Arbitration: In Two Cases, the Alabama Supreme Court Monitors Fair Play Between (Web)
June 12, 2007
Alabama's Supreme Court backed two lower court arbitration decisions in two opinions, both issued on the same day In Paw Paw's Camper City Inc., et al.v. Hayman, No. 1050873 (Ala. S.Ct. May 18, 2007)(available at http://www.bradleyarant.com/publications_opinions.cfm?ID=4555), the Alabama Supreme Court, in a 6-3 decision written by Associate Justice Champ Lyons Jr., declined a motor home seller’s request to compel arbitration against purchasers where the seller had substantially participated in litigation.
But in Ritter v. Grady Automotive Group Inc., No. 1051362, 2007 WL 1454458 (Ala. S. Ct. May 18, 2007)(available at http://www.bradleyarant.com/publications_opinions.cfm?ID=4557), the Court found that an Alabama couple’s contract and tort claims against an auto dealer in the aftermath of an accident must be arbitrated, analyzing, among other things, the application of a merger clause in a purchase agreement to a separate arbitration agreement.
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In Paw Paw's Camper City, the Court decided that defendant Paw Paw Camper City Inc.--a Mississippi corporation with two Alabama locations, including Mobile County, Ala., where the case was filed--and two of its employees had waived their rights to arbitration by participating in litigation, and not making a timely request to compel under the motor home purchase agreement.
In January 2005, the plaintiffs, the Haymans, a married couple, began negotiating a purchase price for a motor home with the defendants. After the plaintiffs’ credit was approved, they negotiated payment plans with Paw Paw sales associates.
On Jan. 31, 2005, Paw Paw agreed to sell a motor home to the Haymans for about $1,300 per month for 240 months. The Haymans executed a retail buyer's order, which contained an arbitration clause.
The Haymans, however, asserted that the agreement sections containing the monthly payment amounts and duration, were left blank. Additionally, they argued in their suit--for breach of contract, fraud in the inducement of the contract, and fraud in the procurement of the arbitration agreement--that the Paw Paw sales associates assured them that a secretary would insert the correct terms into the blanks at a later date.
In fact, the Haymans discovered that the financing agreement indicated monthly payments for a term of 300 months, instead of the agreed-upon 240 months. The Paw Paw sellers countered that the Haymans agreed to the duration term, because it was listed in the retail buyer's order at the time the Haymans signed the agreement.
The sellers responded with an affirmative defense, asserting that the arbitration agreement reserved their right to seek a dismissal. The sellers also asserted a counterclaim and demanded a jury trial.
In February 2006, the sellers filed a motion to compel arbitration, 10 months after the buyers filed suit in March 2006. During that 10-month period of discovery disputes, the sellers never mentioned arbitration.
In its analysis, the Court cited Companion Life Insurance Co. v. Whitesell Manufacturing Inc., 670 So.2d 897, 899 (Ala.1995), which stated a standard for waiving the right to arbitrate: A “party may waive its right to arbitrate a dispute if it invokes the litigation process and thereby substantially prejudices the party opposing arbitration.”
But the Companion Life opinion also notes that waiving this right and meeting this high standard requires an ad hoc analysis, because a court must decide “whether the participation bespeaks of an intention to abandon the right in favor of the judicial process. . . .” If a court finds this element, then it must further decide whether the opposing party would be prejudiced if it was ordered to arbitration.
In Paw Paw’s Camper City, the Court found that although both parties communicated extensively through the discovery phase, the defendant-sellers didn’t object to a trial date. The sellers didn’t explain why they acquiesced and participated in preparation for trial on all issues. They even agreed to defer the deposition of a key witness until shortly before the trial.
Thus, the Court found that sellers substantially invoked the litigation process, satisfying the first element, because they began preparing for trial instead of moving to compel arbitration and obtaining an early resolution.
Second, the Court decided that there also was substantial prejudice. The opinion says that the Haymans spent$1,650 on four depositions, and $9,400 total in trial preparation fees.
The Court notes that it is difficult to compare the costs for preparing for a jury trial with the cost of appearing before an arbitrator, because the arbitrator may not ask for discovery. The Court notes that “[p]rejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate,” quoting Hales v. ProEquities Inc., 885 So.2d 100, 105-106 (Ala.2003)(quoting quoting Morewitz v. West of England Ship Owners Mut. Protection & Indem. Ass'n, 62 F.3d 1356, 1366 (11th Cir.1995)).
The Court concluded that the Haymans had shown that they were substantially prejudiced because they were forced to participate in “full-blown pretrial discovery” and endure high costs.
