Arbitration Is Alive And Living In Federal Law

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By: Arthur Grebow, founding partner of Grebow and Rubin,
LLP

There is an old Chinese curse which says: “May you live in interesting times.” While sometimes taken as a blessing, it is in fact a curse. It is used usually with the clear implication that uninteresting times of peace and tranquility are more life arming than interesting times of chaos.

Only someone living in a cave in outer Mongolia would believe that 2016 was not an interesting time. While we have said this for some time, it was dramatically demonstrated last year that the very last place that a parkowner wants to have a civil dispute resolved is before a jury.

While arbitration, the resolution of dispute outside the judicial system, has been the preferred choice, parkowners have not successfully enforced arbitration agreements under State law. For example, California Civil Code §1281.2 provides that when a petition for arbitration is led, the court shall order the parties to arbitrate the controversy, unless it determines that grounds exist for the revocation of the agreement, or the parties are involved in a pending court action or special proceedings arising out of the same transaction or series of related transactions by the party refusing to arbitrate, and there is the possibility of conflicting rulings on similar issues. Under this statute, if even a small number of plaintiffs in a failure to maintain case do not sign arbitration agreements, then the case will proceed to jury trial.

In 2011, the United State Supreme Court clarifieded the Federal rule that an arbitration agreement that is subject to the Federal Arbitration Act (“FAA”) pre-empts any State law that stands as an obstacle to the accomplishment in the FAA’s objectives. In enacting the FAA, Congress declared a national policy favoring arbitration and withdrew the power of the States to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.

Although the FAA has dramatically changed the scope of arbitration law in California, the decisions of the individual cases do not always provide a clear path. Here are two recent examples:

Penilla v. Westmont Corporation

was decided in September. In that case, 45 of 60 plaintiffs, who had written rental agreements containing arbitration clauses with Wildwood Mobilehome Country Club (“Westmont”), sued on various contract, tort and statutory claims. Westmont filed a petition to compel arbitration. The residents opposed the petition, arguing that the arbitration provision was both procedurally and substantively unconscionable. The trial court denied Westmont’s petition to compel arbitration because it was unconscionable, and the Court of Appeal affirmed. The arbitration provision provided that it was governed by the California Arbitration Act and did not mention the FAA.

Under the FAA, arbitration agreements can be invalidated for fraud, duress, or unconscionability. Unconscionability, however, under Federal law is only applicable to general principles of contract and not if it derives its meaning from the fact that an agreement to arbitrate is at issue.

Under California law, a contract must be both procedurally and substantively unscionable to be rendered invalid. California law utilizes a sliding scale to deter- mine unconscionability – greater substantive unconscionability may compensate for lower procedural unconscionability. The Court in Penilla found both procedural and substantive unconscionability.

Procedural Unconscionability

Procedural unconscionability concerns the manner in which the agreement was negotiated and the respective circumstances of the parties at that time, focusing on the level of oppression and surprise involved in the agreement. Oppression results from unequal bargaining power when a contracting party has no meaningful choice but to accept the contract terms. Unfair surprise results from misleading bargaining conduct or other circumstances indicating that the parties’ consent was not an informed choice.

Thee trial and appellate Court found evidence of oppression. Thee residents were under severe pressure to sign the agreements since they were signed after they had paid for the mobilehome or deposited a large amount of money toward the purchase of the mobilehomes.

Evidence of unfair surprise was shown because although Westmont’s managers knew that many of the residents were not proficient in English, they did not explain the arbitration provision in Spanish or provide a Spanish language interpretation of it. They also failed to explain the import of the arbitration clause. In particular, they failed to inform the residents that they would be required to advance half the cost of arbitration and that their share of those costs would be between $2,500 to $5,000 per day.

Substantive Unconscionability

Substantive unconscionability relates to the fairness of the actual terms of the agreement and an assessment of whether they are overly harsh or one-sided.

Thee Penilla court concluded that the agreement was substantively unconscionable because it required the payment of an unaffordable fee to initiate the process. (The evidence was that most residents earned less than $3,000 per month and could not afford to advance $2,500 to $5,000 per day for arbitration fees.) Additionally, the arbitration clause limited damages to a one-year period from the date residents delivered their written demands or notice of intention to arbitrate and that it limited punitive damages to 2% of the owner’s equity in the park.

The Court declined to sever the provision relating to the prohibitively high arbitration costs, and allowed the parties to proceed with the remaining arbitration provision.

Nguyen v. Applied Medical Resources, a non-mobilehome case, was decided by a different Court of Appeal in October. This case was decided under the FAA, which the state court described as a “liberal federal policy favoring arbitration.”

It concluded that although the arbitration clause was presented as a “take or leave it” contract of adhesion, and that although English was not the plaintiff’s native language, that the degree of procedural un- conscionability was not strong or moderate but only “modest.”

The plaintiff also contended that the arbitration clause was substantively unconscionable because he was required to pay one-half of the arbitration fees. e Court severed that provision from the arbitration clause and ordered the defendant to pay all the costs of the arbitration other than those it would necessarily pay in a court proceeding. Other than the fee issue, it concluded that the agreement was not substantively unconscionable.

SUGGESTIONS

• It is well established that the FAA reflects a liberal Federal policy favoring arbitration and that the principle purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms. erefore, if the arbitration agreement specically provides that it is to be governed by the FAA it will be enforced unless it is subject to grounds such as the general principles of contract un- conscionability that would cause revocation of any contract. It seems apparent that, unlike California law, under Federal law, those 45 out of 60 plaintiffs in Penilla who signed arbitration agreements would have their claims subjected to arbitration in spite of the potential for inconsistent results under Code of Civil Procedure § 1281.2(c).

• FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. e phrase “involving commerce” in the FAA is the functional equivalent of the term “affecting commerce” which is a term of art that ordinarily signals the broadest permissible exercise of the Federal Commerce clause.

While it is expected that the residents, when objecting to an arbitration petition, will assert that it does not fall within the Interstate Commerce Clause, the parkowner should be prepared to argue, for example, that the park operation involves a channel or instrumentality of interstate commerce such as purchasing or receiving products from another State, the use of interstate telephones, etc.

•The arbitration clause should be drafted and presented in a manner that eliminates the potential for procedural and substantive unconscionability claims. Here are some suggestions:

(a) The arbitration provision should be clear, and not in- conspicuous or written in ne print, or hidden. We suggest that the arbitration provision be clearly written in large letters, preferably on a separate document that requires separate signatures of the parties.

(b) It should not be presented on a “take it or leave it” basis. The park manager should present it as optional and residents should not be denied tenancy in the park if they reject arbitration.

(c) The parkowners should bear all costs of arbitration other than those costs that would typically be charged in a court proceeding, e.g., ling fees.

(d) The arbitration agreement should not limit the remedy that would otherwise be avail- able in a Court of law. is does not mean that all remedies such as unlawful detainer or injunctions should be subject to arbitration. But the remedies that are arbitrable should not be more limited than if they were in a court of law.

This is far from a complete list. There are other relevant rules, i.e., whether to translate the lease into a foreign language, which equally applies to arbitration provisions. The objective is not to achieve perfection but to come closer to avoiding the horrible.

Special thanks to WMA 

◆ Arthur Grebow is a founding partner of Grebow and Rubin,
LLP. He has more than 35 years of experience
in real estate, manufactured housing, business litigation, appeals and corporate matters. Mr. Grebow may be reached by phone at 818.783.1100, or by email at agrebow@ grebowrubinlaw.com. 

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