Unconscionability and Arbitration

The Florida Supreme Court recently decided a case with broad implications regarding arbitration clauses and contract unconscionability. In Basulto v. Hialeah Auto., 39 Fla. L. Weekly S 140, 2014 Fla. LEXIS 1051 (Fla. Mar. 20, 2014), the court was faced with a situation in which a consumer who purchased an automobile from a commercial dealership signed documents requiring him to arbitrate his dispute over the contract. The consumer filed a court case, and the dealership moved to compel arbitration. The trial court denied the motion, finding that the arbitration agreement signed by the consumer was unconscionable. The Third DCA reversed, but the Supreme Court re-reversed, reinstating the trial court’s decision.

The opinion contains two basic points. First, in determining whether to compel arbitration, the trial court considers three questions: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived. If no valid written agreement to arbitrate exists, then a motion to compel arbitration cannot be granted, either under State law or under the Federal Arbitration Act. Second, despite some inconsistent statements among prior district court cases, Florida has adopted the sliding scale approach to unconscionability. Unconscionability is a common law doctrine that courts have used to prevent the enforcement of contractual provisions that are overreaches by one party to gain an unjust and undeserved advantage which it would be inequitable to permit him to enforce. Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. [That was the explanation of the doctrine from this case. Wikipedia explains it more clearly here.] Under the sliding scale approach, in order to invalidate a contract as unconscionable, the court must find both procedural unconscionability (the manner in which the contract was entered, including the relative bargaining power of the parties and their ability to know and understand the disputed contract terms) and substantive unconscionability (whether the more powerful party overreached and gained an unjust and undeserved advantage through unreasonably favorable terms which it would be inequitable to permit him to enforce). But the key is, under the sliding scale approach, unlike others, neither must be present to a particular degree, and the more of one there is, the less there needs to be of the other. For more on that, read Melissa T. Lonegrass, Finding Room for Fairness in Formalism – The Sliding Scale Approach to Unconscionability, 44 LOY. U. CHI. L.J. 1, 29–30 (2012). Interestingly, in this case, the procedural unconscionability was found by virtue of the fact that the arbitration provisions were written in English, while the consumer spoke only Spanish, that the dealer coerced the consumer to sign rapidly without reading, and that no dealer representative was able to convey to the consumer that by signing he was agreeing to arbitrate and to give up certain rights. Therefore, the Supreme Court invalidated the arbitration provision.

It is important to note that the U.S. Supreme Court recognized in Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (U.S. 2010), that arbitration clause provisions delegating the issue of the agreements enforceability, including issues of unconscionability, can be valid (unless the enforceability or unconscionability argument goes to the arbitration provision itself as opposed to the contract as a whole, in which case the issue is one for the Court to decide). There are two caveats: One, unlike other matters in which any doubt is resolved in favor of arbitration, in order to support a finding that the parties meant for gateway issues to be decided by the arbitrator, there must be “clear and unmistakable evidence” that the parties so intended. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). Two, such delegation provisions can be waived by conduct in participating in litigation. In Johnson v. KeyBank Nat’l Assoc (In re Checking Account Overdraft Litig.), 2014 U.S. App. LEXIS 11443 (11th Cir. Fla. June 18, 2014), the bank filed a motion to compel arbitration, and the consumer defended against the motion by arguing that the arbitration agreement was unconscionable. The bank participated in that litigation in court without arguing, until after the trial court had already denied the motion to compel arbitration, that the arbitration clause contained a provision delegating the issues of arbitrability and of unconscionability to the arbitrator. The Eleventh Circuit held that participating in litigation of that issue waived the right to have an arbitrator decide it

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