its entirety. The order did not include the language to which Fialkowski objected. In fact, the judge crossed out the provision that the arbitration be assigned to a different arbitrator. In a supplemental handwritten statement of reasons, the judge indicated that his reasons were placed on the record on May 18, 2006, and that the court had "read and considered the opposition to the form of the order submitted by [PWI's and the Dealership's counsel] before signing this order." The order also provided that the court did not retain jurisdiction.

On remand, the AAA again assigned the case to Marain. On September 14, 2006, the Dealership's counsel sent the trial judge a letter objecting to this appointment, requesting clarification as to whether or not Marain could be the arbitrator on remand, and arguing that under N.J.S.A. 2A:23B-23(c), if an arbitration award is vacated due to undue means or misconduct on part of the arbitrator, the rehearing must be before a different arbitrator. In response, Fialkowski's counsel noted that the Dealership's objection was raised well beyond the forty-five day time limit for appealing the May 31, 2005 order, that the trial judge had relinquished jurisdiction to the AAA, and that the AAA did not join the Dealership's' request for "clarification."

On September 27, 2006, the Law Division judge issued an amended order, which specifically required that the AAA submit the arbitration "to an arbitrator other than Allan Marain." The order was not supported by any statement of reasons.


The consumer protection statutes of New Jersey and Pennsylvania both permit an award of treble damages to an injured consumer. N.J.S.A. 56:8-19; Metz v. Quaker Highlands, Inc., 714 A.2d 447, 450 (Pa. Super. 1998). Therefore, the arbitrator had the authority to award treble damages if he found that the Dealer violated the UTPCPL. However, unlike Pennsylvania, New Jersey law requires an arbitrator to explain the basis for an award of treble damages:

If an arbitrator awards punitive damages or other exemplary relief pursuant to subsection a. of this section, the arbitrator shall specify in the award the basis in fact justifying and the basis in law authorizing the award and state separately the amount of the punitive damages or other exemplary relief. [N.J.S.A. 2A:23B-21(e)].

Therefore, the central question on this appeal is whether Pennsylvania's or New Jersey's procedural law applies to the review of the arbitrator's award. While our courts will honor the parties' contractual choice of the law governing their agreement "if it does not violate New Jersey's public policy," N. Bergen Rex Transp. v. Trailer Leasing Co., 158 N.J. 561, 568 (1999), it is well-established that "the procedural law of the forum state applies even when a different state's substantive law must govern." Id. at 569. Consequently, "when parties have adopted an otherwise valid choice of law provision in an agreement, that provision will not govern when an issue is procedural." Kramer v. Ciba-Geigy Corp., 371 N.J. Super. 580, 601 (App. Div. 2004)(citation omitted).

We conclude that New Jersey's statute requiring an arbitrator to articulate the basis for an award of treble damages, N.J.S.A. 2A:23B-21(e), is procedural. The distinction between substantive and procedural law has been cogently described as follows:

In [Winberry v. Salisbury, 5 N.J. 240 (1950)], we distinguished between substantive and procedural laws by their primary effects on the parties. Substantive law defines the parties' rights and duties, whereas procedural law regulates the means through which those rights and duties are enforced. Winberry, supra, 5 N.J. at 247-48. In other words, "[i]f it is but one step in the ladder to final determination and can effectively aid a court function, it is procedural in nature and within the Supreme Court's power of rule promulgation." Suchit v. Baxt, 176 N.J. Super. 407, 427 (Law Div. 1980). [Ferreira v. Rancocas Orthopedic Assocs., 178 N.J. 144, 162 (2003)(Zazzali, J., concurring in part and dissenting in part).]

The mandate that an arbitrator explain a treble damage award does not affect the winning party's substantive right to receive the award; it simply describes the procedure by which the award is to be made. Thus, the statutory provision provides a procedural safeguard against the arbitrary award of an amount far beyond the injured party's proven economic loss. The requirement is not a substantive limit on the amount of the award, however, but only a mandate that the factual and legal basis for the award be explained.

