Arbitration agreements aren't always binding or legal. If you
are deceived or lied to regarding the agreement you are being asked to sign in
any way, that may invalidate it in the eyes of the court. Bring your own
cassette recorder to meetings in the contract stage -- you will have your own
record of what was said. One family contacted me who were lied to regarding the
arbitration clause as my wife and I were. They asked Clayton Homes for the copy
of the recording that was made at the Clayton sales office. It finally arrived
after a delay of many weeks, and most of what had transpired had been erased
from the tape! The lesson is that you should protect your interests as actively
as the dealership (although you probably won't want to go to the extremes of
fraud as they commonly do!).
Arbitration agreements are facing more and more scrutiny as
homeowners are being cheated out of their constitutional rights with increasing
frequency. Consumer organizations like Homeowners Against Deficient Dwellings
(http://www.hadd.com/index.php) are raising consumer awareness of the issues, and some courts are starting to
defend the weaker parties in cases where large companies are trying to deprive
homeowners of their right to a jury trial. What follows is one case in point
(albeit with a site-built home), and hopefully it marks a beginning trend:
Cite as: Burch v. Dist. Ct.
118 Nev. Adv. Op. No. 46
July 17, 2002
IN THE SUPREME COURT OF THE STATE OF NEVADA
No. 38283
JAMES BURCH AND LINDA BURCH,
Petitioners,
vs.
THE SECOND JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA, IN AND FOR THE COUNTY
OF WASHOE, AND THE HONORABLE STEVEN R. KOSACH, DISTRICT JUDGE,
Respondents,
and
DOUBLE DIAMOND RANCH, LLC, A NEVADA CORPORATION; AND DOUBLE DIAMOND HOMES, LLC,
A NEVADA CORPORATION,
Real Parties in Interest.
Original petition for a writ of mandamus, challenging a district court order
granting a motion to compel arbitration pursuant to a warranty agreement.
Petition granted.
Robert C. Maddox & Associates and Samuel S. Crano, Reno, for Petitioners.
Walther Key Maupin Oats Cox & LeGoy and Donald A. Lattin, Reno, for Real Parties
in Interest.
Vannah Costello Canepa Riedy Rubino & Lattie, Las Vegas, for Amicus Curiae
Nevada Trial Lawyers Association.
BEFORE SHEARING, ROSE and BECKER, JJ.
OPINION
PER CURIAM:
This petition challenges a district court order granting a motion to compel
arbitration in favor of real parties in interest Double Diamond Ranch, LLC and
Double Diamond Homes, LLC (Double Diamond). Petitioners James and Linda Burch
purchased a new home and a homebuyer warranty from Double Diamond. When problems
developed in their home, they contacted Double Diamond to fix them. After
attempts at mediation failed, the Burches filed a complaint in district court
for damages relating to Double Diamond’s construction of their new home. The
district court concluded that the Burches had entered into a valid contractual
agreement, via the homebuyer warranty, to resolve any disputes concerning their
home through arbitration. We disagree, and we, therefore, grant this petition
for a writ of mandamus.
FACTS
In March 1997, the Burches purchased a new Diamond Country home developed and
constructed by real parties in interest Double Diamond. In October 1997,
approximately four months after closing, Double Diamond gave Linda Burch a
thirty-one-page warranty booklet and asked her to sign a one-page "Application
for Home Enrollment" for the 2-10 Home Buyers Warranty (HBW) offered by Double
Diamond. She signed the "application" form, but she did not read the
thirty-one-page booklet.
The HBW purports to be an express limited warranty. It provides one-year
coverage that warrants the home will be free from materials and workmanship
defects. In the second year, the coverage narrows to electrical, plumbing, and
mechanical systems defects. For ten years, the HBW provides coverage that
warrants the home will be free from structural defects.
The one-page "Application for Home Enrollment" states in paragraph nine that,
[b]y signing, Homebuyer acknowledges that s/he has viewed and received a video
of "Warranty Teamwork: You, Your Builder & HBW", read the warranty and has
received a copy of this form with the Home Buyers Warranty Booklet and CONSENTS
TO THE TERMS OF THESE DOCUMENTS INCLUDING THE BINDING ARBITRATION PROVISION
contained therein.
The HBW’s arbitration clause provides, in pertinent part, that:
Any controversy, claim or complaint arising out of or relating to Builder’s
workmanship/systems limited warranty coverages provided by Builder under the
terms of this agreement which Homebuyer and Builder do not resolve by mutual
agreement shall be settled by final and binding arbitration in accordance with
the Construction Arbitration Services (CAS) or other [National Home Insurance
Company] NHIC/HBW approved rules applicable to the home warranty industry in
effect at the time of the arbitration. . . .
