The Dark Side of Alternative Dispute Resolution: Concrete Contractor’s Deceptive Arbitration Provision is Voided as “Unconscionable”

“Seldom do we see cases so readily covered by established case law.” So begins the analysis leading the Court of Appeal to affirm the trial court’s refusal to enforce an arbitration clause in a dispute between a concrete contractor and the homeowners whose plumbing and drainage systems he is alleged to have damaged.

The Harpers hired the contractor, Frank Ultimo, to stabilize soil and re-level their backyard swimming pool. The contracts included a provision requiring any and all disputes arising from the contract or work to be submitted to arbitration “in accordance with the Uniform Rules for Better Business Bureau Arbitration.” In the course of the work, Ultimo allegedly broke a sewer pipe, permitting concrete to enter the pipe, the sewer system and surrounding soil, causing blockages. Ultimo was also alleged to have damaged the backyard drainage system and to have lied about the amount of work he had performed.

Only after the harm was done did the Harpers discover that the Better Business Bureau arbitration rules limit the available remedies to no more than $2,500 above any out of pocket loss or property damage, and specifically prohibit any award for “personal injuries” unless the parties agreed in writing to permit such compensation. Ultimo, the court notes, “has conspicuously not made an offer to so agree.” The Harpers sued Ultimo for negligence, fraud and breach of contract. Ultimo sought to have the case ordered to arbitration. The superior court refused, finding the arbitration provision to be “unconscionable” and unenforceable. Ultimo appealed and the Court of Appeal agreed.

The rule in California is that a contract provision will not be voided as unconscionable unless it displays both “procedural” and “substantive” unconscionability.

Procedural unconscionability, the court notes, depends upon showings of “surprise and opression.”

Here is the surprise: The customer must inevitably receive a nasty shock when he or she discovers that no relief is available even if out and out fraud has been perpetrated, or even if he or she merely wants to be fully compensated for damaged property.

Here is the oppression: The inability to receive full relief is artfully hidden
by merely referencing the Better Business Bureau arbitration rules, and not attaching those rules to the contract for the customer to review. The customer is forced to go to another source to find out the full import of what he or she is about to sign -- and must go to that effort prior to signing.

Substantive unconscionability lies in the one-sidedness overly harsh effect of the provision. Here, unbeknownst to the homeowners, their agreement to the arbitration provision left them without even the possibility of full relief, as there were entire classes of harm for which they effective waived any potential compensation.

The decision in Harper v. Ultimo (Dec. 5, 2003), Case No. G031671, can be found at these links in PDF and Word formats.