Inconspicuous Arbitration Agreements Will Not Be Upheld
Posted by GibbsGiden Under Business and Commercial Law
Although there is a strong public policy favoring arbitration, such a policy cannot displace the necessity for a voluntary agreement to arbitrate. In a recent decision, the appellate court held that the trial court could reasonably determine that there was no agreement to arbitrate where the form of the agreement is deceptive. Specifically, the court said the arbitration clause was invalid “because the clause is as inconspicuous as a frog in a thicket of water lilies.”
In Domestic Linen Supply Co., Inc. v. L J T Flowers, Inc., Case Nos. B292863/B294788, 2020 Cal. App. LEXIS 1148 (Cal. Ct. App. December 4, 2020), Domestic Linen Supply Co., Inc. (“Domestic”) entered into a contract with L J T Flowers, Inc. (“LJT”) whereby Domestic rented uniforms to LJT. Three years into the relationship, a dispute arose. Domestic claimed LJT owed it $30,515.58 and filed a petition to compel arbitration. LJT opposed the petition. The court denied Domestic’s request because it found that LJT suffered a lack of “procedural due process” because the arbitration agreement was “inconspicuous.” LJT then brought a motion for attorney fees pursuant to the fee provision in the contract and LJT was awarded $32,757.04. The appellate court affirmed both orders.
I. The Arbitration Clause
The pre-printed contract between Domestic and LJT is double-sided with the signature block at the bottom of the front page. The first paragraph on the front-page states, “THE PARTIES HEREBY AGREE UPON THE TERMS SET FORTH BELOW AND UPON THE REVERSE SIDE HEREOF.” Paragraph 15 found on the back page contains the following arbitration clause:
In the event of any controversy or claim in excess of $10,000.00 arising out of or relating to this agreement, including but not limited to questions regarding the authority of the persons who have executed this agreement and enforcement of any guarantee that is related to this agreement, the question, controversy or dispute shall be submitted to and settled by arbitration to be held in the city closest to the city in which the branch office of the Company which serves the Customer is located.
This paragraph is in 8-point font size and contains no heading, boldface, italics, or capitalization. Domestic’s employees are not trained to disclose the arbitration clause and their training manual states that no contract with writing on the back will be approved. Additionally, there is no place on the back page for the parties’ signatures or initials.
The trial and appellate court agreed that LJT had not consented to arbitrate. The arbitration clause is not above the signature block where one would expect to find it, but instead hidden in a thicket of fine print on the back of the contract. The appellate court stated:
There is a constitutional right to trial by jury. That right is basic and should be zealously guarded by the courts. In case of doubt, the issue should be resolved in favor of the right to a trial by jury. The party seeking to compel arbitration bears the burden of proving a valid agreement to arbitrate.
Based on the above, the appellate court decided “If the contract [between Domestic and LJT] is not intentionally deceptive, it has that effect. There was simply no agreement to arbitrate.”
II. The Attorneys’ Fees Clause
Domestic contended that the trial court erred in awarding LJT attorney fees. LJT based its claims for attorneys’ fees on the portion of the arbitration clause that states, “The judge or arbitrator shall include as part of the award all costs including reasonable attorney fees and arbitration fees of the non-breaching party where it is determined that one of the parties has breached the agreement.” Domestic believed neither party had been determined to have breached the contract. All that has been determined was that the arbitration clause is not enforceable.
LJT argued that the attorneys’ fees clause unilaterally favors Domestic because if Domestic prevails in its action for breach of contract, it will be entitled to fees. However, if LJT prevails on the ground that it did not breach the contract, under the express language of the fees clause, it would not be awarded fees. LJT contended that under the circumstances, Civil Code § 1717 should apply to make the attorneys’ fees clause mutual, and fees should be awarded to the prevailing party.
The appellate court agreed with LJT. The attorneys’ fees clause as written denied fees to a prevailing defendant. Section 1717 ensures the mutuality of attorneys’ fees claims when such fees are awarded pursuant to a contract. Thus, here the prevailing party should be permitted to assert a claim for fees. LJT prevailed in the action because defeating Domestic’s petition to arbitrate terminated the action. Had Domestic petitioned to compel arbitration in an existing lawsuit as opposed to creating the action with the petition, the lawsuit would have continued after the petition was defeated. Since LJT was the prevailing party, its attorneys’ fees award was upheld.
California law favors enforcement of valid arbitration agreements. However, in order to be valid, special notice should be given to arbitration clauses. What this appellate decision teaches us is that formats like bold, italics, and capitalization should be utilized. The signature space for the contract should be below the arbitration clause or the parties should initial next to it. Beware of blending an arbitration clause into a thicket of fine print!
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Samantha Riggen is an associate in the Westlake Village office of Gibbs Giden where she represents clients in all areas of business and commercial matters with an emphasis on construction litigation. Her construction practice includes the prosecution and defense of claims arising out of both public and private projects.
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