Opinion handed down May 26, 2015
In Eaton v. CMH Homes, Inc. (“CMH”), Mr. Eaton contracted with CMH to purchase a manufactured home.[1] On or around September 27, 2012, Mr. Eaton sued CMH for alleged defects in the home.[2] Mr. Eaton’s complaint alleged fraud, negligence, breach of contract, and negligent misrepresentation.[3]
CMH denied the allegations and moved to dismiss or stay the court action. Further, CMH moved to enforce the arbitration agreement section of the contract by compelling arbitration between the parties.[4] Mr. Eaton replied, arguing the arbitration agreement was unconscionable.[5]
The trial court overruled CMH’s motion to dismiss or stay the court action and compel arbitration.[6] On appeal, the Missouri Court of Appeals for the Eastern District affirmed the trial court’s holding.[7] Upon transfer, the Supreme Court of Missouri held that the trial court erred in refusing to compel arbitration.[8] The court noted that the anti-waiver clause of the arbitration agreement was unconscionable, but the clause did not render the entire agreement unenforceable.[9]
I. Facts and Holding
On April 16, 2009, Mr. Eaton purchased a manufactured home from CMH.[10] Mr. Eaton and CMH executed a standard form contract, provided by CMH.[11] The standard form contract contained an arbitration agreement, which was the cause for dispute in this case. The home was subsequently delivered and installed.[12] A few months later, Mr. Eaton began to notice defects and irregularities in the home.[13] As a result, he sued CMH.[14]
Mr. Eaton alleged CMH negligently manufactured the home, fraudulently induced Mr. Eaton to sign the contract, breached the contract, and engaged in negligent or intentional misrepresentation regarding the defects in the home.[15] CMH argued the contract was binding and moved for the court to dismiss or stay the court action and compel arbitration pursuant to the arbitration agreement contained in the contract.[16] The trial court denied CMH’s motion without an opinion and the Missouri Court of Appeals for the Eastern District affirmed.[17]
Upon transfer to the Supreme Court of Missouri, CMH argued that the trial court erred in denying its motion to dismiss or stay and compel arbitration.[18] Mr. Eaton countered, arguing that the arbitration agreement was unconscionable; therefore, he should not be compelled to arbitrate the issue.[19]
First, Mr. Eaton argued that the arbitration agreement was unconscionable because it lacked mutuality of agreement to arbitrate.[20] He reasoned that because the agreement was not mutual, the agreement lacked adequate consideration.[21]
Second, and more importantly, Mr. Eaton argued that the anti-waiver provision, considered together with the lack of mutuality of agreement to arbitrate, would result in all of his claims, counterclaims, and affirmative defenses proceeding in arbitration while CMH could proceed in court.[22] Thus, under the agreement, Mr. Eaton could have been the recipient of inconsistent adjudications and subject to the possible application of res judicata or collateral estoppel against future claims.[23]
The Supreme Court of Missouri held that the arbitration agreement was unconscionable because it contained both the anti-waiver clause and a lack of mutuality of agreement obligating the parties to arbitrate issues.[24] However, instead of designating the entire contract unconscionable, the court struck the “anti-waiver clause” as unconscionable, severed the clause from the contract and then reversed the trial and appellate courts’ decision to deny CMH’s motion to compel arbitration.[25]
II. Legal Background
In Missouri, both state and federal law govern arbitration agreements. The Federal Arbitration Act (“FAA”) “governs the applicability and enforceability of arbitration agreements in all contracts involving interstate commerce.”[26] The Missouri Uniform Arbitration Act (“MUAA”) governs arbitration agreement issued in Missouri that are not preempted by the FAA.[27] The Acts are very similar. In fact, the Missouri legislature modeled the MUAA after the FAA.[28]
In AT&T Mobility LLC v. Concepcion, the Supreme Court of the United States held that the provision of the FAA that makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” allows arbitration agreements to be invalidated by general contract defenses.[29]
In Missouri, trial courts have the authority to evaluate the validity and enforceability of arbitration agreements when considering whether to grant or overrule a motion to compel arbitration.[30] Accordingly, Missouri trial courts test arbitration agreements through the lens of ordinary, state-law principles that govern contracts, and “consideration is given to whether the arbitration agreement is improper in light of generally applicable contract defenses.”[31]
Unconscionability is a commonly invoked contract defense, with its origin in common law.[32] A party disadvantaged by a lack of bargaining power and/or sophistication may invoke unconscionability to protect themselves from one-sided contracts, oppression, and unfair surprise.[33]
Oppression and unfair surprise can occur during the bargaining process or may become evident later, when a dispute or other circumstances invoke the objectively unreasonable terms. In either case, the unconscionability is linked inextricably with the process of contract formation because it is at formation that a party is required to agree to the objectively unreasonable terms.[34]
When determining whether a contract or terms of a contract are unconscionable, a court will look at both the procedural and substantive aspects of the contract.[35] Some common factors that bear on a court’s determination of whether a term or contract is unconscionable are: high pressure sales tactics, unreadable fine print, misrepresentation or unequal bargaining positions, lack of mutuality of the agreement to arbitrate, and harshness of terms in arbitration agreement.[36]
III. Instant Decision
The Supreme Court of Missouri concluded that the arbitration agreement between CMH and Mr. Eaton was “unconscionable and unenforceable,”[37] but not solely because it lacked mutuality of agreement as to when the parties could arbitrate issues.[38] The court clarified that lack of mutuality as simply a factor that should be considered when determining whether an agreement is unconscionable.[39] Instead, the court looked to the anti-waiver clause, in addition to the lack of mutuality of agreement to arbitrate, to render the agreement unconscionable.[40]
But despite finding the agreement was unconscionable, the court did not void the entire arbitration agreement.[41] The court simply struck the anti-waiver clause from the agreement.[42] It explained: “[T]he anti-waiver provision of the arbitration clause is not essential to the agreement to arbitrate. Once it is severed . . . the lack of mutuality of the obligation to arbitrate does not itself render the agreement to arbitrate unconscionable.”[43]
IV. Comment
On one hand, the Supreme Court of Missouri’s decision to render the agreement unconscionable clearly evinced the court’s concern for protecting consumers with a lack of bargaining power from unfair adhesive contracts. On the other hand, the court’s decision to strike the anti-waiver clause and compel arbitration clearly evinced its desire to uphold agreements that parties willingly make. In effect, the principle of caveat emptor remains: “Let the Buyer Beware.”
[1] Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 430 (Mo. 2015) (en banc).
[7] Eaton v. CMH Homes, Inc., 2014 WL 2883483 (Mo. Ct. App. 2014).
[8] Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 430 (Mo. 2015) (en banc).
[28] See State ex rel. Hewitt v. Kerr, 461 S.W.3d 798, 805 (Mo. 2015) (en banc).
[29]563 U.S. 333, 131 S.Ct. 1740 (2011).
[30] Brewer v. Missouri Title Loans, 364 S.W.3d 486 (Mo. 2012) (en banc).
[31] Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 432 (Mo. 2015) (en banc).
[35] Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 433 (Mo. 2015) (en banc).
[40] Id. at 436. The court stated, “Under the anti-waiver provision, CMH . . . unilaterally divested itself of the arbitration agreement to the extent that it [could] bring suit on the key financial issues of importance to it. Yet Mr. Eaton [was] prohibited from defending [those] claims in court and risk[ed] inconsistent adjudications, or the application of res judicata or collateral estoppel, [had] he tr[ied] to file an arbitration claim in which he [brought] up [those] defenses.” Id.
