Many times in this column we discussed the strong judicial preference to uphold arbitration clauses. Finding court decisions that refuse to enforce arbitration provisions is very difficult because of how infrequently such decisions are rendered. The courts, both federal and state, have expressed the belief that there is a strong public policy to support arbitration. That does not mean, however, that there are no court decisions where a court has refused to enforce an arbitration provision.
Recently, such a decision involving an arbitration provision in a construction contract was rendered by the Court of Appeals for Lake County. The case of Bayes v. Merle’s Metro Builders/Boulevard Construction, LLC (2007), 2007 Ohio 7125, involved a contract between a homeowner and a contractor.
When Tommy and Patricia Bayes wanted to add onto their home and remodel their basement bathroom, they contacted Merle Sobol, the owner of Merle’s Metro Builders. Mr. Sobol explained the nature of the work required and offered to complete the work at a price of $70,000. The Bayes agreed to proceed with the work, and the parties entered into a written agreement for the work.
The agreement was a one page pre-printed document that contained an arbitration provision. As a result of the arbitration provision the parties were seemingly required to submit any controversy or claim emanating from the agreement to arbitration in accordance with the American Arbitration Association Rules.
The Bayes became unhappy with the work being performed and informed Mr. Sobol that they wished to terminate the agreement. Mr. Sobol advised the Bayes that, in accordance with the agreement, he would refer the matter to arbitration. Prior to referral to arbitration, the Bayes filed suit against Merle’s in Lake County Common Pleas.
Merle’s filed a motion to stay the proceedings pending arbitration and the trial court granted the motion. The Bayes appealed the decision claiming the provision was unconscionable. Unconscionable is a legal term for saying in essence that a contract, when presented in a ‘take it or leave it’ manner, is so one-sided that it would be unfair to enforce the contract.
Determining that a provision unconscionable requires two separate findings. The court must first find that the provision is substantively unconscionable. This test looks to the reasonableness of the actual terms of the contract. Among other factors considered is the fairness of the term, the standard in the industry, and the ability to accurately predict future liability.
The court must then find that the provision is procedurally unconscionable. This test looks to the circumstances surrounding the formation of the contract. Factors the court will consider include the age, education, and business acumen of the parties, whether the terms were explained to the weaker party, and who drafted the contract.
The arbitration provision in the one-page agreement reads as follows:
“Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be exclusively settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, any judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”
In the Bayes case, the Court first evaluated substantive unconscionability. The Court was concerned that the arbitration provision in the agreement failed to clearly and unequivocally alert the Bayes to the fact that, by executing the agreement, they were waiving their right to a jury trial, waiving their right to have the matter determined by any court, and agreed that the award of the arbitrator will be final and binding. The Court found that access to the courts to resolve a dispute was protected under Article I, Section 5 of the Ohio Constitution which provides that “the right of trial by jury shall be inviolate.”
Reflecting on the actual language used in the provision, “any judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof,” the Court found:
“Many consumers would not equate this language with waiver of a constitutional right and waiver of their right to have the dispute determined by any court. To the contrary, it suggests to some extent that a court will at least have some jurisdictional review of the case. As a result, we hold the particular arbitration clause at issue in this case to be substantively unconscionable.”
Turning to procedural unconscionability, the Court focused on the apparent adhesive nature of the agreement. Quoting from Black’s Law Dictionary, the Court observed that an adhesion contract is a “standard-form contract prepared by one party, to be signed by the party in a weaker position, usu(ally) a consumer, who adheres to the contract with little choice about the terms.”
The strong public policy favoring arbitration is weaker when the clause is found in a contract of adhesion. An adhesion contract is not automatically unconscionable, but it is more susceptible to that claim. A party still must submit evidence showing the contract is one of adhesion and as a result is unconscionable.
In this case, the Bayes both presented affidavits and the transcript from Sobol’s deposition. The documents established a number of facts. Sobol, who was 71, had been in the construction business all his adult life and had entered into numerous contracts. He did not have any formal education beyond high school. However, he relied upon attorneys, accountants, and trade organizations to help him make business decisions.
The arbitration provision in question was placed into the agreement upon the advice of an attorney. Mr. Sobol was not able to remember if the Bayes asked any questions about the arbitration provision. Mr. Sobol did, however, testify that he did not explain the “cost” of the arbitration provision to the Bayes.
In their affidavits, the Bayes stated that Tommy only had a tenth-grade education and Patricia was a housewife with only a high school education. Patricia had worked in a family owned business “many years ago.” The Bayes also stated that they were unaware they were giving up their right to a jury trial.
The Court found that the Bayes and Mr. Sobol may have been relatively comparable in regard to age and education, but Mr. Sobol’s business acumen was “far superior” to the Bayes as he had years of experience in the industry. He may have explained some terms of the contract, but the Court did not believe that he explained the arbitration provision to them. As a result, the Court found that the procedural unconscionability factors weighed in favor of a finding that the agreement was procedurally unconscionable.
The Court turned back to the discussion of the waiver of the right to a jury trial from a procedural unconscionability standpoint. They found the waiver particularly troubling because of the ambiguous language in the provision. There was no unequivocal waiver of the right to a jury trial or any unequivocal waiver of the right to go to court altogether. “Based on the language of the agreement in question, it would be unusual for a consumer in the position of Bayes herein to appreciate the import of such language.”
Having found the agreement both substantively and procedurally unconscionable, the Court reversed the ruling of the trial court. This was not, however, a unanimous decision by the three judge panel.
The dissent found the majority’s opinion would allow “a competent individual of majority status to disregard an arbitration provision by claiming he or she was ignorant both of what was signed as well as its legal impact.” The dissent pointed to a string of cases to find that the loss of a jury trial is a “fairly obvious consequence of an agreement to arbitrate,” and that there is no requirement that an arbitration provision “be explained orally to a party prior to signing where the provision at issue was not in fine print, was not hidden or out of the ordinary, and was not misrepresented to the signatory.”
Mr. Sobol, in his deposition, indicated that the Bayes studied the contract for “probably a half hour” before they signed it. When asked if he would have allowed changes to the pre-printed form, he stated, “Oh, I would have - - a lot of time, I [cross] things out in contracts.” Thus, the dissent would have found the agreement was neither substantively nor procedurally unconscionable.
It is likely this decision will have very little impact on commercial construction contracts with arbitration provisions. The Court referenced the fact that the Bayes were consumers multiple times. An agreement made between commercial entities would likely not receive the same consideration by the court.
Finding an agreement unconscionable is fact specific and each case must be individually evaluated. Even in the consumer arena, courts seldom fail to enforce mandatory arbitration provisions.
One other lesson learned from this case is the need to be very clear when drafting the language of an arbitration provision. If the arbitration provision clearly and unequivocally stated that the Bayes were giving up their rights to a jury trial and the court process, then the court likely would have held in favor of Merle’s and against the Bayes.