Arbitration Gets Another Boost From Supreme Court
Fraud, duress, and unconscionability can invalidate contracts.
In Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal. 4th 899, the California Supreme Count examined the unconscionability defense involving an arbitration agreement between a car dealer and customer. The vehicle was a 2006 pre-owned Mercedes-Benz S500 purchased for $53,498 and financed at 4.99%. A dispute arose concerning the sale. The customer filed a lawsuit on behalf of himself and other potential class members. The dealer moved to compel arbitration. The trial court denied the motion. The Court of Appeal affirmed the denial. It found the entire arbitration agreement was too one-sided and unfair. For example, the agreement provided that the arbitrator’s award was final and binding on all parties, except if the award was $ 0 or against a party in excess of $ 100,000, or includes an award of injunctive relief against a party. In those situations, the losing party may request a new arbitration by a three-arbitrator panel. The appealing party had to pay the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs. The Court of Appeal found the appeal and cost-shifting provisions heavily favored the dealer. The Supreme Court REVERSED.
Unconscionability is not easy to prove. It requires a substantial degree of unfairness beyond a simple old-fashioned bad bargain. The standard is high, the Court noted, because “commerce depends on the enforceability, in most instances, of a duly executed written contract. A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided contract provisions are unconscionable; hence the various intensifiers in our formulations: “overly harsh,” “unduly oppressive,” “unreasonably favorable.”
The doctrine is fact-intensive. It often requires inquiry into the “commercial setting, purpose, and effect” of the contract or contract provision at issue. Each case will have different facts. Therefore, it will be difficult to get the defense dismissed without first conducting discovery. For example, a contract can provide a “margin of safety” that provides the “party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable.” The test is “whether the terms are ‘so extreme as to appear unconscionable according to the mores and business practices of the time and place’”. “Substantive unfairness of the terms must be considered in light of any procedural unconscionability. The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.”
Careful drafting will go a long way to ensure contracts are enforced. One-sided, unfair provisions against the party with little or no bargaining power will likely trigger a challenge based on unconscionability. Once a lawsuit is filed or a defense raised, an experienced attorney should be consulted so he or she can develop the facts necessary to prevail.