Supp. To § 1.4 Contracts of Adhesion

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(A) The following cases cite this section:

(1) Higgins vs. The Superior Court of Los Angeles County, 140 Cal. App. 4th 1238, 45 Cal. Rptr. 3d 293, 2006 Cal. App. LEXIS 972 (2006) . Five siblings sued various television defendant entities in connection with their agreement to appear on a realty-based television series called Extreme Makeover. The siblings' parents died in 2004, and they were taken in by church acquaintances, the Leomiti family. The television defendants approached the Leomitis about featuring the siblings in the realty-based television show, which is designed to find needy and deserving families who live in a home that does not serve their needs. The program radically improves the home by demolishing and rebuilding it. The siblings entered into contracts with the television defendants containing an arbitration provision. Following the production and airing of the television program, the Leomitis informed the siblings that the home belonged to the Leomitis, and the Leomitis ultimately forced siblings to leave. The television defendants advised the siblings that they could not help them. The siblings filed an action against the television defendants and the Leomitis based on, among other things, misrepresentation and breach of contract. The television defendants petitioned to compel arbitration, which the trial court granted. The appellate court reversed on the basis that the arbitration provision was unconscionable. The court explained that although arbitration is generally favored under both the Federal Arbitration Act and California law, an arbitration agreement is to be rescinded on the same grounds as other contracts. The court explained that unconscionability has both a procedural and a substantive element, the former focusing on ''oppression'' or ''surprise'' due to unequal bargaining power; the latter on ''overly harsh'' or ''one-sided'' results. The court explained the prevailing view that both procedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause due to unconscionability. However, they need not be present in equal degrees. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required, and vice versa. The court also explained that a contract of adhesion is a standardized contract imposed and drafted by the party of superior bargaining strength and gives the other party only the opportunity to adhere to the contract or reject it. Citing Corbin, the court explained that adhesion contracts are routine in modern day commerce, and that they are worthy of neither praise nor condemnation. Though the siblings read the contract, the court found the arbitration provision to be procedurally unconscionable. The provision appeared in one paragraph near the end of a lengthy, single-spaced document. The entire document was drafted by the television defendants, who knew that the siblings were young and unsophisticated and had recently lost both parents. The television defendants made no effort to highlight the presence of the arbitration provision. It was one of twelve paragraphs in a section entitled ''Miscellaneous.'' Unlike other provisions in the contract, no text in the arbitration provision was conspicuously printed. The court also found that the provision was substantively unconscionable, that is, unfairly one-sided. The arbitration provision required only that the siblings submit their claims to arbitration. It allowed the television defendants the right to seek injunctive or other equitable relief in court. Only the siblings were barred from seeking appellate review of the arbitrator's decision and costs were to be borne equally by both parties. Accordingly, the arbitration provision was deemed to be unconscionable and, therefore, unenforceable. For further discussion of unconscionability and arbitration clauses, see § 29.4 of this supplement.

(2) Kloss v. Edward D. Jones & Co., 310 Mont. 123 (2002) . Kloss, a 95-year-old widow, opened a living trust account with the defendant company in 1992 under an agreement containing a mandatory arbitration provision. In 1998, she executed another agreement with the company to activate a charitable trust account. This agreement also contained an arbitration clause. She did not sign the 1998 agreement; rather, she received a detachable signature card which acknowledged that she had received a copy of the agreement and incorporated the arbitration clause by reference. She decided to revoke the trust and sued Jones for violation of state statutes regulating the sale of securities, breach of fiduciary duties, negligence, unfair and deceptive trade practices, and fraud. Jones's motion to compel arbitration was granted by the district court but was reversed on this appeal.

The Supreme Court of Montana relied upon Corbin's analysis of a contract of adhesion, i.e., a contract dictated by one contracting party to another who has no voice in its formulation. In Montana, a contract of adhesion will not be enforced against a weaker party when it is (1) not within the reasonable expectations of the party, or (2) is within the reasonable expectations of the party but, when considered in its context, is unduly oppressive, unconscionable, or against public policy. The contracts here were contracts of adhesion since they were drafted by Jones, and Kloss had no opportunity to negotiate the terms. Furthermore, it was an industry-wide practice to compel arbitration; Kloss, therefore would have had to agree to arbitration in order to participate in the securities market. Moreover, Kloss did not read the agreements but instead relied upon the Jones representative to explain to her the significant portions of the agreement. The representative, however, failed to explain the arbitration provision by which she waived her right of access to state courts, her right to a jury trial, her right to reasonable discovery, her right of findings of fact based on the evidence, and her right to enforce the law applicable to her case by way of appeal. Accordingly, the court concluded such a waiver of rights was not within Kloss's reasonable expectations. It was, therefore, unnecessary to consider the second prong of the test for enforceability of adhesion contracts, i.e., whether the arbitration clause was unduly oppressive, unconscionable, or against public policy.

The court emphasized that its holding was not based on a finding that the arbitration clause was unconscionable since unconscionability would require a complete analysis of the operation and effect of the arbitration clause in this case to determine whether it was oppressive. It would not, however, be unfair to construe the court's analysis as refusing to enforce the arbitration clause on the grounds of what other courts would characterize as procedural unconscionability, albeit the clause, itself, may be substantively conscionable. In this light, the court's analysis would suggest an uncommon holding, i.e., the refusal to enforce a provision because of procedural unconscionability alone. Courts typically suggest that unconscionability requires both procedural (bargaining imperfection) and substantive (oppression) elements. Courts may be moved to find a clause unenforceable because of substantive unconscionability alone. See, e.g., Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (App. Div. 1998) ; Maxwell v. Fidelity Financial Services, Inc., 184 Ariz. 82, 907 P. 2d 51 (1995) . Holding a clause unenforceable on the sole basis of procedural unconscionability, however, would be unique.