Arbitration Clause on Back of Pre-Printed Auto Purchase Contract Is Unconscionable

by charlesjung

Mini Maint Page 1

Mini Maint Page 1 (Photo credit: Flyinace2000)

Yesterday, in Vargas v. SAI Monrovia B, Inc., No. B237257, __ Cal. App. 4th __ (2d Dist. June 4, 2013), a putative class action, the Second District revisited its holding in Sanchez v. Valencia Holding Co., LLC, 201 Cal.App.4th 74 (2012), review granted March 21, 2012, S199119.  In Sanchez the court held that a “Retail Installment Sale Contract” used to purchase an automobile is unconscionable and unenforceable.  In Vargas, the court again concluded that the identical sale contract does not require the arbitration of disputes between a purchaser and a car dealer because it is permeated by unconscionability.

The arbitration provision, entitled, “ARBITRATION CLAUSE,” was on the back at the bottom of the page, outlined by a black box; the arbitration provision was the last provision in the Sale Contract concerning the purchase of the vehicle; a provision related to the assignment of the contract appeared below it. The buyers’ final signatures appeared near the bottom of the front side. The only signature line on the back was at the very bottom of the page; it required the seller’s signature to assign the contract to a third party.

Slip Op. at 3.

The court found that the arbitration provision satisfies the two elements of procedural unconscionability: oppression and surprise.

Plaintiffs were presented with the Sale Contract on a take-it-or-leave-it basis. Its preprinted terms were not negotiable. The contract was a single two-sided page. The arbitration provision, which was printed on the back side, was unnoticeable to buyers who were told where to sign on the front side and were not given an opportunity to see that the contract had provisions on the back or to read the provisions on either side.

We conclude that the arbitration provision exhibited a high degree of procedural unconscionability. Because of the format of the Sale Contract and the way in which the finance manager controlled and directed its execution, the buyers knew nothing about the arbitration provision, placing the parties’ agreement to arbitrate on a weak legal foundation. Given the high degree of procedural unconscionability, plaintiffs were required to show a relatively lower degree of substantive unconscionability.

Id. at 17.

The court concluded that four clauses in the arbitration provision are substantively unconscionable.

First, if an arbitration award exceeds $100,000, the losing party may appeal the decision to a panel of three arbitrators. Second, an appeal is permitted if an award includes injunctive relief. Third, the appealing party must pay, in advance, “the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs.” Fourth, the provision exempts repossession from arbitration while requiring that a request for injunctive relief be submitted to arbitration. These clauses impose an unduly oppressive burden on buyers. In assessing unconscionability, we focus on the practical effect of a provision, not a facial interpretation.

Id. at 18-19.

Judges and Attorneys

Presiding Justice Robert M. Mallano delivered the opinion for the Court.  Associate Justice Jeffrey W. Johnson concurred, and Associate Justice Frances Rothschild concurred in the judgment.

Appeal from an order of the Superior Court of Los Angeles County, Judge Richard E. Rico.

Rosner, Barry & Babbitt, Hallen D. Rosner, Christopher P. Barry and Angela J. Smith for Plaintiffs and Appellants.

Arent Fox, Aaron H. Jacoby, Christian J. Scali, Victor P. Danhi; The Scali Law Firm and Christian J. Scali for Defendants and Respondents.