Enforceability of Arbitration Agreements

October 21, 2014 in Ohio Consumer Sales Practices Act (OCSPA), Ohio Courts by Brad Council

Ohio has a public policy favoring the enforcement of arbitration provisions in contracts and ORC 2711.01(A) provides that such provisions will be enforced unless grounds exist in law or equity for revocation of the contract. The Ohio Court of Appeals recently addressed the issue and looked at whether an arbitration provision in a consumer contract should be upheld in a suit alleging violations of the Consumer Sales Practices Act.

In Tamara Hedeen v. Autos Direct Online, Inc., the plaintiff alleged violations of the Ohio Consumer Sales Practices Act, fraud, and deceit arising from a contract to purchase a vehicle. 8th Dist. Cuyahoga No. 100582, 2014-Ohio-4200. Tamara Hedeen (“Hedeen”) purchased the vehicle online from Autos Direct Online (“ADO”) and discovered after delivery that the vehicle had been in an accident and had unrepaired damage. The contract signed by Hedeen included an arbitration agreement and ADO moved to stay proceedings pending arbitration. The trial court granted the motion and Hedeen appealed the decision. The Court of Appeals addressed five potential grounds for not enforcing the arbitration provision.

The Court of Appeals first addressed whether ADO waived its right to arbitrate by waiting five months to file its motion and by participating in discovery and pretrial hearings. A party may waive its right to arbitration if it acts inconsistently with that right. Such an inconsistency may be found in a delay requesting arbitration, the extent of participation in the litigation prior to requesting arbitration, the filing of a counterclaim without  a motion for a stay, or if the plaintiff would be prejudiced by the inconsistent acts. The Appeals Court determined that ADO did not waive its right to arbitrate as it participated in the litigation only as required by the court and moved to stay the proceedings before the litigation within 75 days of answering the complaint.

The Appeals Court then addressed whether ADO was required to attach authenticated evidence to its Motion to Stay Pending Arbitration. Hedeen cited case law indicating that a copy of the arbitration agreement must be included with the motion along with an affidavit stating that the arbitration agreement is the agreement that was signed. The Appeals Court found that case inapplicable as it was unclear if the parties agreed to arbitrate and an oral contract was involved. In this case, Hadeen inadvertently admitted that she signed the agreement and did not dispute the authenticity of the arbitration agreement or her signature on it. As such, the trial court had the discretion to admit the arbitration agreement into evidence.

Hedeen also argues that the arbitration agreement was procedurally and substantively unconscionable, both of which are required for an agreement to be found unconscionable. Procedural unconscionability occurs when no voluntary meeting of the minds was possible due to the circumstances of the execution and substantive unconscionability is found when the terms are found to not be commercially reasonable. Hadeen alleged that there was procedural unconscionability because ADO failed to notify her of or explain the arbitration agreement and the arbitration agreement was included in a stack of papers emailed to her. The Appeals Court found no procedural unconscionability since Hedeen had an adequate opportunity to read the arbitration agreement, the agreement was set out on its own page with a bold notice directly above Hadeen’s signature, Hadeen had no impairment or disability that prevented her from understanding the agreement, and she made no effort to renegotiate its terms.  As there was no procedural unconscionability, the court did not address substantive unconscionability.

The arbitration agreement also contained a provision requiring the losing party to pay the attorney fees of the prevailing party in arbitration. The Ohio Consumer Sales Practices Act however provides for the shifting of attorney fees only if the action was both groundless and filed or maintained in bad faith. While courts have found that statutory remedies may be heard in arbitration, they have also found a violation of public policy if they prevent the remedial purpose of the statute from being achieved. Hadeen argues that enforcement of an arbitration agreement with such a provision is contrary to public policy as it would directly contradict Ohio law protecting consumers who bring claims in good faith. The Appeals Court agreed and found that the arbitration agreement could not be enforced due to the “loser-pays” attorney fee shifting provision.

Hedeen also alleges that a provision in the arbitration agreement that states the arbitration is “final and binding” is against public policy as Ohio law sets out circumstances when a court may vacate an arbitral award. The Appeals Court rejected this argument as Ohio law requires such a statement before an arbitration award may be enforced in court.

While the Appeals Court ultimately found the arbitration agreement could not be enforced due to the loser-pays attorney fee shifting provision, it also detailed a number of other arguments that are insufficient to prevent the enforcement of such agreements. Without the loser-pays provision, the arbitration would have been upheld, showing the strong preference for enforcing arbitration agreements by Ohio courts.

** Many thanks to William Abbey for his contributions to this article.  William is a law clerk with Slovin & Associates Co., L.P.A. and student at the University of Cincinnati College of Law.  **

The Full Text of the Court Opinion May Be Found Here: http://www.supremecourt.ohio.gov/rod/docs/pdf/8/2014/2014-ohio-4200.pdf