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Business Law by Tom Ramsey

Unsuccessfully Hiding Important Contract ProvisionsTom Ramsey - Business Law

April 23rd, 2013 – It is a good business practice for sellers of goods and providers of services to present potential customers with a written agreement in a form that can be reviewed in a reasonable manner. Beyond that, the hiding of important provisions can result in those provisions becoming unenforceable as a result of a court decision. Such a result is reported below.

In May 2010, William Goodridge purchased a 2008 Hyundai Elantra from El Cajon Mitsubishi. The process involved William being “presented with a stack of preprinted form documents” (the court’s description). He was told by an employee of the dealer to sign and/or initial as indicated. One document was about 26 inches long and contained provisions on both sides of the sheet. The only places for signatures or initials were on the front side of that document.

About five days later, William returned to the dealer because he was concerned about the documents. He was instructed to sign a new set of documents, which were virtually identical to the original set.

Each version of the agreement contained an arbitration provision, printed on the back side of the long sheet. William was unaware that it existed.

The following December, William initiated a lawsuit against the dealer. The complaint claimed violations of provisions of the Automobile Sales Finance Act. The dealer filed and served an answer to William’s complaint. The answer did not mention the existence of the arbitration provisions in the agreement. About five months later, the dealer filed a petition to compel arbitration of the dispute. It also asked the court to “stay” (put on hold) its proceedings until the petition to compel arbitration had been ruled upon.

William opposed arbitration. He alleged that the arbitration clause was unconscionable and unenforceable. Beyond that, by waiting so long to seek arbitration, the dealer waived its right to arbitrate. Turning to the process by which he signed the document, William asserted that he was handed the documents and instructed to “sign here” in a number of spots. He was not given the opportunity to negotiate anything. He had no reason to suspect that hidden on the back of the contract would be a section that prohibited him from being able to sue in court if he had a problem. In the process, the dealer did not ask him if he was willing to arbitrate any disputes. No one at the dealership ever turned over the contract to show him the writing on the back or asked him to sign any sections on the back of the contract where the arbitration clause is located. Among other provisions, the arbitration clause allowed the dealer to compel arbitration before a three arbitrator panel. The costs of this process would be prohibitive. Finally, although the dealer could avoid arbitration and go directly into court, William did not have such a choice.

The trial court sided with William and issued an order denying the dealer’s petition to compel arbitration because the arbitration provisions were unconscionable. In summary, the trial court determined that to reach this conclusion, procedural and substantive unconscionability must exist. The procedural requirement was met because of the “take it or leave it” process by which the agreement was presented to William and the fact that the arbitration language was hidden. The substantive requirement existed because the arbitration language was unfairly one-sided in favor of the dealer.

The dealer appealed.

The Court of Appeal stated the general belief that a strong public policy exists favoring arbitration as a speedy and relatively inexpensive means of dispute resolution. However, there are limits to enforcing arbitration provisions. The Court of Appeal agreed with the trial court concerning unconscionability. First, it explained that procedural unconscionability focused on oppression and surprise. The inequality of bargaining power between William and the dealership certainly supported the oppressive process imposed by the dealer. Surprise also existed. William’s focus was on the front side of the agreement. It contained all spaces for signature and initialing. The back side contained no such spaces. There was no opportunity to negotiate. Second, substantive unconscionability focuses on whether the arbitration provision is overly harsh or one-sided and is outside William’s reasonable expectations. The court concluded that “there is a high degree of procedural unconscionability” in this case.

The ruling of the trial court was affirmed.

The case is entitled Goodridge v. KDF Automotive Group, Inc. It was decided in 2012.

(Tom Ramsey is a Long Beach attorney who has specialized in business law for more than 40 years. He may be reached at bizlawwiz@aol.com.)