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Summer 2011 Performance Test

PT-B: David v. Sovereign Auto Store, Inc.

Instructions, File and Library: PT-B David v. Sovereign Auto Store, Inc. 320 KB

STATEMENT OF FACTS
The sales agreement between the parties contains the following provisions:
         A. Parties agree that all disputes shall be resolved by binding arbitration by on arbitrator selected by the Dealer, with the consent of the Purchaser.
         B. The consumer is limited to arbitration, but that Dealer may proceed with a court action in the event Purchaser fails to pay sums due under the Agreement.
         C. Parties waive right to jury trial in court action.
         D. Cost of arbitration shall be borne equally, however, the arbitrator may order the losing party to pay the prevailing party’s costs.
         E. Purchaser’s failure to pay on the note or bouncing a check or repossession of auto is not subject to arbitration.
         F. Damages are limited to the total amount paid by Purchaser for the vehicle plus any other provable economic loss as determined in sole discretion of arbitrator.

ARGUMENT

I. BECAUSE PUBLIC POLICY PROTECTS SALES CONTRACTS JUST AS IT DOES EMPLOYMENT CONTRACTS, THE THREE MINIMUM REQUIREMENTS SET FORTH IN MEDINA SHOULD APPLY TO THIS CONTRACT.

In Medina, the court said that the law covering employment contracts exists to protect broad public polices of non discrimination and employment. For that reason, there are three minimum requirements arbitration agreements must meet in employment contracts.

In our case, the sales contract is covered by the Unfair Trade Practices Act (UTPA) which also exists to protect the public interest against misrepresentation in sales and leases. Because both laws exist to protect the public interest, the Court should apply the same minimum requirements to the sales arbitration agreement as it would apply under Medina to employment contracts.

II. BECAUSE UNDER GENERAL PRINCIPLES APPLICABLE TO ALL CONTRACTS, CONTRACTS THAT ARE PROCEDURALLY AND SUBSTANTIVELY UNCONSCIONABLE ARE UNENFORCEABLE, THE SALES CONTRACT IS UNENFORCEABLE.

The Medina court also considered objections to mandatory arbitration that apply to any type of claim. These are procedural and substantive unconscionability. A contract is procedurally unconscionable when it contains oppression and unfair surprise. A contract is substantively unconscionable when the results are overly harsh and one-sided.

The sales contract states that the parties agree that all disputes shall be resolved by binding arbitration. The contract also states in capital letters: “You acknowledge that this purchase agreement contains an agreement to arbitrate disputes and that you have read the arbitration provision and you agree to its terms.”

Therefore, the sales contract has a mandatory arbitration clause and is thus subject to the court’s scrutiny for unconscionability.

Even if the court does not adopt the Medina three requirements to the sales contract, we will show that the sales contract is both procedurally and substantively unconscionable.

III. THE SALES CONTRACT LIMITS MR. DAVID’S REMEDIES, EMPOWERS THE DEALER TO SELECT THE ARBITRATOR AND DOES NOT DISCLOSE THE COSTS OF ARBITRATION, THUS FAILING ALL THREE MINIMUM REQUIREMENTS OF FAIRNESS.

The Medina court announced the following requirements for fair arbitration agreements, which we believe should apply equally to sales contracts:

A. Remedies should not be limited;
B. Neutral arbitrator; and
C. Party with the weaker bargaining strength should not bear the costs of arbitration and the cost to enter arbitration should be not prohibitive.

The sales contract is both substantively and procedurally unconscionable on the same three grounds.

A. The sales contract limiting Mr. David to actual money damages and purporting to waive his rights to other remedies violates both the unwaivable remedies of the Unfair Trade Practices Act and public policy that prevents parties from immunity from fraud, making the provision unenforceable.

The Unfair Trade Practices Act (UTPA) states that it is a violation, whether or not any consumer is in fact misled, deceived or damaged, for any person to misrepresent a material fact that has a tendency to mislead; fail to state a material fact if such failure tends to mislead; or make or enforce unconscionable terms or provisions of sales or leases.

In the David-Sovereign Auto negotiation, the sales person told Mr. David that based on his pay stubs, he qualified for a loan of $389 per month, even though he told her the most he could afford was $200 per month. Mr. David said he was not told the total price of the car until the sales person presented him the contract. The price of the car was $19,955. He later learned that the Kelly Blue Book value for the car when he bought it was $9,775.  Mr. David attempted to refinance the car because he could not afford the payments.

