|
 | |
|
Courts Enforce One-Sided Arbitration Clauses; Other Provisions Held Unconscionable
|
| |
|
April 2, 2007
|
|
(A revised version of this article appears in The Construction Lawyer, Volume 27, No. 2, Spring 2007, published by the American Bar Association's Forum on the Construction Industry.)
|
|
|
|
Howrey LLP
The U.S. Court of Appeals for the 6th Circuit has held that an arbitration clause, which permitted one party to elect arbitration, was enforceable. The arbitration clause, in a subcontract between a prime contractor and subcontractor, provided:
Should [subcontractor] and [prime contractor] be unable to resolve said dispute(s) through mediation, any and all dispute(s), at the sole discretion of [prime contractor], shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association.
After mediation failed, the prime contractor sued the subcontractor, and the subcontractor filed a motion to stay litigation and compel arbitration. The subcontractor argued that the arbitration clause gave the prime contractor "sole discretion" if the mediation failed to decide that (1) no dispute existed; or (2) that a dispute continued to exist and had to be submitted to arbitration.
The prime contractor argued that the arbitration provision gave it the right to decide after mediation whether the dispute would be decided by arbitration or litigation. To support this interpretation, the prime contractor quoted another provision in the subcontract: "All disputes not resolved by arbitration pursuant to the terms of [the arbitration clause] will be resolved by litigation in any court having jurisdiction thereof, after compliance with [the negotiation and mediation subsections] hereof."
The trial court found that the subcontractor did not offer any persuasive arguments to support its position.
Upholding the trial court's denial of the subcontractor's motion to compel arbitration, the appellate court noted that the subcontract gave the prime contractor sole discretion with regard to a variety of issues, including the location of the mediation and arbitration, and which commercial mediation service to use. The court therefore found that it was consistent that the general contractor "also retained the power to decide whether a dispute may be decided by arbitration or litigation" and affirmed the lower court's decision. Albert M. Higley Co. v. N/S Corp., 445 F.3d 861 (6th Cir. 2006).
Similarly, the Missouri Supreme Court enforced a clause that granted one party the power to elect arbitration but held other provisions in the contract relating to arbitration to be unconscionable and therefore unenforceable. State ex rel. Vincent v. Honorable Nancy Schneider, 194 S.W.3d 853 (Mo. 2006).
Purchasers of single-family homes and a seller-homebuilder executed a form contract prepared by the seller. The contract provided that:
In the event of any claim by Purchaser against [s]eller arising out of this Contract or the Residence, Seller, at its option may either (a) By written notice to Purchaser, repurchase the Residence..; or (b) By written notice to Purchaser, submit the resolution and determination of such claim by Purchaser against Seller to binding arbitration pursuant to the Missouri Uniform Arbitration Act. and/or the Federal Arbitration Act..
The arbitration clause also provided that the arbitrator "shall be selected by the President of the Homebuilders Association of Greater St. Louis" and that "Purchaser shall be liable to Seller for all court, arbitration and attorney's fees and costs incurred by Seller in enforcing this provision."
After discovering defects in their homes, the buyers sued the seller for violations of the Missouri Merchandising Practices Act, fraudulent misrepresentation, breach of the implied warranty of habitability and breach of fiduciary duty. The seller responded with a letter to the buyers advising them that the disputes were subject to arbitration and that the seller was entitled to recover its costs to enforce the arbitration provision. The letter also proposed alternative methods of appointing an arbitrator because the President of the Homebuilders Association of Greater St. Louis also was the seller's President and refused to appoint an arbitrator.
The Missouri Supreme Court held that the contract, a preprinted form prepared by the seller, was not a contract of adhesion under the circumstances of its negotiation and execution. The court held that the provision that gave the seller the right to elect arbitration was not unconscionable and was, therefore, enforceable.
The court, however, found two provisions relating to the arbitration clause to be unconscionable: (1) Even if the president of the Homebuilders Association of Greater St. Louis had not been the seller's president, the provision giving the person holding that position sole discretion to appoint the arbitrator was unconscionable; and (2) the provision governing award of fees and costs was unconscionable.
With regard to the appointment of the arbitrator, the court pointed out that unconscionability is to be judged at the time the contract is made. The court held that the provision was unconscionable because it "require[d] that an individual in a position of bias be the sole selector of an arbitrator, who must be unbiased."
With regard to the cost-shifting provision, the court noted that the provision was "strangely worded" because of the inclusion of the word arbitration: "Purchaser shall be liable to Seller for all court, arbitration and attorney's fees and costs incurred by Seller in enforcing this provision."
Without the word "arbitration," the provision would read like a standard provision granting one party its costs incurred to enforce the arbitration clause. The inclusion of the word "arbitration", according to the court, "evidence[d] a broader intended reach. It [could not] be reasonably argued that the parties contracted to arbitrate to compel arbitration. Neither [could] the term 'arbitration' be ignored as mere surplusage."
The court concluded that the "plain and simple" meaning of the inclusion of the word "arbitration" was "an attempt to charge [purchasers] for all of the 'fees' incurred by [seller] in the course of the arbitration, if [seller] decides that it would like to arbitrate the claims being brought against it by a purchaser." The court held that inclusion of the "arbitration" was unconscionable and, therefore, the clause unenforceable.
If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2007 Howrey LLP
|
| | |
