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Some Inequality between the Parties to an Arbitration Agreement Does Not Render it Unconscionable When the Contract as a Whole Is Supported by Sufficient Mutual Consideration

ABSTRACT: The Supreme Court rules that an arbitration agreement in a sales agreement is not unconscionable where a vendor retains the right to proceed in Court on some claims it may have, while requiring the purchaser to bring all claims in arbitration, so long as the contract as a whole is supported by sufficient consideration and the purchases is not prevented from bringing defenses if claims are made in Court.

On May 26, 2015, the Missouri Supreme Court overturned a denial by the Circuit Court of Lincoln County, Missouri of an employer’s motion to dismiss or to stay and to compel arbitration in the case of Robert S. Eaton v. CMH Homes, Inc. No. SC94374. The Court ruled that the trial court erred in refusing to compel arbitration, because when determining whether consideration is adequate to support an arbitration agreement the trial court must look at the consideration given for the contract as a whole.

Facts

Robert Eaton entered into a contract with CMH Homes Inc. for the purchase of a manufactured home in 2009. The Eaton-CMH contract included an arbitration agreement. The arbitration agreement required Eaton to arbitrate all claims but gave CMH the option to bring suit in court for certain specified claims. The arbitration clause included an “anti-waiver” provision stating that CMH’s right to bring suit in court for the specifically identified claims did not constitute a waiver by either party to compel arbitration regarding any other dispute or remedy subject to arbitration in the contract.

CMH, pursuant to the contract, provided and installed the mobile home. In 2012, Eaton sued CMH over the sale of the manufactured home. CMH moved to dismiss or stay the court action and to compel arbitration based upon the arbitration provisions in the contract. The trial court overruled CMH’s motion, and CMH appealed.

Lack of Mutuality in an Agreement to Arbitrate Does Not Render an Agreement to Arbitrate Unconscionable.

On Appeal, Eaton argued that the differences between Eaton and CMH regarding the obligation to arbitrate rendered the agreement unconscionable. The U.S. Supreme Court has held that while the mere fact that a large company has utilized an arbitration provision in a consumer contract does not make it “unconscionable”, unconscionability is an allowed common law contract defense that state courts may recognize in determining whether an arbitration clause is valid. See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1746, 1750 (2011).

Under Missouri law, an agreement is unconscionable where there is “an inequality so strong, gross, and manifest that it must be impossible to state it to one with common sense without producing an exclamation at the inequality of it.” Missouri courts will look at procedural and substantive aspects of the contract provisions in question as a whole to determine unconscionability. Noting that courts will look to a contract as a whole to determine whether adequate consideration is given for an agreement to arbitrate,, the Court held that, since both parties exchanged consideration for the entire contract as a whole, the “lack of mutuality” between the parties vis-a-vis the ability to bring suit rather than resort solely to arbitration did not render the arbitration provision void. Noting that an agreement to arbitrate lacks consideration when it is subject to unilateral change and the return promise purportedly made is effectively illusory, the fact that both parties exchanged consideration for the entire contract – Eaton paid the purchase price and CMS provided the mobile home – clearly placed this matter squarely outside the realm of unconscionability despite the lack of mutuality regarding the arbitration clause.

Although the Contract’s Waiver of Defenses Provision Is Unconscionable, This Does Not Void the Arbitration Provision Because the Unconscionable Provision Is Severable.

The Court additionally ruled that, although the “anti-waiver” provision in the contract was unconscionable, this did not void the arbitration agreement because it was severable. The Court ruled that the “anti-waiver” provision was unconscionable because it potentially placed Eaton into the untenable position, if CMH were to make claims against Eaton in Court, of submitting all claims, including counterclaims and affirmative defenses, to arbitration while CMH proceeded with claims against Eaton in Court, risking inconsistent results and precluding Eaton from asserting defenses to claims made in Court.

Severability of a contract clause depends upon the facts and circumstances of each case and depends largely upon the intent of the parties. The agreement at issue in this matter contained a severability clause, and Missouri courts will enforce these clauses when the provision at issue is “not a necessary part of the contract.” 

The Court Also Disregarded Eaton’s Arguments That a Choice of Arbitrator Provision and The Contract, as a Contract of Adhesion, Voided the Arbitration Provision.

Arbitration agreements are not required to give both sides in equal roles in selecting an arbitrator. As long as the arbitrator selection process in the agreement protects against the selection of a biased arbitrator and does not prevent the parties from actually entering into the arbitration, it will not be disturbed by the Court.

Also, a contract with an “adhesive” or “take-it-or-leave-it” nature does not necessarily render an arbitration provision therein void. As long as adequate consideration is evident, as noted herein, the agreement will not be invalidated.

Conclusion

This ruling is notable in that, as long as an agreement to arbitrate is supported by sufficient mutual consideration as a whole, the imposition of different or unequal burdens and responsibilities under the agreement will not render it void.

You can read a previous post on arbitrability cases here.