When Is an Arbitration Clause Unconscionable? Not Often

Here at Construction Law Musings, I have discussed the pros and cons of various forms of Alternative Dispute Resolution (ADR), including arbitration.  I am a fan of most ADR, but less of one for arbitration than for mediation.  However, where the arbitration can be done under a good set of cost-containing rules and with an arbitrator that is experienced in construction, arbitration can help with the resolution of construction claims.  Of course, arbitration provisions in construction contracts are routinely upheld by the courts of Virginia with limited exceptions.  One of these exceptions is where the arbitration clause is unconscionable and therefore unenforceable.  A recent case out of the Western District of Virginia, Marroquin v. Dan Ryan Builders Mid-Atlantic LLC, shows how high a hurdle it is to get a court to invalidate an arbitration provision.

In this case, the Marroquins purchased a new construction home from the Defendants.  As is often the case in such purchase transactions, Defendant provided a limited warranty agreement (in this case provided by Quality Builders Warranty Corporation (“QBW”)) that along with the sales contract contained a mandatory arbitration provision.  The parties executed the limited warranty and the sale proceeded with the Marroquins taking possession.  Over the next year or so, the County inspector’s office issued several correction orders to Defendant, and the Marroquins, through counsel, identified numerous defects in construction, many of which they alleged to remain unremedied.  Needless to say, they sued for breach of statutory warranty and for breach of the limited warranty.  Defendant removed the case to Federal District Court and then moved to compel arbitration.

The main arbitration clause at issue, found in the QBW Warranty, stated that after a 4 step resolution process is completed:

disputed items shall be submitted for binding arbitration by QBW to Construction Arbitration Program, administered by DeMars & Associates Limited (CAP-Home), or such other independent arbitration service as may be designated by QBW, for resolution in accordance with the rules and regulations for home warranty disputes of CAP-Home or such other service.

The Marroquins contested the Motion to Compel Arbitration on the grounds that the arbitration clauses taken together were unconscionable and therefore unenforceable because QBW retained the sole right to designate the arbitration service and could therefore theoretically require arbitration anywhere in the U. S. thus effectively pricing them out of a remedy.  They further argued that the warranty provision was a contract of adhesion that held such an inequitable tilt of power to QBW that the arbitration provision was unenforceable.  The Court disagreed.

After determining that, absent unconscionability, the claims made by the Marroquins were subject to arbitration and the Federal Arbitration Act, the Court set out the test under Virginia law for an “unconscionable” contract provision:

Under Virginia law, a contract is unconscionable if it is “one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other.” The substantive terms of the contract must be so grossly inequitable that it “shocks the conscience.” The party asserting unconscionability of a contract has the burden of proving that the contract is unconscionable by clear and convincing evidence.  At the hearing, plaintiffs argued that the clauses are unconscionable because the clauses could have been drafted to be more fair to plaintiffs. That, however, is not the applicable standard. (citations omitted)

The Court then stated that the provision was not so grossly inequitable as to “shock the conscience.”  The Court also pointed out that the relevant arbitration provision allowed for the arbitration to be held at the Plaintiffs’ home and that the Marroquins did not provide any evidence at the hearing of grossly unequal bargaining power.

In sum, even where one party clearly has to consent to certain arbitration provisions and where the other party holds all of the cards, the only way to show such clauses are unconscionable is to show that only the deluded would enter into such an agreement.

As always, I recommend that you read the opinion in its entirety and let me know if any of this analysis is off base. I also highly recommend that you work with a qualified Virginia construction attorney to help evaluate the arbitration clauses in any contracts that you plan to execute.

I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.