The Washington Supreme Court—in Gandee v. LDL Freedom Enterprises, Inc., 176 Wn.2d 598 (2013)—recently examined the validity and enforceability of a contractual arbitration provision and found, under the circumstances, that the clause was “unconscionable” and therefore unenforceable. Although the case did not occur within a construction setting, it nevertheless presents important lessons to consider when drafting, negotiating or complying with mandatory arbitration provisions in construction agreements.
In Gandee, a borrower, under a debt adjustment contract, brought suit against LDL Freedom Enterprises, Inc. (“Freedom”), seeking to recover damages based on alleged violations of the Washington Consumer Protection Act (the “CPA”) (RCW 19.86, et seq.) and the Debt Adjusting Act (RCW 18.28, et seq.). Id. at 601-02. Freedom moved to compel arbitration based on the following arbitration clause reflected in the parties’ agreement:
Arbitration. All disputes or claims between the parties related to this Agreement shall be submitted to binding arbitration in accordance with the rules of [the] American Arbitration Association within 30 days from the dispute date or claim. Any arbitration proceedings brought by Client shall take place in Orange County, California. Judgment upon the decision of the arbitrator may be entered into any court having jurisdiction thereof. The prevailing party in any action or proceeding related to this Agreement shall be entitled to recover reasonable legal fees and costs, including attorney’s fees which may be incurred.
Id. at 602 (brackets in original). In addition, the agreement contained a common “severability clause,” providing that “[i]f any of the above provisions are held to be invalid or unenforceable, the remaining provisions will not be affected.” Id.
The borrower opposed Freedom’s motion on the grounds that Freedom failed to move for arbitration in a timely manner and that the arbitration clause was unconscionable. See id. The trial court denied Freedom’s motion, finding that the motion was untimely and the venue requirement for the arbitration was unconscionable, and severed the attorneys’ fee clause. See id.
On appeal, the Washington Supreme Court examined whether the arbitration clause, as to the borrower’s interests, was unconscionable. In Washington, a term is “unconscionable” if it is “one-sided or overly harsh, shocking to the conscience, monstrously harsh, or exceedingly calloused.” Id. at 603 (internal quotation marks and citations omitted). The Court noted that “[s]everence is the usual remedy for substantively unconscionable terms, but where such terms ‘pervade’ an arbitration agreement, [the Court] refuse[s] to sever those provisions and [will] declare the entire agreement void.” Id. (citation omitted).
In support of its decision not to enforce the arbitration agreement, the Court in Gandee initially found that both the Washington and U.S. Supreme Courts recognized prohibitive-cost challenges to mandatory arbitration clauses. See id. at 604 (citing Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000), and Adler v. Fred Lind Manor, 153 Wn.2d 331 (2004)). “‘[A]n affidavit describing [the party’s] personal finances as well as fee information obtained from the American Arbitration Association [ ]’ can be sufficient to meet this burden” to demonstrate the unconscionability of an arbitration clause.” Id. (brackets in original) (quoting Adler, 153 Wn.2d at 353). The party seeking to compel arbitration then may present countervailing evidence as to “the likelihood of bearing those costs.” Id.
First, the Court found that the borrower had presented evidence sufficient to substantiate a prohibitive-cost defense to the arbitration provision, specifically showing through affidavits that the expenses to be incurred, including travel costs to Orange County, California and AAA fees, proved too costly relative to the borrower’s financial condition. See id. at 604-05.
Next, the Court examined the “loser-pays” provision of the arbitration clause, finding that the attorneys’ fees element of the clause serves to benefit only Freedom, and contrary to the legislative intent of the CPA, “effectively chills [the borrower’s] ability to bring suit under the CPA.” Id. at 606. Therefore, as the Court reasoned, the arbitration provision, in this respect, proved one-sided and overly harsh.
Lastly, the Court assessed the arbitration clause’s requirement to submit all disputes or claims to binding arbitration within 30 days from the dispute date or claim. See id. While the Court recognized that, “[g]enerally, a private statute of limitations will control over general statutes of limitation, unless prohibited by statute or public policy, or unless it is unreasonable,” the provision in the Gandee case unreasonably shortened the statute of limitations from four years under the CPA to 30 days. Id. (internal quotation marks and citations omitted). In Adler, the Court had previously held that “the shortening of the statute of limitations from three years to 180 days to be substantively unconscionable.” Id. at 607. To this end, the Court in Gandee held that the limitations period at issue was substantively unconscionable.
Having found three unconscionable terms within a four-sentence arbitration clause, the Court held that severance was not an option, as the unconscionable terms pervaded the agreement. See id. Accordingly, the Court held that the arbitration clause was unenforceable.
In light of the Gandee decision, parties drafting or negotiating terms of a construction contract should pay particular attention to the language used in any mandatory arbitration provision. If the provision clearly benefits one party over the other, dramatically shortens the limitations period for submitting disputes or claims and/or unreasonably deters a party from seeking legal relief, a court could very well find the entire clause unenforceable in a construction dispute.