New Jersey Supreme Court Affirms Limited Scope of Appellate Review for Private Arbitration Awards

In a unanimous opinion, issued on April 1, 2025, by Justice Patterson, the New Jersey Supreme Court held that the remedy of modification under the New Jersey Arbitration Act (NJAA) was not warranted, reversing the Appellate Division’s decision to modify an arbitration award. See Rappaport v. Pasternak, 332 A.3d 713, 727 (N.J. 2025). This opinion serves as a good reminder that New Jersey Courts will not vacate or modify an arbitration award unless the specific statutory requirements are met. Moreover, the Court has opined that if a party wishes to exclude an issue from arbitration that is arbitrable under the parties’ agreement, the party must be clear with its intention and provide written notice.

In Pasternak, the Court, for the first time, considered the standard of review for a private sector arbitration award under section 2A:23B-24(a)(2) of the NJAA, which is one of the conditions under which a court may modify an award. The NJAA identifies three circumstances in which a court may modify an arbitration award. Pertinent to Pasternak is when “the arbitrator made an award on a claim not submitted to the arbitrator and the award may be corrected without affecting the merits of the decision upon the claims submitted.” N.J.S.A. 2A:23B-24(a)(2). The other two circumstances are when there is an “evident mathematical miscalculation . . .” or “the award is imperfect in a matter form not affecting the merits of the decision . . . .” Id. at 24-(a)(1),(3).

Historically, the Supreme Court has enforced strict constraints on appellate review of private arbitrations. The standard derives from a concurring opinion by Justice Wilentz in Perini Corp., v. Greate Bay Hotel & Casino, Inc., which expressed the view that arbitration awards should be vacated only for “fraud, corruption, or similar wrongdoing on the part of the arbitrators” and modified “only for very specifically defined mistakes” under N.J.S.A. 2A:23B-24. 610 A.2d 364, 399 (N.J. 1992) (Wilentz, C.J., concurring). This view was confirmed two years later when a majority of the Court in Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc. adopted Chief Justice Wilentz’s proposed test. 640 A.2d 788 (N.J. 1994)

In analyzing the modification of the award, the Pasternak Court reaffirmed the strictly limited judicial review of private arbitration set forth in Perini and Tretina and found that the Appellate Division’s review did not conform to the standard.

The Pasternak appeal arose from the arbitration of a dispute among members of several limited liability companies. The arbitrator ruled on numerous claims and counterclaims, awarding the plaintiff $4.9 million, offset by a counterclaim asserted by the defendant for a net award of $3.8 million. As part of the series of awards, the arbitrator ruled that the plaintiff was not entitled to damages for the loss of future distributions of carried interest.

After the arbitrator made his awards, the plaintiff contended that the question of carried interest had not been presented to the arbitrator and that the arbitrator had improperly ruled that he was not entitled to such distributions. The Chancery Division later confirmed the award. The Appellate Division, however, ruled that the parties “specifically excluded” the question of carried interest from the arbitration and rejected the arbitrator’s valuation of Rappaport’s aggregate claim at $4.9 million as “implausible.” The Appellate Division ruled that Rappaport was entitled to carried interest going forward under the operating agreements and modified the award under N.J.S.A. 2A:23B-24(a)(2). The Appellate Division held that the arbitrator’s ruling on carried interest constituted “an award on a claim not submitted to the arbitrator” and that “the award may be corrected without affecting the merits of the decision upon the claims submitted.”

Ultimately, the NJ Supreme Court found that (1) the remedy of modification under N.J.S.A. 2A:23B-24(a)(2) was not warranted, and (2) the Appellate Division’s review of the arbitration award did not conform to the standard. The Court, relying on Tretina and Perini, applied the “extraordinarily deferential standard of review” and expressed that “[a]n award may not be vacated or modified simply because a court disagrees with the arbitrator’s interpretation of the law or view of the facts; unless the statute’s specific requirements for vacating or modifying an award are met, the award must be confirmed.”

With respect to modification, the Court reiterated the two mandatory components of modification under N.J.S.A. 2A:23B-24(a)(2): the award includes a claim not submitted to the arbitrator, and the award may be corrected without affecting the merits of the decision upon the claims submitted.

The Court first expressed that it found no basis for the Appellate Division’s statement that the parties “specifically excluded” the claim for carried interest. To the contrary, the Court found that the parties “vigorously disputed” the plaintiff’s right to carried interest at several stages of the arbitration, including: the pleadings, the plaintiff’s motion in limine, the parties’ opening statements, the plaintiff’s direct examination and the parties’ post-hearing submissions. The Court concluded that the arbitrator ruled on a claim that was presented to him.

The Court further found that the Appellate Division’s remedy fundamentally affected the merits of the arbitrator’s decision on the other claims presented to him. The Court reasoned that the $4.9 million award reflected the arbitrator’s assessment of the carried interest claim as well as claims for other categories of damages. Moreover, the arbitrator intended to grant the “business divorce” that the defendants sought. The Court noted that the Appellate Division’s decision to modify undid that resolution and required the parties to maintain business relations that the arbitrator deemed “toxic.”

The Court ultimately held that the Appellate Division’s decision did not meet the two mandatory factors under N.J.S.A. 2A:23B-24(a)(2), and each factor warranted a reversal of the decision.

The Court also briefly addressed the Appellate Court’s declaration that the arbitrator’s award was “implausible” and asserted that the appellate court’s task is not to determine “[w]whether the arbitrators commit errors of law or fact” but rather were they “honest and did they stay within the bounds of the arbitration agreement?”

The Court concluded its opinion by suggesting that when parties intend to exclude issues that fall within the arbitration agreement from an arbitration, the parties should identify those issues in writing for the arbitrator and all counsel prior to the arbitration proceeding.

Co-authors Greg Sellers, partner, and Megan O’Neill, associate, are members of the Litigation Department at Klehr Harrison.