Arbitration Clause Deemed Unconscionable on Appeal Enforceability Overturned by

Mississippi Supreme Court

Find Out Why…

Many times, in an effort to afford ourselves the maximum protection permitted by

contract law, inspectors include everything but the “kitchen sink” in their
inspection agreements. In this particular case, and in addition to some unforeseen
consequences in the follow-on processes associated with the arbitration clause,
one inspector found himself forced back into court.

Arbitration clauses are generally thought of as enforceable within common

contracts. Many contracts contain arbitration clauses, and most folks don’t give
them a second glance. Such was the case of a Mississippi inspector and his client
in 2003. In the case at hand, the inspector spoke to his clients via telephone,
discussed the inspection process and services offered, and agreed on a price. A
time and date was set to perform the inspection. After the inspection, and prior
to the delivery of the inspection report, the inspector asked the clients to sign
an inspection agreement. Contained within the agreement was an arbitration clause.
The clause compelled the client to utilize the services of the American
Arbitration Association in the event the client brought an action against the
inspector. The agreement was signed and the report delivered. As with many
inspection-related disputes, defects were discovered several months later. The
clients sued the inspector, and the inspector moved for summary judgment against
the clients, as the inspection agreement compelled them to binding arbitration.
The courts initially upheld the enforceability of the arbitration clause. However,
the story did not end there, as the clients appealed the lower court decision, and
eventually had the judgment overturned in 2005. That’s two-year worth of
litigation and legal expenses. How could this happen? Well, there were several
reasons.

A number of factors were weighed by the appellate court, resulting in the overturn
of the lower court’s ruling. One of the first things examined was the initial
conversation between the inspector and client. Most inspectors consider the
initial contact and discussion over price and scope as a simple sales pitch; why
one should choose your firm in favor of another. However, the court considered
this discussion and agreement over price, and a notice to proceed, as an oral
contract. In that initial discussion between the parties, an arbitration clause
was never mentioned to the client. Further complicating the matter was the fact
that the actual inspection agreement was signed after the inspection had been
performed. So, with these initial, but important steps, the notion of
unenforceability reared its ugly head, in that arbitration was neither discussed
during oral negotiations, nor pointed out in an agreement signed after the fact.
An important concept is noted here, in that the court was starting to look at
whether one party lacked the opportunity to study the contract and to inquire
about the contract terms. Considering that the majority of home inspectors meet
their clients immediately before the inspection begins, this situation technically
is the norm, as opposed to the exception. The concept of an oral agreement is also
most interesting, as the court brings another common practice of home inspectors
into the mix.

The court also found that the inspector and client were not in equal standing as
far as knowledge and bargaining power. Indeed, the contract itself may have
contained inconspicuous print (beware the fine print) and complex legalistic
language. Indeed, the “sophistication” of the parties also weighs into a
determination as to whether something may be enforceable. This very argument is
often heard of late as it pertains to sophisticated terms involving the
refinancing industry and the mortgage crisis, which is precisely why such
contracts have a window or time for review and re-consideration. Not so,
typically, when it comes to home inspection agreements.

Beyond these initial findings, other clauses ultimately made the court decide that
the contract was unconscionable. A lynch-pin in the client’s argument, and the
appellate courts findings, was that the arbitration clause, barring all else
decided so far, was one-sided.

How so? Well, on one breath, the Inspector limited the client to binding
arbitration, yet allowed the inspector to utilize the courts to recover money from
the clients in the event of non-payment. This contradiction may be more common
than anyone realizes. The old saying “what’s good for the goose is good for the
gander” had never been heard so loud and decisively. The fact was that the
inspector included a term which offered him certain rights available at law and
equity, while barring his client from seeking relief in a court of law. The
courts found this clause to be oppressive.

Further, the inspector had a limitation of liability clause in his contract.

Again, these clauses are almost universal in inspection agreements, except where
they may be barred by law. Often, these clauses are found to be enforceable, and
often they are not. In this case, not only did the court find this clause to be
unconscionable, they further went on to tie it into the arbitration clause itself.

In the agreement, the client was compelled to utilize the services of the American
Arbitration Association, which is a fine firm, it also has a specific fee
structure. At the time of the inspection, American
Arbitration Association used a sliding fee schedule, based on the value of the
suit. In this particular case, the fee to arbitrate far exceeded the value of the
inspection. At best, based on a limitation of liability, the client could only
recover $265. The cost to arbitrate at that time was at least $500, which was
undisclosed in the contract clause.

Beyond this, the inspection agreement also contained a statute of limitation

clause, limiting any action by the parties to one (1) year. Unfortunately, this
clause ran contrary to public law (Mississippi), which set an actual statue at
three (3) years.

In essence, the contradictory language contained within this agreement ultimately

gave the court enough latitude to conclude that it was oppressive and
unconscionable. The decision of the lower court was overturned, and the clients
were allowed to seek redress in a court of law.

Keep in mind that the case hadn’t even been discussed yet. Whether or not it had
merit was a discussion for another day. The events described were all based on the
applicability and interpretation of contract law as it pertained to clauses
contained within an inspection agreement.

If anything is to be learned from this expose, it is that rarely is anything

guaranteed in this world. Another important lesson is one of enforceability of any
contract. Often, inspectors include fine print. Many things contained in that fine
print contain legalese. Most clients have no opportunity to examine what they have
signed. Many times, an oral agreement of sorts is made via telephone. Inspectors
are often lax in when the agreement is signed. Agreements often contain limits of
liability clauses, which may be thrown out later. Indeed, there are many
provisions that inspectors include specifically designed to protect us, which may
be contradictory or not provide equality of avenues of relief for the parties. An
inspector’s own arbitration clause and “undisclosed” process and fee structures
may hamstring them in the end.
When choosing an arbitration clause or service, be sure that the process and fee
structures are not onerous to the client. Ensure that both parties utilize a
service that is qualified, cost-effective, and fair to everyone involved. Ensure
that the inspection agreement is disclosed at the time of discussion, that it is
signed prior to the engagement, and that the arbitration clause is initialed by
the client.

These are starting points for helping to ensure the enforceability of any
inspection agreement.

BY JOE FARSETTA, CMI

http://www.inspectionarbitrationservice.com

© Copyright 2009