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Arbitration Clause Deemed Unconscionable on Appeal Enforceability Overturned by Mississippi Supreme Court

By: Joe Farsetta

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.

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Arbitration Clause Deemed Unconscionable on Appeal Enforceability Overturned by Mississippi Supreme Court

By: Joe Farsetta
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