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Court Watch
Claims to Prevent Enforcement of Arbitration Clauses
Two recent U.S. district court cases considered claims by franchisees seeking to prevent the enforcement of arbitration clauses in their contracts. Ace Hardware Corporation v. Advanced Caregivers, LLC d/b/a/ Hialeah Ace Hardware, et al., Bus. Franchise Guide (CCH) '14,935 (USDC, N.D. Illinois, Oct. 18, 2012) was an action by Ace to compel arbitration of fraud claims brought in state court by the respondents. The respondents, apparently an entity and its owner, had signed various agreements in connection with the entity becoming an Ace Hardware store owner. At the time of their signing, the agreements used by Ace did not contain an arbitration provision. Several months after the agreements were signed by the parties, Ace notified the respondents that there was an error in the agreements concerning the address of the respondents' Ace store. Ace forwarded revised agreements to the respondents. Between the time the original agreements were signed and when the revised agreements were provided, the standard-form agreements used by Ace were modified to require arbitration of disputes between the parties to the contracts. In the cover letter to the respondents, Ace did not point out the arbitration provisions, only that the agreements now contained the correct store address. The respondents signed and returned the revised agreements to Ace.
Several years after the agreements were signed, the respondents brought an action against Ace in state court for fraud and sought class action status. Ace went to federal court and sought to compel arbitration of the claims.
The respondents attempted to prevent arbitration of their claims by alleging that the arbitration provisions in the revised contracts should not be enforced because they were unaware that they were agreeing to arbitration when they signed the modified contracts. The respondents argued that since they did not know the agreements contained an arbitration clause, there was no meeting of the minds or mutual assent to those provisions and that their inclusion resulted from mutual mistakes ' Ace's mistake was sending the altered agreements, and the respondents' mistake was signing them. The respondents also attacked the arbitration provisions on the basis that they were not notified by Ace that the contract provisions were changed, that the change was the result of procedural unconscionability, and that their consent to the altered agreements was procured by fraud.
In determining whether there was a mutual mistake, the court determined that it could look only to the written agreement, not to the subjective intent of the parties; it noted that mutual mistakes are rarely found in commercial transactions between sophisticated parties. Looking at the four corners of the agreement, the court pointed out that it is basic contract law that a person who signs an agreement is presumed to know its terms and, by signing, agrees to be bound by those terms. As such, there was no mistake, either by Ace, which sent the agreements with the disputed terms, or by the respondents, whom the law presumes to have read and agreed to the contracts.
The absence of notice by Ace that the terms had been changed was of no consequence to the court since there was no duty by Ace to notify the respondents that the terms had changed. One party does not have a duty to the other party to inform that party as to what the contract says.
The court made quick work of the claim that the new contracts were not enforceable because of procedural unconscionability ' where the terms of a contract are hidden in a lengthy document, hard to find, hard to read, difficult to understand, etc. The arbitration clauses in the contracts were headlined in bold print; the word “arbitrate” appeared in the relatively short agreements over a dozen times; and the provisions appeared immediately above the signature lines in the revised contracts.
While the absence of a reference to the arbitration provisions in the cover letter transmitting the new agreements to the respondents could arouse suspicion, the fact was that the respondents could have easily found the new clauses by looking over the contracts. Having the opportunity to read the contracts, which opportunity the respondents claim they did not take, defeated the fraud claim.
While never a defense, an “I should not be bound by the contract since I did not read it” claim can be somewhat appealing in a case like this. However, courts will expect the parties to an agreement, even a revision of a previously agreed to agreement, to review a contract prior to signing. Anyone who has been burned by slipped-in provisions need not be reminded of the risk of not reviewing a revised agreement prior to signing. The respondents in this matter are now members of that club.
In Ironson v. Ameriprise Financial Services, Inc., Bus. Franchise Guide (CCH) '14,891 (USDC, D. Connecticut, Sept. 10, 2012), the plaintiff, the proprietor of a financial planning business previously affiliated with the defendant, was put to a choice: Either become an employee of Ameriprise, an alternative financially unattractive to the plaintiff, or become an Ameriprise franchisee. The plaintiff chose the latter. The franchise agreement signed by the parties contained an arbitration clause. The franchise agreement had been in effect for more than 10 years when Ameriprise sought to terminate the franchise because of the plaintiff's failure to comply with certain account requirements. The plaintiff filed suit against Ameriprise, alleging violations of the Connecticut Franchise Act and the Connecticut Unfair Trade Practices Act. Ameriprise moved to compel arbitration. The plaintiff argued that the franchise agreement was unenforceable because it was signed under economic duress; this contractual defense, while not recognized in all states, is available in Connecticut.
