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Friday, September 30, 2005
Harrington v. Pulte Home Corporation: Division One Holds That an Arbitration Clause in a Contract of Adhesion May Be Enforced
Plaintiffs, a group of homeowners seeking to proceed as a class, sued Pulte Homes and various other defendants alleging that they failed to disclose that the homes they purchased were in close proximity to an area used for pilot training and jet engine testing. Defendants moved to compel plaintiffs to pursue their claims via arbitration pursuant to an arbitration clause set forth in the home purchase contracts. Plaintiffs did not dispute that, if enforceable, the arbitration clause would apply to the claims asserted against all of the defendants, nor did they dispute that styling their action as a class action precluded proceeding in arbitration. Instead, they argued that the arbitration clause was unenforceable either under the “reasonable expectations” doctrine set forth in Darner Motor Sales, Inc. v. Universal Underwriters Insurance Company, 40 Ariz. 383 682 P.2d 388 (1984), and its progeny, or under the unconscionability doctrine. In particular, they argued that the form adhesion contracts resulted in an unknowing waiver of the right to trial by jury (without disclosing that in the contract) and forced plaintiffs to pursue arbitration that involved cost-prohibitive expenses required by the American Arbitration Association. The trial court (Gottsfield, J.) accepted plaintiffs’ arguments, and denied the motion to compel arbitration.
As a preliminary matter, the Court of Appeals explained that although generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements consistent with the Federal Arbitration Act, that Act precludes states from invalidating arbitration clauses under state laws applicable only to arbitration provisions. The Court then rejected the trial court’s finding that the arbitration clause violated the doctrine of reasonable expectations. That doctrine requires a showing that the party seeking to enforce the agreement had reason to believe that the signing party would not accept the term in issue. The seven factors relevant to this inquiry, which the Court reviewed, do not suggest that the arbitration clause violated the doctrine. The Court further explained that the right to a jury trial can be waived even if it is not done knowingly, intelligently, and voluntarily, and rejected the argument that Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 840 P.2d 1013 (1992), created a new rule applicable to all standardized contracts with arbitration clauses. The Court also found the costs were not so prohibitive to run afoul of the reasonable expectations doctrine.
As for the distinct ground of “unconscionability,” that inquiry concerns the actual terms of the contract and examines the relative fairness of the obligations assumed to determine whether they are so one-sided as to oppress or unfairly surprise an innocent party. The Court found that the plaintiffs failed to meet their burden of demonstrating that arbitration would be so expensive as to be unconscionable. Judge Barker authored the decision, Judges Portley and Ehrlich concurred
Plaintiffs, a group of homeowners seeking to proceed as a class, sued Pulte Homes and various other defendants alleging that they failed to disclose that the homes they purchased were in close proximity to an area used for pilot training and jet engine testing. Defendants moved to compel plaintiffs to pursue their claims via arbitration pursuant to an arbitration clause set forth in the home purchase contracts. Plaintiffs did not dispute that, if enforceable, the arbitration clause would apply to the claims asserted against all of the defendants, nor did they dispute that styling their action as a class action precluded proceeding in arbitration. Instead, they argued that the arbitration clause was unenforceable either under the “reasonable expectations” doctrine set forth in Darner Motor Sales, Inc. v. Universal Underwriters Insurance Company, 40 Ariz. 383 682 P.2d 388 (1984), and its progeny, or under the unconscionability doctrine. In particular, they argued that the form adhesion contracts resulted in an unknowing waiver of the right to trial by jury (without disclosing that in the contract) and forced plaintiffs to pursue arbitration that involved cost-prohibitive expenses required by the American Arbitration Association. The trial court (Gottsfield, J.) accepted plaintiffs’ arguments, and denied the motion to compel arbitration.
As a preliminary matter, the Court of Appeals explained that although generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements consistent with the Federal Arbitration Act, that Act precludes states from invalidating arbitration clauses under state laws applicable only to arbitration provisions. The Court then rejected the trial court’s finding that the arbitration clause violated the doctrine of reasonable expectations. That doctrine requires a showing that the party seeking to enforce the agreement had reason to believe that the signing party would not accept the term in issue. The seven factors relevant to this inquiry, which the Court reviewed, do not suggest that the arbitration clause violated the doctrine. The Court further explained that the right to a jury trial can be waived even if it is not done knowingly, intelligently, and voluntarily, and rejected the argument that Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 840 P.2d 1013 (1992), created a new rule applicable to all standardized contracts with arbitration clauses. The Court also found the costs were not so prohibitive to run afoul of the reasonable expectations doctrine.
As for the distinct ground of “unconscionability,” that inquiry concerns the actual terms of the contract and examines the relative fairness of the obligations assumed to determine whether they are so one-sided as to oppress or unfairly surprise an innocent party. The Court found that the plaintiffs failed to meet their burden of demonstrating that arbitration would be so expensive as to be unconscionable. Judge Barker authored the decision, Judges Portley and Ehrlich concurred
Posted date: Fri, Sep 30, 2005
