05.02.13

Newsletters,

Washington Supreme Court Case Alert: Enforceability of Arbitration and Attorney Fee Provisions in Consumer Contracts

The Washington Supreme Court recently issued a unanimous opinion that touches on three of the topics covered last year in our Ten Common Contracting Mistakes (or Unintended Consequences) presentation:  attorney fee shifting, forum selection and arbitration provisions.  While the Supreme Court’s recent ruling does not change any substantive law, it does raise the possibility of significant unintended consequences when entering contracts with consumers.  The bottom line is that before including one-sided terms in a contract, a party should consider whether those terms could invalidate an otherwise enforceable term such as an arbitration clause.

In Gandee v. Freedom Enterprises, Inc., 176 Wn.2d 158, 293 P.3d 1197 (2013), the Washington plaintiff entered a debt adjustment contract with the defendant. The contract’s arbitration clause (1) required any claim by the plaintiff to be submitted for arbitration in Orange County, California within thirty (30) days of when the claim arose, and (2) included a prevailing party attorney fees provision. Three years later, the plaintiff filed a putative class action lawsuit against the defendant in Washington state court, alleging that the defendant charged excessive fees in violation of Washington’s Debt Adjusting and Consumer Protection Acts. The defendant moved to stay the lawsuit and compel arbitration.

The plaintiffs challenged the arbitration clause as unconscionable, and the trial court agreed. The Supreme Court affirmed on appeal, reasoning that arbitration in California presented a financial hardship to the Washington plaintiff, and that a private statute of limitations of thirty (30) days was substantively unconscionable. The court also refused to enforce the prevailing party attorney fees provision as one-sided and overly harsh. According to the court, the plaintiff already had a right to recover attorney fees if she prevailed under the CPA, and therefore only the defendant stood to benefit from the attorney fees provision

Arbitration clauses are often viewed as potential shields to class action lawsuits.

The defendant in Gandee offered to waive any “objectionable” terms in its arbitration clause, presumably to try to force arbitration in Washington. Despite a severability clause, the court refused the defendant’s offer, concluding that permitting such waivers would encourage parties “to load up their arbitration agreements full of unconscionable terms and then, when challenged in court, offer a blanket waiver.” According to the court, such an approach “would encourage rather than discourage one-sided agreements and would lead to increased litigation.”

The Gandee decision does not undermine the principles that forum selection and attorney fee shifting provisions are generally enforceable between sophisticated commercial parties. This decision, however, does reinforce the point that potentially one-sided provisions should not be included merely because the opposing party is unlikely to object. Instead, it is important to consider the likelihood that such provisions will actually be enforced, and whether they may invalidate entire provisions of a contract.

A copy of Gandee is available by clicking on this link.

PDF of Newsletter.