DONALD W. AND LINDA L. GONSKI, HUSBAND AND WIFE, PETITIONERS, v. THE SECOND JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA, IN AND FOR THE COUNTY OF WASHOE, AND THE HONORABLE STEVEN P. ELLIOTT, DISTRICT JUDGE, RESPONDENTS, AND PN II, INC., A NEVADA CORPORATION DBA PULTE HOMES OF NEVADA, REAL PARTY IN INTEREST.
No. 53414
Supreme Court of Nevada
December 30, 2010
245 P.3d 1164
551
Lee, Hernandez, Brooks, Garofalo & Blаke, APC, and David S. Lee, Natasha L. Brooks, and Charlene N. Renwick, Las Vegas, for Real Party in Interest.
OPINION
By the Court, DOUGLAS, J.:
This original writ proceeding involves real party in interest‘s attempt to enforce two arbitration provisions that it drafted with respect to petitioners’ purchase of a residential home in Reno, Nevada. Petitioners argue that the two arbitration clauses at issue, one of which was in the purchase agreement and the other of which was contained in a limited warranty, are unconscionable, and thus unenforceable, for a variety of reasons. Most significantly, petitioners assert that the arbitration provisions waived statutory remedies and failеd to fully and clearly inform petitioners of the significant rights being forfeited. The district court disagreed, however, and compelled arbitration, causing petitioners to seek this court‘s review.
We conclude that the arbitration provisions at issue are unconscionable as to several aspects that, taken together, demonstrate that petitioners were not made fully aware, or given the opportunity to become aware, of the provisions’ terms. In particular, the circumstances under which the provisions were signed, combined with their nonhighlighted nature, failed to provide petitioners with a meaningful opportunity to agree to the arbitration terms. Also, the first provision misleadingly suggested that real party in interest would pay the arbitration costs, while the second document, purportedly incorporated into the first, required petitioners to pay the initial arbitration costs. And finally and most significantly, the provisions’ confusing language suggested that
In April 2004, petitioners Donald and Linda Gonski signed a purchase agreement for a home located in an age-restricted subdivision developed by real party in interest PN II, Inc., d.b.a Pulte Homes of Nevada (Pulte Homes). Several months later, the Gonskis served Pulte Homes with an
In response to the Gonskis’ complaint, Pulte Homes moved to compel arbitration, pointing to the purchase agreement‘s arbitration clause:
ARBITRATION: Any controversy, claim or dispute arising out of or relating to this Agreement or Your purchase of the Home (other than claims under the Limited Warranty) shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (AAA) and the Federal Arbitration Act (Title 9 of the United States Code) and judgment rendered by the arbitrator(s) may be confirmed, entered and enforced
Purchaser‘s Initials ______ Purchaser‘s Initials ______ Seller‘s Initials ______
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in any court having jurisdiction. As a condition precedent to arbitration, the dispute shall first be mediated in accordance with the Construction Industry Mediation Rules of the AAA, or such other mediation service selected by Us. Claims under the Limited Warranty will be arbitrated in accordance with the arbitration provision set forth in the Limited Warranty.
In the event the claim relates to a construction defect, the construction dispute provisions (including good-faith mediation) of Chapter 40 of Nevada Revised Statutes shall also apply if аnd to the extent that the alleged defect is covered by the Limited Warranty.
The Gonskis opposed the motion to compel, pointing out that the purchase agreement purported to incorporate a second arbitration clause, applicable to construction defect claims, found on pages 9-10 of the home‘s separate limited warranty. The limited warranty‘s arbitration clause provides as follows:
DISPUTE SETTLEMENT
This Dispute Settlement provision sets forth the exclusive remedy of all disputes or controversies under this LIMITED WARRANTY.
....
If the Plan Administrator is unable to successfully mediate the dispute, the Plan Administrator will inform THE HOMEOWNER and THE BUILDER that the dispute is unresolved and that Binding Arbitration is provided as a remedy for resolving the dispute.
....
