Several months ago I posted a blog about two New York Times articles criticizing arbitration clauses in consumer contracts.  Despite nationwide statutory and judicial support (federal and state), the New York Times article argued that arbitration clauses are often biased against and detrimental to consumers.

That sentiment was recently expressed by the Tennessee Court of Appeals when it refused to enforce an arbitration clause in a funeral services contract. InWofford v. M.J. Edwards & Sons Funeral Home Inc., 2015 WL 7428743 (Tenn. Nov. 23, 2015), the court invalidated the following arbitration agreement that was placed directly above the signature line in all caps, bold text:

NOTICES TO PURCHASER/CO-PURCHASER

SEE PART THREE FOR TERMS AND CONDITIONS THAT ARE PART OF THIS AGREEMENT.  DO NOT SIGN THIS AGREEMENT BEFORE YOU READ IT OR IF IT CONTAINS ANY BLANK SPACES.  YOU ACKNOWLEDGE RECEIPT OF AN EXACT COPY OF THIS AGREEMENT.

BY SIGNING THIS AGREEMENT, YOU ARE AGREEING THAT ANY CLAIM YOU MAY HAVE AGAINST THE SELLER SHALL BE RESOLVED BY ARBITRATION AND YOU ARE GIVING UP YOUR RIGHT TO A COURT OR JURY TRIAL, AS WELL AS YOUR RIGHT OF APPEAL.

This arbitration clause seems pretty clear.  So, why did the court conclude it was unenforceable?  Through a somewhat tortured analysis, the court found the following:

  • The funeral home and the consumer did not have a “meeting of the minds” with respect to the arbitration clause.  Though the contract set out the arbitration provision right before the signature line, it also referred to a “Part Three.”  The consumer never received “Part Three,” which contained additional information about arbitration.    Though the consumer was on notice that any claim was subject to arbitration, the court found the parties did not reach an understanding with respect to arbitration because she did not receive “Part Three.”
  • The consumer was in a distressed state when she signed the contract shortly after her father died, and she was in immediate need of funeral services.  The court distinguished this situation from contracts between large construction companies in which two sophisticated parties negotiate the terms of the agreement, including the arbitration provisions.
  • The disparity of bargaining power between the funeral home and the consumer, and the consumer’s obvious emotional distress led the court to also find the arbitration clause was a “contract of adhesion.”  This means the contract was offered on a “take it or leave it” basis with no real opportunity to negotiate.  Contracts of adhesion are usually found when the contract is (1) a standardized form; (2) the offering party has superior knowledge about the underlying subject matter; (3) the contract is offered on a “take it or leave it” basis; (4) failing to sign the agreement would have interrupted rendition of services; and (5) because of the type of services involved, choosing another provider would have caused delay, resulting in a difficult choice.
  • In addition, the consumer’s circumstances also led the court to find the arbitration clause was unconscionable.  Unconscionable contracts arise when they are one-sided and there is comparatively unequal bargaining power between the parties.  The court was also concerned that the funeral home did not explain the impact of waiving the right to a jury.

There are numerous cases where arbitration clauses in consumer contracts are unenforceable for a variety of reasons.  However, the issues raised in theWofford case are generally insufficient for invalidating an arbitration agreement.

Does this recent Tennessee Court of Appeals decision mark the beginning of a trend to invalidate arbitration clauses in the consumer context?  I doubt it.  There is still strong statutory support for arbitration under the Tennessee Uniform Arbitration Act, and many Tennessee cases have enforced arbitration clauses in circumstances far worse than that presented in Wofford.  The Wofford case appears to be a one-off driven largely by a very sympathetic consumer with enough facts to allow the court to justify invalidating the arbitration agreement.

But, we’ll see what happens when the next case comes out.