Harrington v. Pulte Home Corp.
| Decision Date | 27 September 2005 |
| Docket Number | No. 1 CA-CV 04-0576.,1 CA-CV 04-0576. |
| Citation | 211 Ariz. 241,119 P.3d 1044 |
| Parties | Peter HARRINGTON, a single man, on behalf of himself and all others similarly situated; Donald Hovan and Ingrid Hovan, husband and wife, on behalf of themselves and all others similarly situated; Linda D. Smith and Philip K. Smith, wife and husband, on behalf of themselves and all others similarly situated; James J. Gallipo, a single man, on behalf of himself and all others similarly situated; Kristin Challacombe and Jared Challacombe, wife and husband, on behalf of themselves and all others similarly situated; Dennis M. Moore and Patricia J. Moore, husband and wife, on behalf of themselves and all others similarly situated; Andrew Homer and Doris Homer, husband and wife, on behalf of themselves and all others similarly situated; Edward Watkins and Diane Watkins, husband and wife, on behalf of themselves and all others similarly situated; William Hendertilo and Angelica Hendertilo, husband and wife, on behalf of themselves and all others similarly situated, Plaintiffs/Appellees, v. PULTE HOME CORPORATION, a Michigan corporation; Del Webb Communities, Incorporated, an Arizona corporation; Steve Canning and Jane Doe Canning, husband and wife; James McGrath and Jane Doe McGrath, husband and wife; Chris Lewis and Jane Doe Lewis, husband and wife; Pamela Davis and John Doe Davis, wife and husband. Defendants/Appellants. |
| Court | Arizona Supreme Court |
The Shanker Law Firm, P.L.C. By Howard M. Shanker, Tempe, Siegel, Bellovin & Karnas, PC By M. David Karnas, Tucson, Attorneys for Plaintiffs-Appellees.
Mariscal, Weeks, McIntyre & Friedlander, P.A. By Stephen E. Richman, David J. Ouimette, Phoenix, Attorneys for Defendants-Appellants.
¶ 1 This case requires us to determine when an arbitration clause in a contract of adhesion may be enforced. The trial court refused to enforce the clause here. Because we find that the arbitration clause in this case was neither contrary to appellees' reasonable expectations nor substantively unconscionable, we reverse.
¶ 2 Appellees, and the class of claimants they seek to represent, each purchased a home from appellants Pulte Home Corporation or Del Webb Communities, Incorporated. The homes were purchased through sales agents: appellants Steve Canning, James McGrath, Chris Lewis, and Pamela Davis.1 The subdivisions are known as Springfield Lakes and Solera, in Chandler Arizona. Appellees have alleged they "were not provided with full, complete and accurate disclosures" when they purchased their homes. Specifically, appellees assert that they and the other home purchasers were not told that the homes were in close proximity to an "aerobatic box" used for Federal Aviation Administration pilot training procedures and a jet engine test facility operating twenty-four hours a day, seven days a week. They allege that these conditions have had a significant adverse impact on their ability to use their homes, consequently causing the value of their homes to diminish. Accordingly, they filed claims for violation of subdivision reporting statutes, breach of contract, consumer fraud, civil racketeering, negligence and negligence per se, fraudulent misrepresentation or concealment, negligent misrepresentation, breach of the duty of good faith and fair dealing, and rescission.
¶ 3 Appellants moved to dismiss or stay the action and to compel appellees to pursue their claims by arbitration. They relied in the trial court, and also rely here, upon a provision in each of the appellees' home purchase contracts containing virtually identical language:
Any controversy, claim or dispute arising out of or relating to this Agreement or your purchase of the Home (other than claims under the Limited Warranty) shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (AAA) and the Federal Arbitration Act (Title No. 9 of the United States Code) and judgment rendered by an arbitrator(s) may be confirmed, entered and enforced in any court having jurisdiction.2
Appellants contended the arbitration clause applies with equal force to claims against any of the appellants. This is so, they argued, because (1) the claims were based upon the same allegations, (2) appellees asserted that appellants had acted in concert, and (3) the individual appellants were agents of the corporate defendants.
