One-Sided Arbitration Clause in Consumer Contract is Unconscionable and Unenforceable

We have frequently discussed the limits of contractual arbitration. In Cabatit v. Sunnova Energy Corporation et al., No. C089576 (Ct. App. Dec. 31, 2020), the Third District California Court of Appeals denied Defendant’s motion to compel arbitration ruling that the arbitration provisions were procedurally and substantively unconscionable.

Facts of the Case

This case concerned the lease of a solar system installed on the Plaintiffs’ roof. A Sunnova salesperson visited Daniel and Indiana Cabatit’s home to sell them solar products. The Cabatits chose a solar power lease plan, and the salesperson showed them Sunnova’s lease agreement on an electronic device. The salesperson told them that they would need to sign and initial the agreement before work could be done, but also said that they did not need to read it because he would go over the details. Quickly scrolling through the agreement, the salesperson showed them where to signature and initial.

Indiana speaks English but doesn’t understand technical or complicated terms. She signed and initialed the agreement as the salesperson scrolled through it, not understanding much of what he said. He never mentioned arbitration. After the salesperson left, the Cabatits never received a copy of the agreement until they had a dispute with Sunnova.

Cabatits discovered that Sunnova’s solar power installation had damaged their roof. The Cabatits sued Sunnova in San Joaquin County, alleging that Sunnova had damaged their roof installing the solar panels. Then, Sunnova removed the solar panels, and replaced the Cabatits’ damaged roof with inferior materials. The suit alleged violations of the California Home Improvement Law, Home Solicitation Law, Unfair Competition Law, and Consumer Legal Remedies Act, and sought to cancel the lease.

Sunnova filed a petition with the the trial court to compel contractual arbitration, citing the arbitration clause in the agreement. However, after considering the evidence, including Ms. Cabatit’s declaration describing the circumstances in which the Sunnova salesperson procured Plaintiffs’ signatures, the trial court denied the motion, finding that the arbitration clause was procedurally and substantively unconscionable. Specifically, the court found that the arbitration clause is unenforceable because it waived statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law. (McGill v. Citibank, N.A. (2017) 2 Cal.5th 945 (McGill).) Sunnova appealed to the California Court of Appeals.

Must an Arbitrator Decide If the Arbitration Clause Is Enforceable?

First, Sunnova argued to the Court of Appeal that an arbitrator should decide whether the arbitration clause was enforceable. (From a practical point of view, arbitrators are going to view the contractual arbitration provisions liberally). Usually, courts decide issues of enforceability unless the parties clearly delegate this issue to an arbitrator. Critically, Sunnova did not raise this issue in the trial court. The Court of Appeal found that Sunnova “forfeited consideration” of this issue. This is an excellent example of the reason that all legal arguments need to be made before the trial court.

The Arbitration Clause Is Found Procedurally and Substantively Unconscionable

Next, the Court of Appeals considered whether the arbitration clause was procedurally and substantively unconscionable. Unconscionability refers to “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”. (Sonic- Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1133 [citations and quotation marks omitted].) A trial court may refuse to enforce an arbitration clause if a party can show both prongs of unconscionability.

An arbitration clause is procedurally unconscionable if it is part of a contract of adhesion – a “‘standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’” (Armendariz
v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113.) Here, Sunnova prepared the agreement, it was “take it or leave it”, Indiana did not understand the salesperson’s technical terms, the salesperson quickly scrolled through the agreement, he never mentioned the arbitration clause, and the Cabatits did not receive a copy of the agreement before work started. The Court of Appeals concluded that these facts show procedural unconscionability. The Cabatits didn’t have any say in the language presented governing the binding arbitration provision.

Further, an arbitration clause is substantively unconscionable if it is “overly harsh, unduly oppressive, or so one-sided as to shock the conscience”. (See Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910.) Here, the agreement stated that the Cabatits had to arbitrate their claims, but Sunnova could file a lawsuit. The Cabatits have only limited court relief available (to confirm an arbitration award, for example), but Sunnova could go to court for most of its claims. As a result, the Court of Appeals concluded that these facts show the Sunnova arbitration clause was substantively unconscionable.

Because the Sunnova arbitration clause was both procedurally and substantively unconscionable, the Court of Appeals found that it was unenforceable. It did not consider if limitations on discovery and appeals in the clause mattered. It also did not consider whether the arbitration clause was unenforceable under the McGill rule because it waived statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law.

The Takeaway

Arbitration clauses need to be drafted to be fair to both sides if a business intends to later enforce it. When a dispute arises, litigation counsel needs to carefully evaluate the governing law which makes it difficult to enforce one-sided arbitration agreements.