Harper v. Ultimo

• Decision Date: 05 December 2003
• Docket Number: No. G031671.,G031671.
• Court: California Court of Appeals Court of Appeals
• Parties: Laurence H. HARPER et al., Plaintiffs and Respondent, v. Frank ULTIMO et al., Defendants and Appellants.

7 Cal.Rptr.3d 418

113 Cal.App.4th 1402

Laurence H. HARPER et al., Plaintiffs and Respondent, v. Frank ULTIMO et al., Defendants and Appellants.

No. G031671.

Court of Appeal, Fourth District, Division 3.

December 5, 2003.

Lewis, Brisbois, Brisgaard, & Smith, Edward F. Morrison, Jr., Judd. A Gilefsky, Los Angeles, Jeffry A. Miller, and Catherine D. Morlino, San Diego, for Defendants and Appellants.

Wellman & Warren, Scott W. Wellman, Irvine, Stuart Miller, San Francisco, and Khuong D. Tien for Plaintiffs and Respondents.

OPINION

SILLS, P.J.

I

Laurence and Michaelyn Harper signed two contracts with Frank Ultimo and Ultimo Organization to stabilize the soil and re-level a pool on the Harpers' property. Both contracts were pre-printed. Ultimo rejected the Harpers' attempt to add an "addendum" relating to start and stop dates, integration, and notification. The contracts also contained arbitration provisions, which provided that all controversies under, or related to the contract were to be settled "in accordance with the Uniform Rules for Better Business Bureau Arbitration." The Better Business Bureau's rules were not attached to the contract.

Allegedly, Ultimo broke a sewer pipe in the course of the work, with the result that concrete spread into the sewer system and soil, causing blocks to form in the house's plumbing system. Ultimo also is supposed to have caused considerable damage to the backyard drainage system. And he misled the Harpers as to the amount of work performed.

The Harpers' soon discovered, however, that the arbitration rules of the Better Business Bureau limit the damages and remedies available to dissatisfied customers. Customers cannot obtain compensation for "personal injuries" unless all parties otherwise agree in writing (and, after oral argument and as of the date of this writing, Ultimo has conspicuously not made an offer to so agree). Customer remedies are limited to full or partial refund, completion of work, costs of repair or any out of pocket loss or property damage, but "not to exceed $2,500, caused by provision of the service." Any additional remedies may be awarded "only if" the remedy is already included in a business's precommitment with the Bureau or, as in the case of personal injury claims, if agreed in writing by all parties. Customers are thus precluded under the Better Business Bureau arbitration rules from obtaining tort damages, punitive damages, or any other damages otherwise appropriate in a court of law.

The Harpers filed suit in superior court, alleging tort causes of action for negligence and fraud as well as breach of contract. The suit also seeks punitive damages as well as other tort and contract relief. Ultimo brought a motion to compel arbitration. The trial court denied the motion, concluding that the arbitration clause was unconscionable and therefore would not be enforced.

II

Seldom do we see cases so readily covered by established case law. The question of the unconscionability of arbitration clauses is analyzed in terms of procedural and substantive unconscionability. Both must be present. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 [quoting Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533, 60 Cal.Rptr.2d 138 for the idea that procedural and substantive unconscionability "`must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability'" (original emphasis)].)

Yet while both must be present, they need not be present in equal amounts. There is a sliding scale where the greater the evidence of procedural unconscionability, the less evidence is needed of substantive unconscionability. (See McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 91, 134 Cal.Rptr.2d 446 ["a sliding scale is invoked whereby the more procedurally oppressive the arbitration clause is, the less evidence of substantive unconscionability is required to warrant the conclusion that the agreements to arbitrate are unenforceable"].) And vice versa. (See Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 ["the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable"].)

Here both procedural and substantive unconscionability are so present that it is almost impossible to keep from tripping over them.