The Court appears to follow three principles for buyers and sellers in this decision. First, companies should not use arbitration clauses to disguise questionable sales behavior. Second, and on the other hand, a party asserting that an opposing party has waived the right of arbitration must satisfy a heavy burden and overcome a strong presumption. Third, a party asserting arbitration must respect arbitration theory and diligently follow the arbitration clause terms in a timely and efficient manner.
Here, the Haymans proved substantial invocation of litigation and prejudice. As a result, Paw Paw and its employees waived their right to arbitration.
Associate Justice Michael F. Bolin, joined by Associate Justices Harold Frend See Jr., and Lyn Stuart, dissented, saying that arbitration shouldn’t be barred because the sellers filed for arbitration immediately after they learned via a deposition that there was no basis for the Haymans’ fraud-in-the-inducement claim related to the arbitration clause–a question that goes to courts, not arbitrators. With the discovery that the clear court question was inappropriate, the sellers filed a motion to compel which, the dissent says, should have been considered by the trial court.
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By contrast, in Ritter v. Grady Automotive Group Inc., decided the same day, May 18, as Paw Paw's Camper City, the Alabama Supreme Court held, in a 5-0 opinion written by Justice See, that car purchasers-plaintiffs the Ritters did not show that an arbitration agreement was invalid or inapplicable to their claims emanating from an accident suffered by Jennifer Ritter.
The Court also decided that Daryl Ritter's loss-of-consortium claim was subject to the arbitration agreement.
Several months after purchasing a new 2003 BMW 745Li from “Grady Buick,” Jennifer Ritter was in a serious accident, and, according to the opinion, none of the airbags deployed, and the seatbelt “allegedly failed.”
The Ritters brought an action against Mobile, Ala., dealership Grady Automotive Group Inc., and others for misrepresentation, manufacturing defects, defective design, negligent or wanton installation of the air-bag and seatbelt systems, breach of contract, breach of warranties, and loss of consortium.
The Ritters argued that Grady Buick Co. cannot compel arbitration because Grady Buick was not a party to the purchase agreement. They asserted that “Grady Automotive Group” is the party named.
The Court noted that although the purchase contract letterhead stated “Grady Automotive Group,” the disclaimer of warranties and other documents that the Ritters signed contained the name “Grady Buick Co.” Additionally, the Court noted that the Ritters' trial court objection to Grady Buick's motion to compel arbitration did not object to Grady Buick’s status as a contract party. The court held that since the Ritters didn’t raise this issue in trial court, the Supreme Court cannot review this issue now.
Next, the Ritters argued that the arbitration agreement doesn’t apply because the purchase contract contains a merger clause. The Court examined Alabama Elec. Coop. Inc. v. Bailey's Constr. Co., 950 So. 2d 280, 288 (Ala. 2006), Hartford Fire Ins. Co. v. Shapiro, 270 Ala.149, 153, 117 SO.2d 348, 352 (1960), and Mitchill v. Lath, 247 N.Y. 377, 160 N.E. 646 (1928), to determine the scope of a merger clause.
The Court notes in Ritter, “the free-standing, written, and separately executed arbitration agreement meets all three prongs” of a test set out in Mitchill. An agreement is beyond the scope of a merger clause when it is (1) collateral to the document with the merger clause; (2) not explicitly or implicitly contradictory to other provisions in the written contract, and (3) not ordinarily expected to be embodied in the writing.
First, the arbitration agreement is collateral because it is distinct and separate from the merger clause in the purchase agreement; it governs the resolution of any possible disputes before and after the sale.
Second, the arbitration agreement does not contradict express or implied provisions of the purchase contract.
Third, “the parties would not ordinarily be expected to embody” the arbitration agreement in the purchase contract, quoting Hartford Fire and Mitchill. The Court explained that including an arbitration clause in the purchase agreement is permitted but “the agreements are not so related that one would not expect them to be included in the same document.” Hence, the merger clause does not invalidate the arbitration agreement.
Finally, Daryl Ritter alleged that since he did not sign the arbitration agreement with his wife, he is not bound by those terms. But the Court found that his loss-of-consortium claim stems from Jennifer Ritter's car purchase, and he alleged the same breach of duties that Jennifer Ritter asserted. Therefore, he is subject to the arbitration agreement and its terms.
The Court found that the Ritters failed to prove that the arbitration agreement was invalid or inapplicable and affirmed the trial court's order compelling arbitration.
--Ogechi Eto, CPR Intern and Ongmu Tshering