New Jersey Court Holds Against Arbitration Clause in Last Will & Testament
The New Jersey Superior Court, Chancery Division, Bergen County, in the case of In Re Estate of Hekemian, a case of first impression, invalidated a binding arbitration provision that was included in the Decedent’s Last Will and Testament. The Plaintiff, one of four (4) sons of the Decedent, filed a lawsuit against the Executors of his father’s estate, to enforce his rights as “a beneficiary” of the estate and to compel a “full accounting” of the estate. The distribution terms of the Will were not being challenged.
Included within the Will was a very specific clause which required “[a]ny dispute regarding the interpretation of the Will…or arising out of the administration by the executors and/or others acting hereunder in a fiduciary or other capacity, shall be submitted for settlement by arbitration…” The Will further provided the “decision of the arbitrator shall be final and binding upon all interested parties and shall not be appealable to any court of law.”
In response to the Plaintiff’s lawsuit, the Defendants (the Executors) filed a Motion (i) to Compel Arbitration; (ii) to Dismiss the Complaint “with prejudice” (meaning the Plaintiff would be precluded from refiling the lawsuit) for lack of “subject matter jurisdiction” (asserting the court had no authority to address the issues because of the arbitration clause); and, (iii) to Direct Plaintiff to pursue his claims in binding arbitration.
The Plaintiff’s argument was simple and straight-forward. The Plaintiff asserted an arbitration clause in a Will has no legal effect in New Jersey and therefore the arbitration clause in Decedent’s Will was not enforceable against him. The Defendants’ counter argument was the arbitration clause was demonstrative of donative intent and the Decedent’s explicit desire that any disputes concerning his Will be resolved via arbitration.
The Court began its analysis by recognizing (i) the State of New Jersey favors arbitration as a mechanism for resolving disputes and (ii) a hallmark principal that guides probate matters in New Jersey is that a Decedent’s intentions are to be honored and effectuated. Relying on these two (2) reasons, the Defendants’ argued the Decedent, anticipating disputes might arise during the administration of his estate, purposely crafted a very specific and detailed arbitration provision as the means to resolve such disputes.
Acknowledging the issue at hand was a case of first impression in the State of New Jersey, the Defendants cited a Texas case, Rachel v. Reitz, which held that arbitration provisions in testamentary instruments are enforceable in Texas. Rachel was based upon two (2) distinct principles. First, under legal theory of “direct benefits estoppel,” if a beneficiary is seeking to obtain benefits from or otherwise enforce the testamentary instrument, the beneficiary would be bound by its terms. Second, under donative intent principles, the arbitration provision must be upheld to validate the Decedent’s intent. Rachel, similar to Hekemian, involved a beneficiary who was not challenging the provision of a Will but had initiated a lawsuit to compel an accounting.
Plaintiff’s argued that arbitration is typically a remedy of a contractual nature, and that mutual assent of the parties to the contract is a necessary prerequisite for enforcement of an arbitration agreement. Since there was no mutual assent to the arbitration clause by the beneficiaries of the estate, the Plaintiff urged the Court to find it unenforceable. To the contrary, in Rachel, the Texas court found that it was not necessary for there to be a contract for the arbitration clause to be valid, only an agreement. The Texas court further held, under a direct benefit estoppel theory, a non-signatory to an arbitration agreement can be found to have assented to the arbitration provision if the party had obtained or is seeking benefits under the agreement. The Defendants, recognizing New Jersey courts have not directly addressed this issue of direct benefits estoppel, relied on detrimental reliance as having the same effect. Defendants argued detrimental reliance may be found where the non-signor has embraced the agreement (for example, the Will) or has sought to obtain benefits flowing from it. In other words, if the Plaintiff had received benefits under the Will, he should as accepting all the terms of the Will including the arbitration clause.
To the Defendants’ detrimental reliance argument, the Plaintiff correctly asserted such position was fatally flawed as the Plaintiff had received no benefits from either the Will or the arbitration clause. Without the receipt of benefits by the Plaintiff, the Defendants could not meet the detrimental reliance standard.
The Court began its analysis by comparing the arbitration clause with “in terrorem” (also called “no-contest”) clauses. This is a type of provision, sometimes placed in Wills, that says where a beneficiary challenges a Will, they will lose their beneficial interest in the estate or their interest will be reduced. It is sometimes used as a way to prevent a challenge to a Will. In New Jersey, if a Will contains an in terrorem clause, the clause will not be enforced if there was probable cause to challenge the Will. Since the Plaintiff was only seeking to enforce his statutory right to receive an accounting and nothing else, the Court seems to be of the opinion that, similar to the unenforceability of an in terrorem clause, the arbitration clause should also not be enforceable.
While the comparison between an in terrorem provision and an arbitration clause might be interesting, it is not the primary reason for the Court’s ultimate holding. More importantly, the Court held in order to determine whether an arbitration agreement is valid, New Jersey Courts must first apply “state contract-law” principles. Second, the Court concluded a Will is not a contract as there is no mutual assent to the provisions of the Will between the testator and the beneficiaries. Ultimately, the Court determined (i) in the absence of a consensual understanding one party is not entitled to force the other to arbitrate their dispute; and (ii) even if the Decedent’s Will was found to be a contract, the arbitration clause would fail since the Plaintiff was never afforded the opportunity to expressly waive his right to sue. Thus, Plaintiff, based upon contract principles, prevailed as the Court held the arbitration clause invalid.
At first blush, the impact of Hekemian might appear to be rather limited. The case did not involve a challenge to the dispositive provisions of a Will. Rather, the facts involved only the assertion of what the Court described as the Plaintiff’s statutory right to compel an accounting. However, the Court’s lengthy discussion addressing not only arguments presented by both the Plaintiff and the Defendants but arguments also presented by the Court seems to imply, in this Court’s opinion, as a general rule, arbitration clauses in a Will are not enforceable under any circumstance.