Arbitration: Ohio Appeals Court Remands for Enforceability of an Arbitration Clause (Web)

In Yessenow v. Aue Design Studio Inc., Nos. 86580, 86888, 2006 WL 649672 (Ohio 8th App. Dist. March 16, 2006) (available at http://www.sconet.state.oh.us/rod/newpdf/8/2006/2006-ohio-1202.pdf), the Ohio Court of Appeals found that a trial court erred in failing to hold a hearing regarding the enforceability of an arbitration clause contained in a contract that was alleged to be unconscionable.

Defendants Seldon David Kyle and SDK Interactive LLC, appealed from a trial court judgment that denied their motion to compel arbitration of an action filed by plaintiffs Lisa Yessenow and Pretzables, Inc.
The plaintiffs originally filed an action against Kyle and SDK's co-defendants, Aue Design Studio Inc., Mary Ann Aue and Jennifer Sukas alleging that the defendants' failure to establish a mercantile Web site in a timely manner constituted breach of contract, breach of warranty, negligence, negligent misrepresentation, and fraud.

Defendants Kyle and SDK, who had been contracted by Aue and Sukas to establish the Web site, asserted that their written agreement with the plaintiff, which provided for mutual and binding arbitration, was enforceable, and moved to stay the proceedings in favor of arbitration.

The arbitration agreement terms stated that the arbitration would be governed by Arizona law, and that "any dispute arising from, connected with or related to the work of this engagement will be resolved exclusively by arbitration before a single arbitrator under the commercial rules of arbitration of the American Arbitration Association in Tucson, Arizona."

The plaintiffs countered that the arbitration provision contained unconscionable terms and was unenforceable because the agreement in which it was contained also "set forth a limitation of liability which in effect left parties with no meaningful remedy." According to the opinion, the allegedly unconscionable term stated:
 
Our liability on whatever basis arising from, related to or connected with the Work or this engagement otherwise (a) shall be limited to what the client pays us, (b) will not under any circumstances include consequential or incidental damages including but not limited to those for lost profits, loss of business, lost revenue or loss of customer goodwill, (c) will not include that for or in connection with third-party liability or damage claims or (d) loss of or damage to records or data of the client, any customer of the client or any other party.

The plaintiffs also alleged that the agreement was an adhesion contract that resulted after Aue Design and Sukas retained Kyle and SDK to prepare the Web site; the plaintiffs also asserted that they never signed the agreement containing the arbitration provision.

The trial court denied the motion to stay, after which Kyle and SDK filed a notice of appeal and a motion for relief from judgment. The defendants claimed that they were entitled to relief from judgment because newly discovered evidence established that plaintiffs had entered into a written agreement with SDK, and that they had a meritorious defense "as the arbitration provision [was] enforceable under Arizona law because Arizona law does not render an arbitration clause unenforceable if it also limits liability."

On appeal, the defendants asserted that the trial court erred in denying both their motion to stay the proceedings and their motion for relief from judgment.

The court of appeals reviewed the denial of the motion to stay according to the abuse of discretion standard, which the court said requires a showing of "more than an error of judgment" on the part of the trial court. The opinion states that the abuse of discretion standard also includes a demonstration of "perversity of will, passion, prejudice, partiality, or moral delinquency," and added that an "arbitrary, unreasonable or unconscionable attitude" would also suffice. (Citations omitted.)

The appellate court held that an allegation that an arbitration clause is unconscionable "puts the validity of that provision at issue and requires the court to make a finding regarding enforceability."
The opinion states that because the plaintiffs claimed that the arbitration provision had unconscionable terms and was unenforceable due to the limitation of liability that allegedly deprived them of a meaningful remedy, the enforceability and validity of the agreement were in issue.

Accordingly, the court held that the trial court erred in invalidating the arbitration clause without holding a hearing, and reversed and remanded the case to the trial court for it to make findings on the validity, enforceability and scope of the arbitration agreement.

–Brandon Bledsoe, CPR Intern