The Sovereign sales person misrepresented the amount Mr. David could afford based on his pay stubs. She failed to state the value of the car, which the Sovereign Dealership inflated by double its blue book value.

Therefore, Sovereign has violated the UTPA.

The Act states that when there is a violation, the remedies provided in the Act may not be waived and include treble damages or $1,500 per violation whichever is greater; punitive damages; and an injunction against the use of the unlawful trade practice. The Act expressly states that the remedies available under the Act are not waivable by the consumer.

The sales contract limits Mr. David’s remedies to the payments he has made and any other provable economic damage. The contract states that Mr. David understands the rights he is waiving and he voluntarily does so.

Therefore, the damages limitation is unenforceable as against UPTA.

The Medina court gave a second ground for finding damages limitations unenforceable. It stated that contracts that exempt the parties from liability for fraud or willful injury or a violation of the law are against public policy and are unenforceable.

As discussed above, the sales person misrepresented material facts regarding the car sale. These are willful torts of misrepresentation and may also be fraud. The contract violates the UTPA law. Since Mr. David can only sue for money he paid for the car and other provable economic damages, the contract exempts the Dealer from liability for fraud, willful torts and violations of the law. Public policy prevents such exemption and makes the damages limitation unenforceable.

Under both UTPA and also general public policy, limitation on remedies is unenforceable.

B. The sales contract gives Dealer the sole power to appoint the arbitrator creating a danger that the arbitrator will be closely allied to the Dealer and rendering the arbitration agreement harsh and one-sided and is therefore substantively unconscionable.

In Marshall, the Supreme Court of Columbia stated that when a contract is adhesive, that is, a contract where the weaker party is forced to accept standard terms that are nonnegotiable, the possibility of overreaching by the dominant contracting party causes the court to scrutinize contracts to ensure that the party of lesser bargaining power has a realistic and fair opportunity to prevail.

As to the sales contact being adhesive, the Medina court said that a contract that creates a one-sided obligation to submit to arbitration is substantively unconscionable and unenforceable. In our case, the sales person informed Mr. David that everyone who wants to buy a used car from Sovereign has to sign the same form contract.

In the Sovereign Dealer contract, the obligation to arbitrate appears to be bilateral, but, taking the several contract provisions together, that is deceptive.

The contract says first: “The parties agree that all disputes, claims or controversies arising from or relating to the purchaser’s purchase….shall be resolved by binding arbitration. But then it qualifies this by saying: “except that the Dealer may proceed with Court action in the event the Purchaser fails to pay any sums due under the Agreement.” 

The contract later states that if Mr. David fails to pay on the note or pays with a dishonored check and if the Dealer institutes a repossession these are not considered “disputes” under the contract and are thus not required to be arbitrated.

These exceptions swallow the rule. The only promise Mr. David is making under the contract is to make payments. The only thing Dealer could sue him for his failure to pay on the loan or to repossess the car. But these are the exceptions that permit the Dealer to sue instead of arbitrate. By placing these exceptions  on Dealer’s requirement to arbitrate, it gives the lie to the bilateral agreement to arbitrate. Mr. David has no alternative forum under the contract, while the dealer can choose to sue Mr. David in court.

In Medina, the employees but not the employer must arbitrate claims. The party required to submit claims to arbitration forgoes many rights and benefits associated with a judicial forum, while the party requiring waiver retains all the benefits and protections. The unilateral obligation, the court said, is so one sided as to be substantively unconscionable.

Here, the sales contract requires Mr. David to give up his right to a jury trial in court. This forces Mr. David to waive his constitutionally guaranteed right to a trial. Because the contract makes arbitration is only recourse for all disputes “arising under case law, statutory law and all other laws” it is stripping him of the protections and remedies provided by those laws.

Taken together, the appearance that the sales contract gives that both parties are required to arbitrate when in fact the exceptions completely relieve the Dealer of the requirement and forcing Mr. David for forgo the protections of a judicial forum, a jury trial, and to recover for the violation of laws that exist to protect him, makes the agreement to arbitrate a contract of adhesion.

In Marshall, the court said a contract is substantively unconscionable if it is overly harsh and one-sided. The court there found the standard form contracts were substantively unconscionable because they require arbitration of all disputes before the American Federation of Musicians (AFM). That organization is the union for one of the contracting parties. The court found that for the same reasons that designating a party to the contract to serve as arbitrator is substantively unconscionable, so also is designating as arbitrator one whose interests are so closely allied with one of the parties as to amount to the same thing.