¶ 4 Appellants also argued in the trial court that appellees' request for class action treatment did not affect their obligation to proceed by arbitration because the American Arbitration Association ("AAA")3 has Supplementary Rules for Class Arbitrations to accommodate potential class arbitration.4
¶ 5 In response to appellants' motion, appellees did not dispute that, if enforceable, the arbitration clause would apply to their claims against all appellants and did not dispute that treatment as a class action would not be foreclosed by submitting to arbitration. Their response focused entirely upon their contention that the arbitration clause was not enforceable.
¶ 6 Appellees' enforcement argument is that the arbitration clause is part of a contract of adhesion and is invalid because it violated their reasonable expectations and was unconscionable. They assert their reasonable expectations were contravened by the failure of the arbitration clause to disclose that they were relinquishing the right to a trial by jury and the failure to disclose the costs of arbitration. They further contend that the potentially applicable fees for arbitration through the AAA, as required by the arbitration clause, are substantively oppressive and unconscionable in their own right. Appellees submitted in the trial court virtually identical statements from five of the homeowners to the effect that they were unaware of the arbitration provision when they signed the contract, arbitration had not been explained to them, they did not understand they were waiving the right to trial by jury, they did not understand the high costs and fees for arbitration and could not afford them, and that being forced to pay such costs would prevent them from obtaining any remedy for their injuries.
¶ 7 The superior court denied appellants' motion, ruling as follows:
The Court specifically finds that the arbitration clauses in each of the Purchase Agreements . . . which are adhesion contracts. . . are unenforceable clauses because [they are] contrary to the reasonable expectations of the [appellees] and under the circumstances are unconscionable. The Court specifically finds that the arbitration provision is defective because of the lack of conspicuous and express language of a waiver of the fundamental right to a jury trial [citing Broemmer v. Abortion Services of Phoenix, Ltd., 173 Ariz. 148, 840 P.2d 1013 (1992)] and does not constitute a knowing, intelligent, and voluntary waiver of same . . .; and because of the lack of notice that AAA arbitration can involve substantial fees which they must pay and which the Court specifically holds should be included in an arbitration clause (and which in the Court's view, should also be in bold or other conspicuous type just as the waiver of the right to a jury should be).
A formal order was entered. Appellants timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") section 12-2101.01(A)(1) (2003).
¶ 8 Appellants contend the trial court erred by denying their motion to compel arbitration on the basis that it violated the appellees' reasonable expectations and was unconscionable. As discussed below, reasonable expectations and unconscionability have been held by the Arizona Supreme Court to constitute separate theories of relief. Infra ¶ 39. We address some preliminary matters and then address each primary issue in turn.5
¶ 9 Appellants assert that the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1999) ("FAA"), applies to the arbitration clause in this case and mandates application of the arbitration clause. While we agree that the FAA applies, that statute has been construed to permit the application of state law to void arbitration clauses under certain circumstances. Specifically, the United States Supreme Court has held that states may regulate arbitration clauses "under general contract law principles and they may invalidate an arbitration clause `upon such grounds as exist at law or in equity for the revocation of any contract.'" Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (quoting 9 U.S.C. § 2) (emphasis added).6 This authority is limited:
What states may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal `footing' directly contrary to the Act's language and Congress' intent.
¶ 10 Because of this policy, "[g]enerally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2" of the FAA. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). Courts may not, however, "invalidate arbitration agreements under state laws applicable only to arbitration provisions." Id.
¶ 11 Accordingly, Arizona contract law may be applied if it is contract law applicable to contracts generally and not simply arbitration clauses. Both the doctrines of reasonable expectations and substantive unconscionability are such doctrines. Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 392, 682 P.2d 388, 397 (1984) (...
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