While not directly on point, Roadway Package Sys. v. Kayser, 257 F.3d 287 (3d Cir. 2001), holds that while parties may contract for different vacatur standards than those set forth in the Federal Arbitration Act (FAA), a general contract provision that a particular State's substantive law will apply to the contract will not be construed as an agreement by the parties to opt out of the standards for vacating an arbitration award under the FAA. Id. at 297. In other words, an agreement to opt out of the FAA vacatur standards requires contract language specifically directed to that issue. Similarly, in this case, we perceive no indication that the general boilerplate language, concerning the application of Pennsylvania law to disputes over the service contract, was intended to affect the application of New Jersey's procedural law.

Moreover, our courts will not defer to the parties' contractual choice of law if deference would violate our State's public policy. New Jersey law will govern if:

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which * * * would be the state of the applicable law in the absence of an effective choice of law by the parties.

[N. Bergen Rex Transp., supra, 158 N.J. at 568-69.]

In this case, Pennsylvania has no substantial relationship to Fialkowski or the Dealership, or to this dispute. Further, New Jersey has an interest in ensuring the fairness of the arbitration process in this State, a policy that would be undermined if we were not to enforce the requirements of N.J.S.A. 2A:23B-21(e). We therefore agree with the Law Division judge that New Jersey procedural law applies, and the arbitrator erred in failing to explain the legal and factual basis for an award that both parties agree must have included treble damages.

However, we part company with the Law Division judge's determination to order that the matter be remanded to AAA for re-hearing before a different arbitrator. First, we conclude that the failure to explain the award under N.J.S.A. 2A:23B-21(e) is not, in this context, the kind of "undue means" or other arbitrator misconduct that would mandate vacating the award and remanding to another arbitrator. Rather, we conclude that the judge should have remanded the matter to the same arbitrator with direction to explain the award to the limited extent required by N.J.S.A. 2A:23B-21(e).

As we concluded in a somewhat analogous case, High Voltage Engineering Corp. v. Pride Solvents & Chemical Corp., 326 N.J. Super. 356, 365 (App. Div. 1999), an arbitration panel's "failure to take testimony [on attorneys' fees] and award a bottom-line figure does not mean that their award was reached by 'undue means.'" In that case, we reasoned that the trial judge could properly have remanded the matter to the arbitrators to complete the award by making a fee allocation. However, we also concluded that the trial judge properly referred the fee issue to a special master. See also Tretina v. Fitzpatrick & Assocs., 135 N.J. 349, 363 (1994) ("[I]n limited circumstances a court can remand to an arbitrator for reconsideration or clarification."*fn2 ) Here, the arbitrator's decision was not necessarily wrong, it simply lacked a statutorily mandated explanation which could readily have been provided on remand. The matter, therefore, should have been remanded to arbitrator Marain to permit him to provide the required explanation.

We next address the issue of counsel fees. After the hearing, the AAA wrote the parties a letter on behalf of the arbitrator directing that they submit supplemental briefs on two legal issues; the AAA letter did not give either party leave to submit anything else. However, in addition to filing a brief, Fialkowski's attorney filed a statement itemizing his damage claim and summarizing his claim for counsel fees. The Dealership did not object and did not request additional time to respond. Moreover, since the arbitrator's award was consistent with the $5600 in counsel fees that Fialkowski requested in his initial demand for arbitration, we have no way of knowing whether the arbitrator even considered the additional filing.

The standard for review of an arbitrator's award is quite deferential. N.J.S.A. 2A:23B-23. Since there is no record of the arbitration, we do not know what information the parties presented to the arbitrator at the hearing. Unlike High Voltage, supra, the fee award was modest, and the arbitrator who heard the matter was in the best position to determine what constituted a reasonable number of hours to spend on this controversy and what constituted a reasonable hourly rate. This was a hotly-contested matter and we can fairly presume that if the Dealership believed that the fee claimed was unreasonable, it would have objected as soon as it received the submission from Fialkowski's counsel. We find no basis in this record to disturb the fee award under the very limited statutory review standard the trial court was mandated to follow. We therefore reverse the trial court's order concerning the arbitrator's fee award.

To summarize, we reverse the order on appeal insofar as it vacated the arbitration award and insofar as it ordered the matter remanded to a different arbitrator. We remand for entry of an order remanding this matter to the original arbitrator for the limited purpose of explaining the damage award pursuant to N.J.S.A. 2A:23B-21(e).

Reversed in part, modified and remanded in part.

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