Kentucky courts continue to scrutinize consumer contracts, especially those involving arbitration clauses. However, in light of recent federal and state court decisions, the framework for analyzing the enforceability of arbitration agreements has changed. Courts can no longer target arbitration provisions for disadvantaged treatment on grounds not applied to other contract terms. See N. Kentucky Area Dev. Dist. c. Snyder570 SW3d 531, 537 (Ky. 2018) (citing Kindred Nursing Ctrs. ltd. P’ship c. clark, 137 S.Ct. 1421, 1425, 197 L. Ed. 2d 806 (2017)). In other words, an arbitration clause in a consumer contract cannot automatically be declared inadmissible. The Kentucky Court of Appeals recently used a recalibrated framework to Green vs. Frazier2020-CA-0781-MR, 2021 WL 2878360 (Ky. App. July 9, 2021),
exam granted (October 20, 2021). The result remained unchanged – the arbitration agreement was found to be unenforceable.
the Green The case involved a dispute over Mr. Frazier’s purchase of a new pickup truck from Green’s Toyota of Lexington. Identifier. at 1. About a year after purchase, Mr. Frazier returned to the same dealership for a routine maintenance visit. Identifier. at 3. While waiting for his vehicle, Mr. Frazier became interested in another truck in the lot and discussed with a salesperson the possibility of swapping his current truck for the new model. Identifier. When the seller provided an estimate of the trade-in value of his current truck, Mr. Frazier was surprised at the low amount. The dealership explained that the low trade-in value reflected the fact that Mr. Frazier’s truck had been involved in an accident at the dealership prior to the date of Mr. Frazier’s original purchase. Identifier.
Mr. Frazier, obviously upset by the undisclosed accident, filed a lawsuit in Powell Circuit Court. Identifier. In response to the Complaint, Green’s Toyota has decided to deny and compel arbitration pursuant to the terms of the Purchase Agreement, Arbitration Addendum and Acknowledgment, all executed by Frazier.
Identifier. Green’s Toyota argued that arbitration clauses were presented in many places and that it was undeniable that claims should be submitted to arbitration.
For example, the purchase agreement, two paragraphs above the signature line, stated: “Buyer has read and agrees to the terms on the reverse, including ARBITRATION AGREEMENT provided for in paragraph 17.” The referenced paragraph 17, on the reverse side of the page, included an arbitration provision that required disputes to be resolved by binding arbitration in Lexington, Kentucky. The Court noted, however, that the provision was exceptionally hard to read: “The typeface is so fuzzy and small that we had to use a magnifying glass to read its terms. Despite our best efforts, however, there are a few instances where we are unable to decipher the printed text.” Identifier. n.2.
Green’s Toyota argued that even though paragraph 17 was too difficult to read, Mr. Frazier also accepted the unambiguous terms of the arbitration addendum and acknowledgment page. Identifier.at 7 O’clock. The addendum required disputes to be resolved by binding arbitration in Lexington, Kentucky. Identifier. at 2 o’clock. The addendum added, in the same paragraph, that “no party to this agreement shall have any right to recover in any proceeding and the arbitrators shall have no authority to award any party consequential or punitive damages. “. Identifier. In addition, a separate one-page acknowledgment included a similar provision requiring disputes to be submitted to arbitration in Lexington, Kentucky. Identifier.
After a factual inquiry, the Court of Appeals upheld the circuit court’s refusal to compel arbitration, albeit for different reasons. The Court of Appeal held that the circuit court’s recourse to Mortgage Electronic Registration Systems, Inc. v. Abner260 SW3d 351 (Ky. App. 2008), to conclude that the arbitration provision was essentially unenforceable was no longer applicable. Identifier. at 6. Accordingly, the Court of Appeal rephrased the question as follows:
Therefore, instead of focusing on whether the limitation of damages clause is in the arbitration clause, we need to determine whether a limitation of damages clause in a consumer contract for the sale of goods, such as the present, renders the contract inapplicable on the ground of unconsciousness.
