Case Summary: Arbitration Clause in Will Deemed Unenforceable

Authors: Steven K. Mignogna, Kelly M. Barry

In re: Hekemian, Docket No. A-1774-21 (N.J. Super. App. Div. January 13, 2023)

The decedent, Samuel P. Hekemian (“Decedent”), was survived by his wife and their four sons, including the plaintiff and one of the defendants.  Decedent left a Last Will and Testament (“Will”) that named the defendants as executors and trustees.

The Will contained an arbitration clause requiring that any dispute regarding the interpretation of the Will and the trusts created thereunder, or arising out of the administration of the Will and the trusts, be submitted for settlement by arbitration.  The Will also provided that “[a]rbitration shall be the exclusive remedy for resolving disputes concerning this Will and the trusts created hereunder, including but not limited to the administration of the Will and such trusts ….”

After the Will was probated, the plaintiff requested an early distribution or a loan from the trusts.  That request was denied.  The plaintiff subsequently filed a judicial action to enforce his rights and compel an accounting.

The defendant-executors sought to enforce the arbitration clause in the Will.  They argued that the plaintiff was bound by the arbitration clause by (a) failing to challenge the validity of the Will, (b) seeking to receive the benefits of the Will, and (c) seeking an accounting in his capacity as a beneficiary.  The defendants also relied on New Jersey’s strong public policy preference for arbitration and the fact that the Decedent inserted an arbitration clause in his Will, evidencing his intent, by the statement in the Will (emphasis added) that arbitration “shall be the exclusive remedy for resolving disputes.”  The defendants acknowledged that no New Jersey precedent existed on the issue but cited Rachal v.  Reitz, 403 S.W.3d 840 (2013), in support of their position.

In addition, the defendants argued that New Jersey courts have compelled a non-signatory to arbitrate when the non-signatory “engaged in conduct, either intentional or under circumstances that induced reliance, and that [the parties seeking to compel arbitration] acted or changed their position to their detriment.”  See Hirsch v. Amper Fin. Servs., LLC, 215 N.J. 174, 189 (2013) (quoting Knorr v. Smeal, 178 N.J. 169, 178 (2003)).  Thus, the equitable estoppel doctrine prevents a non-signatory from “cherry picking” the provisions of a contract.

Applying these principles to the facts in this case, the defendants noted that the plaintiff had written to the defendants, requesting either a distribution or a loan from one of the trusts.  Additionally, the plaintiff made numerous statements which showed that he sought to avail himself of the benefits under the Will and the trusts.

In response, the plaintiff asserted that the arbitration provision was unenforceable under New Jersey law.  The plaintiff argued that the Rachal decision (a) has no precedential value to a New Jersey court, (b) involved an inter vivos trust, not a will, and (c) involved a situation in which the beneficiary had received benefits from the trust, whereas the plaintiff had received no such benefits.

The plaintiff further asserted that arbitration is a remedy of a contractual nature, and that mutual assent is a prerequisite for enforcement of an arbitration agreement.  The plaintiff also disputed the defendants’ estoppel theory because they failed to establish the plaintiff engaged in conduct that induced their reliance.  Finally, the plaintiff argued that he was only seeking an accounting and cited Article Sixteenth of the Will, which provided that a fiduciary “may submit the account to a court for approval and settlement.”

The trial court recognized New Jersey’s strong public policy favoring arbitration as a mechanism for resolving disputes.  At the same time, in probate matters the court must honor and effectuate a decedent’s intent.  See N.J.S.A. § 3B:3-33.1 (“the intention of a testator as expressed in his will controls the legal effects of his dispositions”).

The trial judge recognized that no court in New Jersey had addressed whether an arbitration clause in a will is valid or enforceable, and the Legislature had not enacted any statute permitting arbitration clauses in wills and trusts.

The trial judge drew a comparison to in terrorem clauses, which are “designed to compel compliance with the testator’s wishes through fear….  In 1977, the New Jersey legislature, via statute, rendered in terrorem clauses unenforceable.”  Id. at *5 (citations omitted).  The court cited Haynes v. First Nat’l State Bank, 87 N.J. 163 (1981), for the principle that in terrorem clauses would not be enforced where there is probable cause to challenge the instrument.  The judge noted that neither the judiciary nor the Legislature has defined “probable cause” in the context of a will contest, but the Restatement of Property (Second) states that “a contestant’s good faith belief is not enough if there was no reasonable basis for it.”  Restatement (Second) Property (Donative Transfers), ¶ 9.1 comment j (1981).  The court found that “probable cause to bring a challenge to a will exists if a reasonable person, based on the evidence, could conclude that there is a substantial likelihood that the will challenge would be successful.”  Id. (citation omitted).

