Arbitration provision: enforceable or unconscionable?

Arbitration is when parties submit their disagreement to a neutral third party for a binding decision instead of going to court.  If a dispute is subject to an arbitration provision, one basis for avoiding arbitration is demonstrating that the arbitration provision is unconscionable.

For example, in Zubek v. Dearborn, 2019-Ohio-3765 (8th Dist. 2019), a homeowner retained an insulation company to insulate his house.  The insulation contract included an arbitration provision.  After the insulation work was performed, disputes arose regarding the quality of the work and whether the work had caused structural damage to the house.  The homeowner wanted to resolve the dispute in court.  The insulation company wanted to resolve the dispute in arbitration.  Not surprisingly, after the homeowner filed a complaint in court, the insulation company asked the court to stay the litigation and enforce the arbitration provision.  The homeowner opposed the effort to force arbitration by contending the contract’s arbitration provision was unconscionable.

Ohio’s Eighth District Court of Appeals held that for the arbitration provision to be set aside as unconscionable, it must be both (a) procedurally unconscionable and (b) substantively unconscionable.  Procedural unconscionability looks at the circumstances of entering into the contract and whether it was understandable or a maze of fine print – e.g. “the parties’ age, education, intelligence, business acumen and experience, who drafted the contract, whether alterations in the printed terms were possible, and whether there were alternative sources of supply for the goods at issue.”  Id.  Substantive unconscionability looks at whether the contract term is unfair and unreasonable – e.g. whether the term itself is “commercially reasonable.”  Id.

On the facts before it, the appellate court held the arbitration provision was not procedurally unconscionable because:  (1) the contract was only 2 pages long; (2) the arbitration provision was set out in bold letters and underlined; (3) the homeowner had been involved in a previous a arbitration and knew what arbitration was; (4) the homeowner was asked to read the contract before signing and had the opportunity to read and ask questions; (5) the homeowner knew that he had 3 days after signing to further review and cancel the contract; (6) the homeowner knew there were other insulation contractors available in the area; (7) the homeowner acknowledged the arbitration language was clear; (8) the homeowner acknowledged that by signing he had agreed to the provision; and (9) the insulation company testified it went over the arbitration provision with customers before signing.

The appellate court also held the arbitration provision was not substantively unconscionable.  Although the court recognized filing fees could make an arbitration provision substantively unconscionable, the court was not persuaded the American Arbitration Association filing fees at issue were so high as to render the clause unconscionable.  The court found that the homeowner had not shown the arbitration fees exceeded the cost of litigation or were unduly burdensome given his financial situation.  The court was also not persuaded that the homeowner had less relief available to him in arbitration than in court.

In the end, the court in Zubek found the arbitration provision was neither procedurally or substantively unconscionable, and that it should be enforced.

Schwandner Law Firm LLC is a construction law firm in Cincinnati, Ohio.  If you would like the help of a construction lawyer for arbitration or other issues, the firm can be reached here.