Under Connecticut law, to prove economic duress, one must establish a wrongful act or threat that left the complaining party no reasonable alternative but to agree to the concerned transaction and, as a result, the victim consented to the proposed agreement, resulting in the party becoming the victim of an unfair transaction. Ameriprise had threatened to significantly change the plaintiff's current earning ability if he elected to become a direct employee, although that alternative still could have been elected.
The plaintiff claimed that the franchise agreement was a non-negotiable contract that he had to sign if he wanted to keep his clients and save what he had built in 15 years as proprietor of his business. Direct employment was less attractive and promised a lowered income. However, Ameriprise had the right to pressure the plaintiff to accept its relationship preference. The court pointed out that economic necessity or pressure is not the same as economic duress. There was no wrongful act or threat, only business alternatives which the plaintiff, a sophisticated businessman, had adequate opportunity to consider. Just as conditioning employment on an agreement to settle disputes by arbitration does not amount to economic duress, neither does requiring the signing of a franchise agreement containing such a clause by a person who had previously enjoyed a different relationship with a franchisor.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415-956-1900 or at [email protected].
Claims to Prevent Enforcement of Arbitration Clauses
Two recent U.S. district court cases considered claims by franchisees seeking to prevent the enforcement of arbitration clauses in their contracts.
Several years after the agreements were signed, the respondents brought an action against Ace in state court for fraud and sought class action status. Ace went to federal court and sought to compel arbitration of the claims.
The respondents attempted to prevent arbitration of their claims by alleging that the arbitration provisions in the revised contracts should not be enforced because they were unaware that they were agreeing to arbitration when they signed the modified contracts. The respondents argued that since they did not know the agreements contained an arbitration clause, there was no meeting of the minds or mutual assent to those provisions and that their inclusion resulted from mutual mistakes ' Ace's mistake was sending the altered agreements, and the respondents' mistake was signing them. The respondents also attacked the arbitration provisions on the basis that they were not notified by Ace that the contract provisions were changed, that the change was the result of procedural unconscionability, and that their consent to the altered agreements was procured by fraud.
In determining whether there was a mutual mistake, the court determined that it could look only to the written agreement, not to the subjective intent of the parties; it noted that mutual mistakes are rarely found in commercial transactions between sophisticated parties. Looking at the four corners of the agreement, the court pointed out that it is basic contract law that a person who signs an agreement is presumed to know its terms and, by signing, agrees to be bound by those terms. As such, there was no mistake, either by Ace, which sent the agreements with the disputed terms, or by the respondents, whom the law presumes to have read and agreed to the contracts.
The absence of notice by Ace that the terms had been changed was of no consequence to the court since there was no duty by Ace to notify the respondents that the terms had changed. One party does not have a duty to the other party to inform that party as to what the contract says.
The court made quick work of the claim that the new contracts were not enforceable because of procedural unconscionability ' where the terms of a contract are hidden in a lengthy document, hard to find, hard to read, difficult to understand, etc. The arbitration clauses in the contracts were headlined in bold print; the word “arbitrate” appeared in the relatively short agreements over a dozen times; and the provisions appeared immediately above the signature lines in the revised contracts.
While the absence of a reference to the arbitration provisions in the cover letter transmitting the new agreements to the respondents could arouse suspicion, the fact was that the respondents could have easily found the new clauses by looking over the contracts. Having the opportunity to read the contracts, which opportunity the respondents claim they did not take, defeated the fraud claim.
While never a defense, an “I should not be bound by the contract since I did not read it” claim can be somewhat appealing in a case like this. However, courts will expect the parties to an agreement, even a revision of a previously agreed to agreement, to review a contract prior to signing. Anyone who has been burned by slipped-in provisions need not be reminded of the risk of not reviewing a revised agreement prior to signing. The respondents in this matter are now members of that club.
In Ironson v.
Under Connecticut law, to prove economic duress, one must establish a wrongful act or threat that left the complaining party no reasonable alternative but to agree to the concerned transaction and, as a result, the victim consented to the proposed agreement, resulting in the party becoming the victim of an unfair transaction. Ameriprise had threatened to significantly change the plaintiff's current earning ability if he elected to become a direct employee, although that alternative still could have been elected.
The plaintiff claimed that the franchise agreement was a non-negotiable contract that he had to sign if he wanted to keep his clients and save what he had built in 15 years as proprietor of his business. Direct employment was less attractive and promised a lowered income. However, Ameriprise had the right to pressure the plaintiff to accept its relationship preference. The court pointed out that economic necessity or pressure is not the same as economic duress. There was no wrongful act or threat, only business alternatives which the plaintiff, a sophisticated businessman, had adequate opportunity to consider. Just as conditioning employment on an agreement to settle disputes by arbitration does not amount to economic duress, neither does requiring the signing of a franchise agreement containing such a clause by a person who had previously enjoyed a different relationship with a franchisor.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. He can be reached at 415-956-1900 or at [email protected].
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