In the end, the trial court concluded that the plaintiff could not be compelled to arbitrate, on several grounds.  First, the Will was not a contract between two parties in the traditional sense, and the benefits of the Will had not extended to the plaintiff based on the traditional principles of contract and agency law.  The plaintiff had not agreed to arbitrate disputes concerning the Will because the Will was “not a contract or an agreement of consensual understanding between two parties.”  Id. at *7.

In addition, the plaintiff had grounds to challenge the administration of the estate.  His only motivation was to seek an accounting.  At the same time, the plaintiff had shown that he had received minimal information about the administration of the estate.  He had a statutory right to receive an accounting under N.J.S.A. § 3B:17¬-2.

Next, the trial court found that the arbitration provision in the Will was unenforceable.  “[T]here is a lack of mutual assent regarding the Article Seventeenth arbitration clause. The [Will] is a statement of testamentary intent, not an instrument that reflects a consensual understanding between parties. In short, a will is not a contract, nor is it an agreement as defined in Rachal.”  Id. at *6.

The judge continued, “No court in New Jersey has ruled that a will is an agreement between the testator and their beneficiaries for the purposes of arbitration provisions because there lacks a consensual understanding between parties in the will context where only one party has expressed an intent to arbitrate…  Therefore, on basic contract principles, the lack of mutual assent to the provision renders the provision unenforceable….”  Id. (citation omitted).

Finally, the court determined that the arbitration clause at issue failed to apprise the plaintiff of his right to sue, and he had no opportunity to expressly waive that right.  Under New Jersey law, for an arbitration clause to be valid, there must be a clear waiver of the right to sue.  Litigants’ rights “to avail themselves to the court process is so important that any court scrutinizing an arbitration clause in an agreement must determine that any party subject to the arbitration clause is apprised of their rights.”  Id. at *7.

The defendants appealed.  The Appellate Division affirmed the trial court’s decision and provided additional reasoning.

First, the Appellate Division analyzed the arbitration clause under the New Jersey Arbitration Act (“NJAA”), which provides, in relevant part, that “[a]n agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.”  N.J.S.A. § 2A:23B-6(a).  The Appellate Division grappled with the meaning of “agreement” under the NJAA, which is not defined in the statute.  Applying the word’s common definition under Black’s Law Dictionary (i.e., a manifestation of mutual assent between two or more persons), the appeals court distinguished an agreement from a contract (i.e., an agreement results in an obligation enforceable at law.)  The court concluded the Legislature intended for “agreements” and “contracts” to be treated differently under the NJAA.

The appeals court further concluded that an agreement to arbitrate must result from mutual assent and that the waiver of rights in such agreements must be “clearly and unmistakably established.”  Hekemian slip. op. at *16.  Because the execution of a will is a “unilateral disposition of property” and, therefore does not require mutual assent of the parties to be bound by an arbitration provision, there was no meeting of the minds to make the arbitration agreement in the Will under the NJAA.  Id. at *17.

The Appellate Division also found that the plaintiff’s underlying request for an accounting did not constitute a “dispute” within the scope of the arbitration clause as drafted.  The court rejected the defendants’ argument that, even without mutual assent to the arbitration clause, the plaintiff was bound by it under the equitable principle of the “substantially similar doctrine of equitable estoppel.”  Id. at *19.

The court was similarly not persuaded by the defendants’ reliance on Rachal, discussed above, and found that defendants did not detrimentally rely on the application of the arbitration provision, such that equity would require the arbitration provision be upheld in the Will.

Likewise, the Appellate Division did not find a “substantial nexus” between the arbitration provision in the Will and the plaintiff’s statutory right to receive an accounting, nor did it find compelling circumstances warranting the application of equitable estoppel principles.

Finally, the Appellate Division considered how the New Jersey Legislature has allocated authority to the courts to hear “controversies respecting wills, trusts and estates” under N.J.S.A. § 3B:2-2.  The Appellate Division declined to opine on the validity of arbitration clauses in wills as a general matter, but decided that any arbitration provision of a will that removes the court’s ability to resolve the controversies contemplated under N.J.S.A. § 3B:2-2 is invalid.