Procedural unconscionability focuses on the factors of surprise and oppression (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1532, 60 Cal.Rptr.2d 138, quoting A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486, 186 Cal.Rptr. 114), with surprise being a function of the disappointed reasonable expectations of the weaker party. (See Armendariz, supra, 24 Cal.4th at p. 113, 99 Cal.Rptr.2d 745, 6 P.3d 669.)

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.

But the oppression is even more onerous than that: As written, the clause pegs both the scope and procedure of the arbitration to rules which might change. And it is unclear whether an arbitration would be conducted under the Better Business Bureau rules as of the time of contracting, or at the time of arbitration. Thus even a customer who takes the trouble to check the Better Business Bureau arbitration rules before signing the contract may be in for a preliminary legal battle in the event that Better Business Bureau arbitration rules were to become substantively less favorable in the interim. Before the main battle commenced in arbitration, there would be a preliminary fight over which set of arbitration rules governed — something which, at the very least, would add to the customer's legal expense. (Cf. Armendariz, supra, 24 Cal.4th at pp. 110-112, 99 Cal.Rptr.2d 745, 6 P.3d 669 [noting problem of forum fees in requiring party who imposes the arbitration to bear its costs].)

The arbitration "rules" of the Better Business Bureau are not just procedural ones, as Ultimo contended in oral argument. By limiting the scope of arbitral claims, the Better Business Bureau rules have the effect of substantively limiting the defendant's exposure.

Substantive unconscionability focuses on the one-sidedness or overly harsh effect of the contract term or clause. (Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, quoting A & M Produce Co., supra, 135 Cal.App.3d at pp. 486-487, 186 Cal.Rptr. 114.) In the present case, the operative effect of the arbitration is even more one-sided against the customer than the clauses in any number of cases where the courts have found substantive unconscionability. (E.g., Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892, 63 P.3d 979 [either party could appeal any award of more than $50,000 to second arbitrator]; Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 118 Cal.Rptr.2d 862 [arbitration clause absolutely barred class actions]; Saika v. Gold (1996) 49 Cal.App.4th 1074, 56 Cal.Rptr.2d 922 [arbitration award could be rejected if it exceeded $25,000].) As in Little, Szetela and Saika, the limitation of damages provision here is yet another version of a "heads I win, tails you lose" arbitration clause that has met with uniform judicial opprobrium. (E.g., Little, supra, 29 Cal.4th at p. 1072, 130 Cal.Rptr.2d 892, 63 P.3d 979.)

In fact, unlike Little and Saika, the bare language of the arbitration clause here ("[A]ny controversy arising out of or related to this contract or the breach thereof"), the customer does not even have the theoretical possibility he or she can be made whole. At least in Little and Saika the plaintiffs could obtain full relief if they ran the gauntlet of a defendant's unsuccessful appeal. At least in Szetela the individual customer could be made whole, if not the rest of the class. Here, absent agreement from the defendant, there is not even the possibility of full relief.

The idea that since Ultimo is also limited in what he can recover from the Harpers, and therefore there is enough "mutuality" to render the clause not unconscionably one-sided, is specious. The relevant probabilities of the deal were these: The odds were far more likely that the customers would have claims in addition to just getting their money back than the business would have claims in addition to just getting paid. (See Little, supra, 29 Cal.4th at pp. 1064, 1072-1073, 130 Cal.Rptr.2d 892, 63 P.3d 979 [looking to the probabilities as to which party was more likely to benefit in determining whether clause was unconscionably one-sided].)

III

So why isn't this a frivolous appeal? There are two things that not only give Ultimo's appeal sufficient color of rationality to obviate frivolousness, but implicate issues where the common law now provides only sketchy guidance.

A

The first stems from a comment made by the trial judge. He specifically rejected the idea that the Ultimo-Harper contract was an adhesion contract. There were market alternatives. "But in a case of this kind where we're talking about soils work, et cetera, you can go down the road and hire someone else instead, and that is different such that I do not believe that it is a contract of adhesion."

This comment is important, because beginning with Stirlen, supra, 51 Cal.App.4th 1519, 60...