Any controversy concerning a claim arising out of or relating to the Builder’s
ten year structural coverage (insured by NHIC) shall be settled by final and
binding arbitration. . . . Arbitration of all structural warranty disputes will
be conducted by arbitrators supplied by an NHIC approved arbitration service.
This arbitration clause further provides that the final and binding arbitration
is governed by the Federal Arbitration Act (FAA)1 "to the exclusion of any
provisions of state arbitration law."
In January 1999, the Burches complained to Double Diamond about "serious
problems underneath [their] house" – saturated floor joists, wet insulation,
muddy ground, and a wet, moldy foundation. They requested that Double Diamond
remedy the situation by removing the insulation, professionally treating the
area with mildew and fungicide controls, installing upgraded insulation with
proper venting, constructing a proper water barrier underneath the house, and
reimbursing them for all current and future fees for professional inspections.
While contesting liability, Double Diamond offered to completely dry the crawl
space underneath the house, install two additional foundation vents and a
six-mill vapor barrier, treat all areas of active fungus with an approved
fungicide, and reinstall insulation except at the rim joist.
The Burches were not satisfied with this offer. After both parties stipulated to
waive mediation, the Burches filed a complaint for damages with the district
court, alleging breach of express and implied warranties, negligence, and fraud
and misrepresentation. Double Diamond filed a motion for a stay and a motion to
compel arbitration, arguing that the HBW provided for final and binding
arbitration of all disputes relating to the construction of the Burch home. The
district court found the HBW valid and granted the motion to compel arbitration.
The Burches now request that this court issue a writ of mandamus directing the
district court to vacate its order compelling the Burches to arbitrate their
claims against Double Diamond.
DISCUSSION
Because an order compelling arbitration is not directly appealable, the Burches
appropriately seek writ relief from this court.2 When there is no plain, speedy,
and adequate remedy at law, a writ of mandamus is available to compel the
district court to perform a required act, or to control an arbitrary or
capricious abuse of discretion.3 Under the circumstances of this case, the HBW
is an unconscionable adhesion contract and, therefore, unenforceable. The
district
court should not have compelled arbitration under the unenforceable clause.
Accordingly, we grant the petition for a writ of mandamus.
This court has defined an adhesion contract as "a standardized contract form
offered to consumers . . . on a ‘take it or leave it’ basis, without affording
the consumer a realistic opportunity to bargain."4 "The distinctive feature of
an adhesion contract is that the weaker party has no choice as to its terms."5
Here, the one-page "application" and the HBW were pre-printed, standardized
contract forms. The Burches, the weaker party, were not given an opportunity to
negotiate the HBW’s terms with Double Diamond or its insurer, National Home
Insurance Company (NHIC); they were required to "take it or leave it."
Therefore, the HBW agreement between the Burches and Double Diamond is an
adhesion contract. This court permits the enforcement of adhesion contracts
where there is "plain and clear notification of the terms and an understanding
consent[,]"6 and "if it falls within the reasonable expectations of the weaker .
. . party."7 This court need not, however, enforce a contract, or any clause of
a contract, including an arbitration clause,8 that is unconscionable.9
Although the FAA establishes a strong public policy favoring arbitration for the
purpose of avoiding the unnecessary expense and delay of litigation where
parties have agreed to arbitrate,10 it does not mandate the enforcement of an
unconscionable contract or arbitration clause.11 The United States Supreme Court
has interpreted § 2 of the FAA and held that "[s]tates may regulate contracts,
including arbitration clauses, under general contract law principles and they
may invalidate an arbitration clause ‘upon such grounds as exist at law or in
equity for the revocation of any contract.’"12 Unconscionability, therefore, is
a legitimate ground upon which to refuse to enforce the HBW and its arbitration
clause.13
Generally, both procedural and substantive unconscionability must be present in
order for a court to exercise its discretion to refuse to enforce a contract or
clause as unconscionable.14 The circumstances present in this case significantly
render the HBW procedurally unconscionable. The Burches did not receive a copy
of the HBW’s terms until after Double Diamond had paid the premium to enroll the
Burch home in the warranty program and almost four months after they closed
escrow on their home. Double Diamond told the Burches that the HBW’s issuance
was "automatic" and offered extra protection for their home, when in fact the
warranty limited their protection under Nevada law.15 The Burches did not have
an opportunity to read the one-page "application" form, or the thirty-one-page
HBW booklet, or to view the HBW video before signing the "application." The
arbitration clause was located on page six of the HBW booklet, after five pages
of material only relevant to persons residing outside of Nevada. The Burches
were not sophisticated consumers, they did not understand the HBW’s terms, and
the HBW’s disclaimers were not conspicuous.16 Under these circumstances, the
Burches did not have a meaningful opportunity to decide if they wanted to agree
to the HBW’s terms, including its arbitration provision. As a result, the HBW
was procedurally unconscionable.