Any binding arbitration proceeding will be conducted pursuant to the United States Arbitration Act (
9 U.S.C. § 1 et seq. ) (“the Act“) by an independent, nationally recognized, arbitration organization designated by the Plan Administrator. The rules and procedures followed will be those under the Act, which may be supplemented by the arbitration organization‘s rules. A copy of the applicable rules and procedures will be delivered to you upon your request to the Plan Administrator.The arbitration will determine THE HOMEOWNER‘S, THE BUILDER‘s and (if applicable) the Insurer‘s rights and obligations under this LIMITED WARRANTY. These rights and obligations include, but are not limited to, those provided to THE HOMEOWNER or THE BUILDER by local, statе or federal statutes in connection with this LIMITED WARRANTY. The award of the arbitrator(s) will be final, binding and enforceable as to THE HOMEOWNER, THE BUILDER and (if applicable) the Insurer, except as modified or vacated in accordance with the Act or the arbitration organization‘s rules. A judgment rendered by the arbitrator(s) may be confirmed, entered and enforced in any court having jurisdiction.
In their opposition, the Gonskis argued that both the purchase agreement‘s and the limited warranty‘s arbitration provisions were unconscionable and, thus, unenforceable. In so arguing, they described the circumstances under which the purchase agreement was signed, noting that they had paid a $10,000 deрosit to join a lottery system to purchase a home in the specialized subdivision. A few days later, they were notified of an available residence and instructed to come to the office in five days. According to the Gonskis, when they arrived at the office, several other people were waiting; they were handed a stack of 25 preprinted forms, totaling over 469 papers, and told that if the documents were not signed and executed at that time, “there were several other people waiting to step in and purchase the residence.” The Gonskis asserted that they were not given adequate time to review the documents providеd to them or sufficient explanation of their contents, and they were directed to leave the documents in the office after
Aftеr considering the parties’ arguments, the district court determined that the arbitration provisions were not unconscionable and entered an order compelling arbitration pursuant to the purchase agreement‘s arbitration provision. In particular, the district court found that no great disparity in bargaining power existed, since the Gonskis could choose another developer or refuse to buy the residence; the Gonskis had failed to establish that Pulte Homes refused to negotiate the contract‘s terms; the Gonskis initialed the arbitration provision, which was not hidden or inconspicuous;2 and the arbitration provision‘s language was clear and unambiguоus. The court concluded that the arbitration clause did not limit the Gonskis’ rights “under Nevada law” because it expressly allowed application of
Consequently, the Gonskis filed the instant petition for a writ of mandamus, challenging the district court‘s order. As directed, Pulte Homes timely filed an answer to the petition, and the Gonskis were permitted to file a reply.
DISCUSSION
Writ petitions are the appropriate means to challenge district court orders compelling arbitration. Burch v. Dist. Ct., 118 Nev. 438, 441, 49 P.3d 647, 649 (2002).
The parties do not dispute that the arbitration clauses at issue are governed by the Federal Arbitration Act (FAA),
In Nevada also, strong public policy favors arbitration, and arbitration clauses are generally enforceable. D.R. Horton, 120 Nev. at 553, 96 P.3d at 1162. The policy of enforcing arbitration clauses arises, however, only after an enforceable agreement to arbitrate is found to exist. See, e.g., Baker v. Osborne Development Corp., 71 Cal. Rptr. 3d 854, 861 (Ct. App. 2008). Although the party seeking to enforce an arbitration clause bears the burden of proving the clause‘s valid existence, any party opposing arbitration must establish a defense to enforcement. D.R. Horton, 120 Nev. at 553, 96 P.3d at 1162; see also Woodside Homes of Cal. v. Superior Court, 132 Cal. Rptr. 2d 35, 39 (Ct. App. 2003); Motsinger v. Lithia Rose-FT, Inc., 156 P.3d 156, 159-60 (Or. Ct. App. 2007); Salley v. Option One Mortg. Corp., 925 A.2d 115, 119-20 (Pa. 2007); Dallas Cardiology Associates v. Mallick, 978 S.W.2d 209, 212 (Tex. App. 1998).
Here, the Gonskis assert that the general defense of unconscionability renders the arbitration provisions unenforceable.3 Un-
The Gonskis assert that the circumstances at signing—numerous documents and limited time for review, competition from other buyers, and unclear and understated terms—precluded them from even attempting to bargain over, and from truly agreeing to, the arbitration terms. Although Pulte Homes asserts that its sales process ensures careful review of the sales documents with purchasers, it does not dispute that the Gonskis were given a large number of documents to review within a relatively short time frame and that they were informed that other buyers were waiting in case they failed to timely execute the documents. Instead, Pulte Homes argues that its arbitration clauses are conspicuous and clear.
