Arbitration provisions: if you have to sneak it in, it probably is not enforceable

Arbitration provisions are found everywhere these days. Retailers and service providers are quite smitten with arbitration because they anticipate it will reduce litigation costs considerably. This overriding desire to arbitrate can lead to creative measures to secure a contract provision requiring arbitration. However, it is more important that any such provision is actually binding.

The recent Court of Appeals case, Paul Miller Ford, Inc. v. Rutherford, 2007-CA-000293-MR (Dec. 28, 2007)(NOTto be published) gives a great example of an unenforceable arbitration agreement. The actual language was not the problem:

ARBITRATION: Any claim or dispute arising out of or in any way relating to this contract, the negotiations, financing, sale or lease of the vehicle which is the subject of this contract, including any claim involving fraud or misrepresentation, must be resolved by binding arbitration administered by the Better Business Bureau of Central and Eastern Kentucky, Inc. in accordance with its rules. All arbitration proceedings shall be held in Lexington, Kentucky. The decision of the arbitrator(s) will be final, conclusive and binding on the parties to the arbitration and no party shall institute any suit with regard to the claim or dispute except to enforce the arbitration decision. Venue for any action to
enforce this arbitration agreement, or an arbitration decision shall be in Fayette County, Lexington, Kentucky.

The problem was that this was a paragraph near the bottom of a page that was styled as a questionnaire. Furthermore, there was no place for initials or a signature with this paragraph while other twelve paragraphs on the page did require initials.

The Court, in making a fact specific determination if this arbitration provision was unconscionable, found that the nature of the document containing the provision was “masuerading as [a] performance evaluation. . . .” Id. at 8. Basically, Rutherford did not voluntarily and knowingly agree to arbitration.

I have no idea why Paul Miller Ford decided it wise to try and slip an arbitration clause in on the customer. Perhaps an attorney advised them to do it this way. Paul Miller should ask for their money back if that is the case. Regardless, not only did this approach prevent the clause from being enforceable, it also engendered mistrust of their business practice in this area. A wiser, and more cost effective approach would be to offer straight up information about arbitration. Explain arbitration fully to the client and have them sign a clear statement agreeing to arbitration.

A business could make enforcement of the provision even more likely to be binding by offering additional consideration for signing the provision – such as an extra $100.00 off the price or a free oil change. This would be a cost saver since the business would garner the savings of arbitration with a highly enforceable provision.