Identifier. As applied here, that question was answered conclusively in the affirmative.
The Court of Appeals began its analysis by considering whether Mr. Frazier was challenging (1) the validity of the arbitration agreement or (2) the validity of a provision of the contract that would render the entire contract unenforceable. Here, the Court of Appeal determined that it was only being asked to review the validity of an arbitration clause, not the entire agreement; it therefore fell within the jurisdiction of the Court. Identifier. at 5. If it were the latter, the arbitrator would have jurisdiction to determine whether the agreement as a whole was inadmissible. ID.; see also Genesis Healthcare, LLC v. stevens544 SW3d 645 (Ky. App. 2017).
Then, the Court recalled the fundamental rule according to which “a written agreement duly signed by the bound party, who has had the opportunity to become acquainted with it, will be executed according to its terms”. Identifier. (quoting Schnuerle c. Insight Communications. Co., LP, 376 SW3d 561, 575 (Ky. 2012)). Of course, inequity is a narrow exception to this basic rule:
There are two types of inequity: procedural and substantive. “Procedural unfairness or ‘unfair surprise’ relates to the process by which an agreement is reached and the form of an agreement[.]'” Schnürle376 SW3d at 576 (citing Conseco, 47 SW3d to 343 n.22). “This includes, for example, the use of fine or unobtrusive type and convoluted or unclear language which may conceal or obscure a contractual term.” Energy House, Div. of Southern Energy Homes, Inc. vs. Peay, 406 SW3d 828, 835 (Ky. 2013). “Substantial unfairness” refers to contract terms that are unreasonably or grossly favorable to one party and to which the disadvantaged party has not consented. ” ” Precious Services of Kentucky, LLC v. Watkins, 309 SW3d 256, 263 (Ky. App. 2009) (citing Conseco, 47 SW3d at 343 n.22). Substantive unfairness is determined by consideration of the “commercial reasonableness of the terms of the contract, the purpose and effect of the terms, the allocation of risk between the parties, and similar public policy concerns” .
Schnürle376 SW3d at 577 (citing Jenkins v First American Cash Advance of Georgia, LLC400 F.3d 868, 876 (11th Cir. 2005)).
Identifier. at 5.
In considering the substantial unfairness of the arbitration provision, the Court turned to Kentucky’s Uniform Commercial Code (UCC). The UCC provides that an agreement may include an exclusion of consequential damages; however, the UCC also states that such waiver of damages should not be unreasonable. Identifier. to 6. For example, a waiver of consequential damages for bodily injury is considered
At first glance unreasonable. Identifier. Although the Court of Appeal said that “limitation of damages clauses in consumer contracts of adhesion are not per se unreasonable”, it concluded, without explanation, that the provision was fundamentally unreasonable. Identifier. at 7 O’clock. Critically, this case was only about a commercial damages claim.
In a more detailed explanation, the Court of Appeal held that the waiver of consequential damages was also procedurally inadmissible. The Court said the limitation of damages was “a matter of central importance to an ordinary consumer”.
Identifier. As a result:
[A] consumer contract that seeks to exclude damages that would otherwise be available to the buyer, such as those under the Kentucky Consumer Protection Act, must do so in a clear, concise, and conspicuous manner so that it cannot there be no doubt that the consumer understands the rights he grants by signing the contract.
In a final blow to Green’s request to compel arbitration, the Court of Appeals declined to sever the limitation of damages clause and enforce the arbitration agreement, stating that “we do not believe that the fairness sanctions such a result in this case”. Identifier. at 8.
The Court of Appeals’ opinion ultimately achieved the same result as the circuit court – invalidating an arbitration agreement because it contained a limitation on consequential damages. The opinion also supports the proposition, perhaps unintentionally, that any waiver of consequential damages in a consumer contract may be considered materially unreasonable. The Kentucky Supreme Court granted discretionary review and will review the case
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