Because the procedural unconscionability in this case is so great, less evidence
of
substantive unconscionability is required to establish unconscionability.17 The
HBW’s arbitration clause is also substantively unconscionable because it grants
Double Diamond’s insurer, NHIC, the unilateral and exclusive right to decide the
rules that govern the arbitration and to select the arbitrators. These
provisions are "oppressive terms,"18 and as such, are substantively
unconscionable and unenforceable. We do not hold that a homebuyer warranty with
an arbitration clause will always be unconscionable or unenforceable. Under the
circumstances in this case, however, the HBW and its arbitration clause are
unconscionable
and, therefore, unenforceable.
We, therefore, grant the petition and direct the clerk of this court to issue a
writ of mandamus directing the district court to vacate its order compelling
arbitration.19
**********FOOTNOTES**********
1 9 U.S.C. §§ 1-16 (2000).
2 See NRS 38.205 (no direct appeal from order granting motion to compel
arbitration); NRS 34.170 (writ to issue when no plain, speedy, and adequate
remedy in law exists); Kindred v. Dist. Ct., 116 Nev. 405, 409, 996 P.2d 903,
906 (2000) (recognizing that mandamus is an appropriate method to challenge an
order compelling arbitration).
3 See NRS 34.160; NRS 34.170; see also Round Hill Gen. Imp. Dist. v. Newman, 97
Nev. 601, 603-04, 637 P.2d 534, 536 (1981).
4 Obstetrics and Gynecologists v. Pepper, 101 Nev. 105, 107, 693 P.2d 1259, 1260
(1985).
5 Id.
6 Id. at 108, 693 P.2d at 1261.
7 See id. at 107-08, 693 P.2d at 1261; see also Bernstein v. GTE Directories
Corp., 827 F.2d 480, 482 (9th Cir. 1987) (applying Nevada law).
8 See NRS 38.035 ("A written agreement to submit any existing controversy to
arbitration or a provision in a written contract to submit to arbitration any
controversy thereafter arising between the parties is valid, enforceable and
irrevocable, save upon such grounds as exist at law or in equity for the
revocation of any contract." (emphasis added)).
9 See NRS 104.2302(1) (court may refuse to enforce an unconscionable contract).
10 See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-71 (1995).
11 See Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (holding
that generally applicable contract defenses, such as unconscionability, may be
used to invalidate an arbitration clause).
12 Allied-Bruce Terminix, 513 U.S. at 281 (quoting 9 U.S.C. § 2 (emphasis
added)); see also Doctor’s Associates, 517 U.S. at 687.
13 See Doctor’s Associates, 517 U.S. at 687.
14 See, e.g., First Family Financial Services, Inc. v. Fairley, 173 F. Supp. 2d
565, 569-71 (S.D. Miss. 2001); Data Based Systems, Intern., Inc. v.
Hewlett-Packard Co., No. CIV. 00-CV-4425, 2001 WL 1251212, at *10 (E.D. Pa.
Sept. 26, 2001); Thomas Engineering, Inc. v. Trane Co., No. 92 C 1251, 1994 WL
692698, at *2-3 (N.D. Ill. Dec. 1, 1994); Armendariz v. Foundation Health
Psychcare, 6 P.3d 669, 690 (Cal. 2000); Villa Milano Homeowners Ass’n v. Il
Davorge, 102 Cal. Rptr. 2d 1, 6-7 (Ct. App. 2000); Complete Interiors, Inc. v.
Behan, 558 So. 2d 48, 52 (Fla. Dist. Ct. App. 1990); M.A. Mortenson Co. v.
Timberline Software, 998 P.2d 305,
314-15 (Wash. 2000).
15 Cf. Sierra Diesel Injection Service v. Burroughs Corp., 890 F.2d 108, 113
(9th Cir. 1989) ("[E]xclusions of warranties are generally disfavored . . . .
They are subject to the general obligation of good faith and of not imposing
unconscionable terms upon a party.").
16 See NRS 104.1201(10) ("Whether a term or clause is ‘conspicuous’ or not is
for decision by the court."); see also Sierra Diesel, 890 F.2d at 115
(explaining that even the use of capital letters in disclaimers will not be
"effective in all cases").
17 See Armendariz, 6 P.3d at 690.
18 24 Hour Fitness, Inc. v. Superior Court, 78 Cal. Rptr. 2d 533, 541 (Ct. App.
1998).
19 See NRS 34.160; see also Round Hill, 97 Nev. at 603-04, 637 P.2d at 536.
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