Saturday, October 24, 2009

Another arbitration clause struck down because: (1) contract without arbitration agreement formed before form with arbitration clause signed, and (2) the agreement was unconscionable with the arbitration clause because it only applied to homeowners.

Every case can turn on its own facts. Typically, an agreement to arbitrate is enforceable, but, as we have seen, there is a growing discomfort in the courts with online agreements to arbitrate in consumer transactions. But there can be problems too in face-to-face contracts, as a new case from the Mississippi Supreme Court demonstrates. As reported in factoidz, there were several reasons the court found to support its conclusion that the arbitration clause in a home inspection agreement was not enforceable. (A copy of the decision is here.) One is that the contract was formed orally and the inspection conducted before the home inspector even gave the written form containing the arbitration provision to the homeowner:
Many contracts contain arbitration clauses, and most folks don’t give them a second glance. Such was the case of a Mississippi inspector and his client in 2003. In the case at hand, the inspector spoke to his clients via telephone, discussed the inspection process and services offered, and agreed on a price. A time and date was set to perform the inspection. After the inspection, and prior to the delivery of the inspection report, the inspector asked the clients to sign an inspection agreement. Contained within the agreement was an arbitration clause. The clause compelled the client to utilize the services of the American Arbitration Association in the event the client brought an action against the inspector. The agreement was signed and the report delivered. As with many inspection-related disputes, defects were discovered several months later. The clients sued the inspector, and the inspector moved for summary judgment against the clients, as the inspection agreement compelled them to binding arbitration. The courts initially upheld the enforceability of the arbitration clause. However, the story did not end there, as the clients appealed the lower court decision, and eventually had the judgment overturned in 2005. That’s two-year worth of litigation and legal expenses. How could this happen? Well, there were several reasons.

1 comment:

  1. Anjela Freeman10/28/09, 11:22 AM

    I agree with the court on one point and disagree with another. With regard to the mandatory arbitration clause, I feel that it is substantively unconscionable because the inspector reserved the right to sue the client if the client failed to pay for the report, but the client was bound to arbitrate.

    As far as limitation of liability is concerned, however, I believe it is perfectly reasonable for a house inspector to limit his liability of a home's condition providing he discloses those area of the home not warrantied by his inspection and the client is aware of those limitations upon hiring the inspector.

    It is unreasonable to expect a home inspector to be wholly liable for the condition of a property in exchange for $265. Especially when home inspections rarely take more than a few hours to complete. Naturally, the inspector could not find every single defect, and one might argue that he should, in fact, not be liable for defects that are cosmetic in nature (floor tiles, fixtures, cleanliness, landscaping, decorative items, etc.), or areas of the home not easily accessible (crawlspaces, attics, inside walls,etc.) or those that pertain to lifespan or continued performance of appliances.

    The plaintiffs argue that there is no incentive for a home inspector to do a good job if he knows his liability is limited to the cost of the inspection. I yield to this argument but also wonder what would happen if courts, as a matter of policy or law, prevent home inspectors from limiting their liability. I believe the result will be an overall increase in the price of home inspections and the inability to find qualified inspectors willing to take on the financial liability.

    Ultimately, I think the main issue is whether the liability limit of $265 is reasonable. In my opion, probably not. But unlimited liability is equally unreasonable.