In D.R. Horton, this court provided that, “to be enforceable, an arbitration clause must at least be conspicuous and clearly put a purchaser on notice that he or she is waiving important rights under Nevada law.” 120 Nev. at 557, 96 P.3d at 1164. In that case, we agreed that the arbitration clause was inconspicuous because nothing drew the reader‘s attention to its importance—it was printed in very small font on the back side of the agreement and contained the same bolded and capitalized headings as the agreement‘s other paragraphs, even though certain other provisions were entirely capitalized. Id. at 551-52, 556, 96 P.3d at 1161, 1164. The clause‘s inconspicuousness, together with the district court‘s finding that the seller had misrepresented its nature and failed to put the homebuyers on notice that they were foregoing certain rights under Nevada law, such as the right to a jury trial and
Like the arbitration provision at issue in D.R. Horton, the purchase agreement‘s arbitration provision here in no way draws the reader‘s attention: it is printed in normal-sized font and located on page 15 of an 18-page document and in the midst of identically formatted paragraphs, even though other paragraрhs and sen-
Moreover, with regard to the arbitration clause that specifically governs construction defect claims, the Gonskis received the limited warranty with a stack of other papers and were not required to initial or sign that they had read it. Like the purchase agreement‘s arbitration clause, the limited warranty‘s arbitration provision is not particularly called out on the pages. And although the limited warranty provision was mentioned in the purchase agreement‘s arbitration clause, neither that clause, nor any other in the purchase agreement, highlighted and clearly explained the limited warranty‘s arbitration provision and its binding effect. For instance, although the purchase agreement‘s arbitration provision points out that
Substantive unconscionability
At least two aspects of the arbitration clauses at issue are substantively unconscionable as to construction defect claims: their arbitration expense terms and the clauses’ misrepresentation and implied waiver of
Arbitration expenses
The purchase agreement is misleading as to arbitration expenses under the limited warranty. In the purchase agreement‘s clause labeled “ATTORNEYS’ FEES,” which immediately follows the arbitration clause, the agreement provides that Pulte Homes will ad-
Moreover, as the district court noted, the documents fail to mention the potentially high amount of the arbitration costs. While that failure alone does not amount to substantive unconscionability, D.R. Horton, 120 Nev. at 559, 96 P.3d at 1166 (stating that “the absence of language disclosing the potential arbitration costs and fees, standing alone, may not render an arbitration provision unenforceable“), in this instance, the plan administrator is to determine the arbitration organization, and thus, the Gonskis were apparently unable to estimate potential costs at the time of signing, since they had to ask the plan administrator for a copy of the applicable arbitration rules. In D.R. Horton, this court noted its agreement with a Ninth Circuit ruling that invalidated a provision, in part because it required the arbitrating parties to split the fees. 120 Nev. at 557-58, 96 P.3d at 1165 (citing Ting v. AT&T, 319 F.3d 1126, 1148-49 (9th Cir. 2003)). Here, the Gonskis were not required merely to split the fees, but to pay the fees up front. Thus, the limited warranty‘s arbitration provision is substantively unconscionable because it required the Gonskis to pay the initial arbitration costs.
As we have previously pointed out,
In this case, the purchase agreement arbitration provision states that, with respect to construction defect claims,
In Armendariz v. Foundation Health Pyschcare, 6 P.3d 669, 679-80 (Cal. 2000), the California Supreme Court analyzed an arbitration agreement‘s applicability to unwaivable statutory rights in light of U.S. Supreme Court language on the subject:
Assuming an adequate arbitral forum, we agree with the Supreme Court that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” [quoting Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985)] .... That is, [the U.S. Supreme Court‘s language] sets a standard by which arbitration agreements and practices are to be measured, and disallows forms of arbitration that in fact compel claimants to forfeit certain substantive statutory rights.
