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From the Desk of Gordon C. Klug:
Contracts are the glue that keeps our modern society from falling into chaos. Contracts are also only as good as our society’s willingness to enforce them. It is absolutely vital for a stable marketplace to be supported by agreements that the parties can rely upon and are enforceable in a Court of Law. In many commercial contracts it is common for the parties to include a promise how they will resolve a dispute, should one arise under the contract. Today, many parties include in their contracts arbitration clauses requiring that parties resolve disputes in arbitration rather than in court. In this case, the Washington Appellate Court considered whether an arbitration clause in a fraternity membership agreement was unconscionable and, if not, whether that agreement covered claims that predated when the contract was signed.
The Washington Court of Appeals held that the trial court erred in denying a motion to compel arbitration without first having an evidentiary hearing, because the facts were insufficient to support a finding that the arbitration agreement was unconscionable.
Cornelius v. Alpha Kappa Lambda, et al., Wn. App. No 82264-1-1 (Nov. 8, 2021).
Eighteen-year-old Austin Cornelius was a freshman at Washington State University attempting to pledge with the Alpha Kappa Lambda Fraternity. After becoming a member, other fraternity members hazed Mr. Cornelius leading to his hospitalization for alcohol intoxication. Upon joining the fraternity, Alpha Kappa Lambda required Mr. Cornelius to sign a New Member Agreement (“Agreement”) which included a commitment to resolve all disputes via arbitration. Mr. Cornelius signed the Agreement at the urging of senior members of the fraternity late one evening in the library. The arbitration clause was on the last page of the contract and listed the types of claims that would be subject to arbitration.
Mr. Cornelius signed the Agreement within 12 minutes of first looking at the document. Almost three years later he filed a negligence lawsuit against Alpha Kappa Lambda in Washington State Court. The Fraternity moved to enforce the arbitration clause, and Mr. Cornelius opposed arbitration, arguing that the arbitration clause was unconscionable. The trial court denied Alpha Kappa Lambda’s motion to compel arbitration without holding an evidentiary hearing finding that the Agreement was unconscionable. The Fraternity appealed.
When a party in a case moves to compel arbitration, the party must show that a written agreement to arbitrate exists and that the contract at issue involves interstate commerce. Walters v. A.A.A. Waterproofing, Inc., 120 Wn. App. 354, 358 (2004). Once this threshold requirement is met, the party opposing arbitration must show that the arbitration clause is unenforceable. Gandee v. LDL Freedom Enters., Inc., 176 Wn2d 598, 602-03 (2013). When the validity of an agreement to arbitrate is challenged, courts apply ordinary state contract law. McKee v. AT&T Corp., 164 Wn2d 372, 383 (2008). Courts consider (1) whether the arbitration agreement is valid and (2) whether the agreement encompasses the claims asserted when reviewing a motion to compel arbitration. Cox v. Kroger Co, 2 Wn. App. 2d 395, 404 (2018).
General contract defenses such as unconscionability may invalidate arbitration agreements. Procedural unconscionability is the lack of a meaningful choice, considering all the circumstances surrounding the transaction. Courts consider the following when determining whether an agreement is procedurally unconscionable: (1) the manner in which the contract was entered, (2) whether the signatory had a reasonable opportunity to understand the terms of the contract, and (3) whether the important terms of the contract are a hidden maze of fine print. Burnett v. Pagliacci Pizza, Inc., 196 Wn2d 38, 54 (2020). Adhesion contracts are standard-form contracts presented on a “take it or leave it basis” by a party with disproportionately more bargaining power. Zuver v. Airtouch Commc’ns, Inc., 153 Wn.2d 293, 305 (2004). Adhesion contracts may be procedurally unconscionable but are not necessarily substantively unconscionable.
Mr. Cornelius argued that the circumstances surrounding his signing of the Agreement deprived him of a meaningful opportunity to read and understand the Agreement. The Court looked at the time he had to consider the Agreement, whether he had an explanation of what the Agreement contained, and whether he was allowed to ask questions about the Agreement to determine whether the Agreement was “procedurally unconscionable.” The Appellate Court held that there was insufficient evidence to show how much time Mr. Cornelius had to consider the Agreement because there is no hard rule as to how much time is enough. Further, the Court concluded that there was no requirement that the Fraternity explain the Agreement to Mr. Cornelius. Since Mr. Cornelius provided no proof that he asked any questions about the Agreement, there was no evidence on appeal to show that he had insufficient time to complete a fair review before signing the Agreement containing the arbitration clause.
Next, the Court considered whether the essential terms of the arbitration clause were hidden in the Agreement. The Court held that since the arbitration clause was clearly identified in the Agreement and stated the types of claims that would be submitted to arbitration, the arbitration clause was not hidden.
Mr. Cornelius next argued that the Agreement was an unlawful adhesion contract because he had no opportunity to negotiate the terms. He said he was presented with a “take it or leave it” contract and that, if he did not sign the Agreement, he would be forced to move out of the Fraternity. The fact that Mr. Cornelius could not negotiate the terms of the Agreement was not determinative. The Court noted that, even if it is an adhesion contract, Mr. Cornelius could have chosen to join a different fraternity. The Court also held that there was insufficient evidence of unequal bargaining power to support a finding that the Agreement was unconscionable.
Lastly, some of Mr. Cornelius’ claims arose before he signed the Agreement. Despite this fact, the Court held that the Agreement was broad enough to encompass Mr. Cornelius’s claims that occurred before the execution of the Agreement. Washington courts had never addressed the issue of retroactivity of an arbitration clause. Relying on cases from other states, the Washington State Appellate Court held that absent language in an agreement to the contrary, a retroactive application of an arbitration agreement is permitted. In other words, the Court will apply the terms of an agreement to claims that arose before signing the contract unless the agreement states otherwise. In this case the claims of negligence Mr. Cornelius may have against the Fraternity that arose before he signed the Agreement would also be subject to arbitration.
The Court reversed and remanded the trial court’s denial of arbitration for an evidentiary hearing to determine if the Agreement was unconscionable.
The Big Picture:
Washington Courts have a long policy of favoring arbitration and will look to the terms of an arbitration clause to ascertain the scope of the agreement, and the parties’ intent to arbitrate. If there is an ambiguity the Courts will resolve it in favor of arbitration. Adhesion contracts (agreements that are presented to a party on a “take it or leave it basis”) are not necessarily unlawful in Washington. Washington Courts will not void a contract simply because the agreement contains “fine print” or was offered to a party on a “take it or leave it” basis. The Courts rarely invalidate contracts because they are claimed to be an “adhesion” agreement.