Not All Arbitration Clauses Are Enforceable

It is common practice among retailers to use form contracts which are presented to consumers for signing without explanation and without an ability on the part of the consumer to negotiate any of the terms in the form contract.  In the recent case of Sanchez v. Valencia Holding Company, LLC (2001) 2011 DJDAR 15555, the court held that an arbitration clause in a form contract for the purchase of a used vehicle was unenforceable.

The plaintiff in Sanchez brought a class action against the automobile dealer, alleging that the dealer made various misrepresentations regarding the terms of the purchase and charged improper fees when selling a certified used car.  The dealer moved to compel arbitration based upon an arbitration clause contained in the sales contract.  The arbitration clause gave either party the right to submit a dispute to binding arbitration and set forth various rules and procedures governing the arbitration process.  The arbitration clause also included a waiver of the right to pursue a class action.  The trial court refused to compel arbitration, ruling that the waiver of the class action rights was unenforceable and therefore the remainder of the arbitration provision was also unenforceable.

The Court of Appeal in Sanchez also refused to compel arbitration, but based its decision on different grounds.  The Appellate Court found that the arbitration provision was unconscionable and therefore unenforceable.

Initially, the appellate court noted that an arbitration provision cannot be deemed unconscionable unless it is both procedurally and substantively unconscionable.  The court determined that the arbitration provision in this case was procedurally unconscionable because it constituted a contract of adhesion.  In so finding, the court emphasized that the sales contract was a lengthy form contract that was presented to the plaintiff without explanation or an opportunity for negotiation, and that the arbitration clause was located on the backside of the last page of the contract, which was signed only on the front side.

The Court of Appeal in Sanchez then found that the arbitration clause was substantively unconscionable based upon four terms contained in the agreement.  The four terms noted by the court as being substantively unconscionable were

1. a term limiting the right to appeal to an award exceeding $100,000.00,
2. a term that provided for an appeal of an award of injunctive relief,
3. a term that exempted self-help remedies such as repossession from arbitration, and
4. a term that required the payment of arbitration costs as a condition to pursuing an appeal.

In the court’s view, all of these provisions heavily favored the dealer.  As a result, the court concluded that because these terms unfairly favored the dealer, and were so pervasive that they could not be severed from the remaining terms of the arbitration clause, the clause was unenforceable.

In summary, the holding in Sanchez reaffirms that, at least with respect to arbitration clauses, courts will examine the terms of the clause at issue to ensure that it is both procedurally and substantively fair to consumers.  As a result, although the best practice would be for consumers to read and understand form contacts before signing, some relief is available from unconscionable provisions through the court system.