Like the California court, we agree that arbitration agreements cannot be used to avoid rights and liabilities imposed by statute when doing so would violate the public policy of this state. Kindred v. Dist. Ct., 116 Nev. 405, 414, 996 P.2d 903, 909 (2000) (citing Mitsubishi Motors, 473 U.S. at 628). Indeed, contract terms that violate public policy are often one-sided in favor of the more powerful party, rendering them substantively unconscionable. See, e.g., State Farm Mut. Auto. Ins. v. Hinkel, 87 Nev. 478, 481-82, 488 P.2d 1151, 1153 (1971) (discussing a contractual exclusionary clause in light of Nevada public protections under insurance statutes and noting that “[i]t was not the intent of the legislature to require the appellant to offer protection with one hand and then take a part of it away with the other“); 8 Richard A. Lord, Williston on Contracts § 18:10 (4th ed. 2010) (pointing out that substantively unconscionable terms are those that “are unreasonably favorable to the more powerful party, such as terms that impair the integrity of the bargaining process or otherwise contravene the public interest or public policy“).
Further, even with respect to covered claims, the arbitration provisions impermissibly fail to preserve the Gonskis’ statutory rights. Although the purchase agreement‘s arbitration provision states that
Based on the above, significant substantive unconscionability exists. Such substantive unconscionability tips the balance so that the arbitration clauses governing the Gonskis’ construction defect claims must be declared unconscionable. Accordingly, the district court manifestly abused its discretion in compelling arbitration.
CONCLUSION
While the procedural unconscionability stemming from the circumstances at signing and the failure to highlight the arbitration provisions is slight, the provisions’ failure to adequately address the arbitration costs and disregard of
HARDESTY, J., concurs.
PICKERING, J., concurring in part and dissenting in part:
I agree that D.R. Horton, Inc. v. Green, 120 Nev. 549, 553, 96 P.3d 1159, 1162 (2004), requires reversal of the order summarily compelling arbitration. However, I write separatеly to emphasize that the limited warranty‘s arbitration provision contains a delegation clause that appears to commit the decision of “whether an issue should be submitted to binding arbitration” to the arbitrator, in addition to specifying application of the Federal Arbitration Act (FAA),
The Supreme Court decided Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), after the briefing in this case concluded. Rent-A-Center rejects a Nevada-law-based unconscionability challenge to the enforceability under the FAA of an arbitration agreement containing a delegation clause, holding that unless the party contesting arbitration “challenged the delegation provision specifically, we must treat it as valid . . . and must enforce it . . . , leaving any challenge to the validity of the [Arbitratiоn] Agreement as a whole for the arbitrator.” Id. at 72. Using arbitration to decide whether arbitration is appropriate seems counter-intuitive, but the Supreme Court has held that such clauses are enforceable if the parties clearly agreed to it. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-85 (2002).
The majority denies that the delegation clause is before this court and concludes that, even if it is, the evidence does not clearly and unmistakably show that the parties agreed to arbitrate the enforceability of the arbitration provisions. But the issue is before this court because the Gonskis are challenging the arbitration agreement as a whole, which includes the delegation clause. Althоugh as-yet factually undeveloped, the written agreement shows that the parties appear clearly to have agreed to arbitrate enforceability of the arbitration provisions. Thus, the limited warranty states:
This Dispute Settlement provision sets forth the exclusive remedy of all disputes or controversies under this LIMITED WARRANTY.
If the Plan Administrator is unable to successfully mediate the dispute, the Plan Administrator will inform THE HOMEOWNER
and THE BUILDER that the dispute is unresolved and that Binding Arbitration is provided as a remedy for resolving the dispute:* These disputes may include, but are not limited to:
. . . . 5. Whether an issue should be submitted to binding arbitration.
The Gonskis agreed to this provision by signing the purchase agreement incorporating the limited warranty.
The majority finds substantive unconscionability in that the arbitration agreement limits the application of
The Gonskis never explicitly challenged the delegation clause, only the agreement to arbitrate. Although Rent-A-Center did not permit Jackson to refocus his argument on the delegation clause specifically, that aspect of the decision appears tied to prudential concerns unique to certiorari practice before the Supreme Court, not the FAA itself. And, while the Gonskis did not focus on the delegation clause, neither did Pulte. On this record, I would not reverse outright. Instead, I would reverse and rеmand for further briefing and argument on whether the agreements contain an enforceable delegation clause under Rent-A-Center. Judicial findings on other matters should abide resolution of the threshold Rent-A-Center issue as to forum.