Arbitration & Mediation

The Continuing Perils of (Potentially) Uneforceable Arbitration Agreements

By Victoria Pynchon

Fellow State Bar Convention panelist Brian Reider recently alerted our panel */ to the Fourth Appellate District's August 26, 2009, decision Parada v. Superior Court (.pdf)  which creates a slippery slope of questionable enforceability for Courts presented with motions to compel arbitration. 

The arbitration provisions at issue in Parada were contained in a form contract between individual investors and a company called Monex which dealt in precious metals.  After suffering investment losses, three customers brought suit in a single consolidated proceeding.  The arbitration clause required each party to individually bring a claim against Monex before a panel of three JAMS arbitrators. 

The trial court granted Monex's motion to compel arbitration and the Fourth District vacated that Order in response to the Plaintiffs' petition for a writ of mandate.  In granting the writ, the appellate court held that the cost of a three-Judge JAMS arbitration panel together with a prohibition against consolidating or joining claims rendered the provisions both procedurally and substantively unconscionable. 

The factors upon which the Court premised its unconscionability decision included the following:  (1)  because Plaintiffs had no meaningful opportunity to negotiate the terms of the agreement, it was an adhesion contract; (2) assuming the arbitration of Plaintiffs' individual claims would require four days of hearing time, JAMS arbitrator and administrative fees would have amounted to a minimum of $20,800 per party; (3) the prohibitions against joinder or consolidation unnecessarily increased the cost to each party of bringing their claims against Monex; (4) the parties demonstrated their inability to afford the JAMS proceeding; and, (5) the provisions requiring arbitration according to JAMS rules -- which provided for sanctions in the event of a party's inability to pay, were not attached to the contract.  

As the Court concluded:

Having determined the presence and degree of procedural and substantive unconscionability, we return to the sliding scale measurement to determine whether the Arbitration Panel paragraphs and No Consolidation paragraphs of the . . . Agreements are enforceable. (Morris, supra, 128 Cal.App.4th at pp. 1318–1319.) 

We concluded the [arbitration provisions] fall in the low to middle range of the procedural unconscionability scale. Without considering each Petitioner's ability to pay, the unjustified requirement of a panel of three arbitrators from JAMS and the prohibition on consolidation or joinder of claims render the Arbitration Panel paragraphs and No Consolidation paragraphs substantively unconscionable to a high degree. Consideration of Petitioners' ability to pay pushes those paragraphs even further into substantive unconscionability territory.

On the sliding scale, this low- to mid–range amount of procedural unconscionability and the high degree of substantive unconscionability render the Arbitration Panel paragraphs and No Consolidation paragraphs of the [arbitration provisions] unconscionable and, hence, unenforceable.

This decision, resting as heavily as it does upon the inability of parties to pay arbitration fees and the failure to disclose the arbitration rules that would govern the resolution of the parties' claims, should give every litigator and transactional lawyer pause when advising their clients concerning the enforceability of arbitration clauses.

In my own mediation practice, I have seen many consumer fraud cases ordered into arbitration based on adhesion contracts requiring arbitration according to the rules of the AAA.  None of these contracts included the rules that would bind the parties and in many cases the Plaintiffs would be unable to afford to fees charged by AAA arbitrators.  Attorneys resisting the enforcement of such agreements would do well to study Parada as would those who advise clients about the enforceability of standardized form arbitration provisions included in contracts which have not been reviewed for unconscionability under recent court rulings. 

For those businesses dealing with consumers, particularly those not given the option of negotiating the terms of an arbitration provision, a possible safety net is the AAA's Expedited Commercial Arbitration Panel, which charges a modest fee for a single day of arbitration before a AAA arbitrator.  Be sure to attach the AAA Expedited Commercial Rules to your contract and avoid the uncertainties created by Parada.

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*/  In What Every Litigator Should Know About Enforcing or Avoiding ADR Clauses, panelists Rebecca Callahan, Brian Reider, Commissioner Michele Flurer and Victoria Pynchon will "explain the most commonly-used ADR proceedings, contractual ADR clauses and ADR enforcement mechanisms and discuss significant issues lawyers must 'consider or avoid' when dealing with those ADR provisions" at the State Bar Convention in San Diego on Saturday, September 12, 2009 at 2:15 p.m.  CLE: 1.5 Hour

Full post as published by Settle It Now Negotiation Blog on September 02, 2009 (boomark / email).