Sovereign Auto, the party to the contract with superior bargaining power, provided Mr. David with a standard form contract that it uses in all its sales of used autos, requires resolution of all disputes by one arbitrator selected by the Dealer (See Paragraph A, above). Although the contract adds that the Dealer’s selection be “with the consent of the Purchaser,” that does not place the parties on an equal footing. First, the Dealer enters into perhaps thousands of such used car contracts every year and has an ongoing need for and relationship with arbitrators. An arbitrator who wants to continue to be selected by the Dealer is likely to find in favor of the Dealer. The purchaser, in Mr. David’s case and probably in most used-car sales, does not have equal resources or information with which to know whether the arbitrator selected is fair and does not have the means to name an alternative.

For these reasons, the arbitration provision’s selection of an arbitrator is harsh and overly one-sided, making it substantively unconscionable.

C. The arbitration clause requires Mr. David to bear the burden of half the cost of arbitration, risk paying the dealer’s costs if he loses, while failing to disclose that those fees are $1,500 at a minimum is oppressive and results in unfair surprise, making it procedurally unconscionable.

In Fillman quoting the Supreme Court in Medina, stated that a mandatory arbitration agreement may not require employees to pay arbitrators fees or expenses that make the forum inaccessible.

Although the dispute in Fillman concerned an employment agreement, the same inequality of bargaining position, choicelessness, and economic disparity exists between dealer and Mr. David.

In the agreement. quoted in “D,” above, the purchaser and dealer are to pay for the costs of arbitration equally. It also states that the arbitrator may award the loser to pay the prevailing party’s costs. However, the contract does not disclose the costs of arbitration. In the dealer’s letter demanding arbitration, Paula Burke, attorney for the dealer, stated that Mr. David would have to pay $250 filing fee to initiate arbitration and a minimum deposit of $1,500 to cover an estimated two day proceeding. Additional days would cost Mr. David $750 a day.

But that is not the end to the matter; Mr. David could lose—especially in front of an arbitrator hand-selected by the dealer—and be forced to pay the dealer’s costs, an amount that would surely be more than double the initial $1,750 outlay.

Since the reason Mr. David was unable to keep up his $359 per month car payment, an arbitration forum that would cost him nearly two thousand dollars at minimum and potentially much more, is effectively no forum at all.

The costs of arbitration are prohibitive to Mr. David. They were not revealed in the contract. The failure of the arbitration agreement to fully inform Mr. David of the costs is oppressive and an unfair surprise. Thus, it is procedurally unconscionable.

IV. BECAUSE THE SALES CONTRACT CONTAINS MULTIPLE
DEFECTS THAT PERMEATE THE ENTIRE AGREEMENT, SEVERANCE IS NOT POSSIBLE, MAKING THE ENTIRE CONTRACT UNENFORCEABLE.
In Medina, the court said that a court has three possible alternatives to unconscionable clauses. It can refuse to enforce the contract or enforce the remainder of the contract without the unconscionable clause, or it may limit the application of any unconscionable cause to avoid the unconscionable result.

The sales contract contains a savings clause in paragraph 2: “If any provision of the Agreement, or the application of such provision to any person or circumstance, shall be held ot be invalid, the remainder of this Agreement shall not be affected.” Dealer will certainly argue that the contract is still enforceable.

But it is not the court’s job to rewrite a contract in order to save it. When the agreement is permeated by unconscionability, the best alternative is to refuse to enforce the contract in its entirety.

The Medina court said two factors weigh against merely severing the unlawful provisions to save the contract. First, the arbitration agreement contains more than one unlawful provisions  Second, the unconscionable provisions permeate the entire contract.

As to multiple defects, the court gave as an example an unlawful damages provision and an unconscionable unilateral arbitration clause. As we have shown, the Sovereign contract limits all but actual money damages and prevents the consumer from asserting remedies guaranteed him under the Unfair Trade Practices Act. The contract mandates only the consumer to arbitrate all claims and permits the Dealer to sue in court for the consumer’s nonpayment

The second factor, unconscionability permeating the entire contract is also present here. . In the statement of facts, six unconscionable defects in this contract are listed. When the unconscionability is so widespread, the offending provisions cannot be stricken to save the remainder of the contract. The court’s job would instead amount to rewriting the entire contract to save it. This the court cannot and should not do.

FOR THE FOREGOING REASONS, we ask the court to refuse to enforce the contract in its entirety.

Answers © 2011 Vivian Dempsey, The Writing Edge™ All rights reserved.

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