Arbitration is waivable

The enforceability of arbitration clauses in employment contracts has become an increasingly contentious area of New York jurisprudence, particularly when such clauses contain provisions that effectively prevent employees from vindicating their statutory rights. While the Federal Arbitration Act generally favors arbitration agreements, New York courts applying Article 75 of the Civil Practice Law and Rules have recognized important limitations when contractual provisions create insurmountable barriers to an individual’s ability to pursue statutory wage claims. The question of whether cost-sharing requirements and inconvenient venue selections render an arbitration clause unconscionable and therefore unenforceable presents a critical issue affecting workers’ access to justice.

The principle established in Brady v Williams Capital Group, L.P., which the Adams court relies upon, articulates a standard that protects employees from arbitration agreements that are oppressive in their practical application. When an arbitration agreement requires an employee to share arbitration costs that would be prohibitive given their financial circumstances, or compels them to arbitrate in a distant forum that effectively denies them access to the arbitration process itself, courts have found grounds to invalidate such provisions. This body of law recognizes that arbitration, while a valid alternative dispute resolution mechanism, cannot be used as a sword to deny individuals their substantive statutory rights under the guise of contractual freedom.

The distinction between federal arbitration law under the FAA and state arbitration law under CPLR Article 75 is significant in this context. While the FAA preempts state law in many commercial contexts, New York courts retain authority to apply contract defenses such as unconscionability when evaluating arbitration agreements under state law principles. The accessibility of the arbitration forum itself becomes a threshold question that must be resolved before enforcing an arbitration clause.

Case Background

In Adams v Kent Security of N.Y., Inc., the plaintiff employee sought to pursue statutory wage claims against his former employer in New York court. The employment contract contained an arbitration clause governed by CPLR Article 75, which required the employee to share arbitration fees and mandated that any arbitration occur in Florida. The defendant employer moved to compel arbitration pursuant to the contractual provision.

The plaintiff opposed the motion, arguing that the fee-sharing and venue provisions effectively precluded him from pursuing his wage claims in any forum. The trial court was confronted with evidence regarding the plaintiff’s financial circumstances and the anticipated costs of arbitrating the dispute in Florida. The central issue before the First Department was whether these contractual provisions rendered the arbitration agreement unenforceable as applied to the plaintiff’s specific circumstances.

Jason Tenenbaum’s Analysis

In my other life, I represent all sorts of people who have been wronged. One of the worst things I encounter when advocating for people who have had their insurance coverage wrongfully disclaimed is the arbitration clause. Imagine having to travel to California to file an arbitration when an insurance carrier abandons you prior to trial in NY because you allegedly violated a condition of the medical malpractice policy? It is reality, and the FAA will not protect you.

This case involves arbitration under Article 75 and a more reasonable standard in deciding whether the arbitration clause may be bypassed. This is a good case – although it has so little to do with no-fault here in NY. But, it is interesting.

Adams v Kent Sec. of N.Y., Inc., 2017 NY Slip Op 09274 (1st Dept. 2017)

“Applying the foregoing standard, we hold that plaintiff has made a preliminary showing that the fee sharing and venue provisions in the arbitration agreement have the effect of precluding him from pursuing his statutory wage claim in arbitration. We remand for further proceedings, consistent with Brady, which, at a minimum, would include proof of plaintiff’s income and assets, as well as proof of the expected costs and fees to arbitrate this dispute in Florida. Because the parties’ arbitration agreements contains a severability clause, in the event plaintiff prevails on his claim that the aforementioned fee sharing and venue provisions should be held unenforceable under Brady, the matter should proceed to arbitration in New York, with defendant to bear the costs of the arbitration.”

Legal Significance

The Adams decision represents an important application of the Brady standard and reinforces New York courts’ commitment to ensuring that arbitration agreements do not function as vehicles for denying substantive rights. The court’s willingness to scrutinize the practical effect of fee-sharing and venue provisions demonstrates a recognition that formal agreement to arbitration terms cannot override fundamental fairness concerns when those terms create prohibitive barriers to dispute resolution.

Significantly, the court’s remedial approach reflects sophisticated contract interpretation principles. Rather than invalidating the entire arbitration agreement, the First Department invoked the severability clause to salvage the arbitration mechanism while excising the unconscionable provisions. This approach preserves the parties’ agreement to arbitrate while ensuring the forum remains accessible. The court’s directive that arbitration proceed in New York with the employer bearing costs removes the impediments that would have prevented the employee from pursuing his claims.

The remand for factual development regarding the plaintiff’s financial circumstances and anticipated arbitration costs establishes a template for future cases. Courts must engage in particularized inquiry rather than making blanket determinations about arbitration accessibility. This fact-intensive approach recognizes that the same contractual provisions may be enforceable against some parties but unconscionable as applied to others based on their individual circumstances.

Practical Implications

Employment attorneys representing workers must carefully scrutinize arbitration agreements for provisions that may be challenged under the Brady standard. When cost-sharing requirements or inconvenient venue selections are present, counsel should gather detailed evidence regarding the client’s income, assets, and the anticipated costs of arbitration in the designated forum. This factual foundation is essential to establishing that the agreement’s provisions effectively preclude the client from pursuing statutory claims.

For employers and their counsel, the Adams decision counsels caution in drafting arbitration agreements. Provisions requiring employees to share substantial arbitration costs or compelling arbitration in forums distant from the employment location create litigation risk and may ultimately prove unenforceable. Including robust severability clauses, as the agreement in Adams did, may allow courts to modify problematic provisions rather than invalidating arbitration agreements entirely, though this still results in increased costs for the employer who must bear the full arbitration expense.

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