Opinion by Judge Peter Messitte
Held: An arbitration clause in a contract may be unconscionable, and thus unenforceable, if there is stark inequality of bargaining power between the parties and the terms unreasonably favor one side over the other.
Note: In this case, the court applied Colorado law pursuant to the terms of the contract (which is substantively similar to Maryland law).
Facts: This case arises from a contract dispute between a church and a building supplies company. The church was located in Maryland; supplier was located in Colorado. The church was presented with a contract and told they had one day to sign because a pricing special would no longer be available. The church signed the contract with supplier which included an arbitration clause. The arbitration clause provided 1) that any arbitration hearing shall be held in Denver, 2) any challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party, and 3) the party initiating arbitration shall advance all costs thereof.
The church filed a breach of contract claim. The supplier filed a motion to dismiss and sought to enforce the venue clause, thus forcing the church into arbitrating the matter in Colorado. The church claimed that portions of the arbitration clause were unconscionable, specifically the venue and cost allocation provisions.
Analysis: Under Colorado law, unconscionability requires an overreaching on the part of one party (i.e. inequality of bargaining power or an absence of meaningful choice by the second party) and contract terms which unreasonably favor the first party. Factors relevant to an unconscionability analysis include:
"[A] standardized agreement executed by the parties of unequal bargaining strength; lack of opportunity to read or become familiar with the document before signing it; use of fine print in the portion of the contract containing the provision; absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; the terms of the contract, including substantive unfairness; the relationship of the parties, including factors of assent, unfair surprise and notice; and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect." quoting Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).
The Maryland case law governing unconscionability is similar to the Colorado law. In Walther v. Sovereign Bank, the Maryland Court of Appeals held that unconscionability requires both a procedural and substantive unfairness. 386 Md. 412 (2005). Procedural unfairness is evident by one party's lack of meaningful choice or unfair bargaining power. Substantive unfairness is evident by contractual terms that unreasonably favor the other party. Id.
In this case, the court, following Colorado law, found that the church was in an unfair bargaining position because the church representative who reviewed and signed the contract did not have business acumen or benefit of counsel. The court also found that the pressure to sign within one day added to the lack of meaningful choice. The court also found the terms of the arbitration clause unreasonably favored the supplier because of the economic hardships the church would incur by arbitrating in Colorado rather than in Maryland. The court also found the provision requiring the church to pay up front all costs of the arbitration and attorney's fees for the supplier was extremely unfair.
The full opinion is available in PDF.