Title: Gonski v. Dist. Ct.

State: nevada

Issuer: Nevada Supreme Court

Document:

426 Nev. Arivance Opinion S|
IN THE SUPREME COURT OF THE STATE OF NEVADA

DONALD W. & LINDA L. GONSKI,
HUSBAND AND WIFE,
Petitioners,

va.
‘THE SECOND JUDICIAL DISTRICT
COURT OF THE STATE OF NEVADA,
IN AND FOR THE COUNTY OF
WASHOE, AND THE HONORABLE

No. 53414

FILED

STEVEN P. ELLIOTT, DISTRICT. ues a9 2010
Respondents, wd
and ore

PN II, INC., A NEVADA
CORPORATION D/B/A PULTE HOMES
OF NEVADA,

Real Party in Interest.

Original petition for a writ of mandamus challenging a district,

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JUDGE, | ey dxominy
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court order compelling arbitration in a construction defect action
pertaining to a single residence.
Petition granted.

Naney A. Gilbert, Reno,
for Petitioners.

Lee, Hernandez, Brooks, Garofalo & Blake, APC, and David S. Lee,
Natasha L. Brooks, and Charlene N. Renwick, Las Vegas,
for Real Party in Interest.

 

BEFORE HARDESTY, DOUGLAS and PICKERING, Jd.
OPINION:

By the Court, DOUGLAS, J.:

/0- 34015.

 

 
ne Be

 

‘This original writ proceeding involves real party in interests
attempt to enforce two arbitration provisions that it drafted with respect
to petitioners’ purchase of a residential home in Reno, Nevada.
Petitioners argue that the two arbitration clauses at issue, one of which
was in the purchase agreement and the other of which was contained in a
limited warranty, are unconscionable, and thus unenforceable, for a
variety of reasons. Most. significantly, petitioners assert that the
arbitration provisions waived statutory remedies and failed to fully and

clearly inform petitioners of the significant rights being forfeited. The

 

district court disagreed, however, and compelled arbitration, causing
petitioners to seek this court's review.

We conclude that the arbitration provisions at issue are
unconscionable as to several aspects that, taken together, demonstrate
that petitioners were not made fully aware, or given the opportunity to
become aware, of the provisions’ terms. In particular, the circumstances
under which the provisions were signed, combined with their
nonhighlighted nature, failed to provide petitioners with a meaningful
opportunity to agree to the arbitration terms. Also, the first provision
misleadingly suggested that real party in interest would pay the
arbitration costs, while the second document, purportedly incorporated
into the first, required petitioners to pay the initial arbitration costs. And
finally and most significantly, the provisions’ confusing language
suggested that NRS Chapter 40 remedies would be fully available, even
though the terms of the contract impermissibly waived most Chapter 40
homeowner protections. ‘The provisions’ confusing and misleading
language created a situation in which petitioners could not reasonably be

expected to understand the terms’ meanings, even if they were given

 
om i

adequate opportunity for review. Further, they impermissibly waived
statutory rights designed to effect a public purpose, in favor of real party
in interest. Accordingly, the arbitration pro

 

jons governing construction

defects are unconscionable, and the district court abused its discretion in

‘compelling arbitration, such that mandamus relief is warranted.
PROCEDURAL HISTORY AND FACTS

In April 2004, petitioners Donald and Linda Gonski signed a
purchase agreement for a home located in an age-restricted subdivision
developed by real party in interest PN II, Inc., d.b.a Pulte Homes of
Nevada (Pulte Homes), Several months later, the Gonskis served Pulte
Homes with an NRS Chapter 40 notice of construction defects, and the
parties subsequently participated in mediation. When the mediation
proved unsuccessful, the Gonskis filed a district court complaint against
Pulte Homes, alleging various claims based on construction defects in
their home.

In response to the Gonskis’ complaint, Pulte Homes moved to
compel arbitration, pointing to the purchase agreement's arbitration
clause:

ARBITRATION: 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 9 of the United

States Code) and judgment rendered by the

arbitrator(s) may be confirmed, entered and
enforced

‘Purchaser’ Initiale__ Purchasers Initials Selle’ Initials ___

 

 
[page break)

in any court having jurisdiction. Ae a condition
precedent to arbitration, the dispute shall first be
mediated in accordance with the Construction
Industry Mediation Rules of the AAA, or such
other mediation service selected by Us. Claims
under the Limited Warranty will be arbitrated in
accordance with the arbitration provision set forth
in the Limited Warranty.
In the event the claim relates to a construction
defect, the construction dispute provisions
(including good-faith mediation) of Chapter 40 of
Nevada Revised Statutes shall also apply if and to
the extent that the alleged defect is covered by the
Limited Warranty.

‘The Gonskis opposed the motion to compel, pointing out that
the purchase agreement purported to incorporat

 

a second arbitration
clause, applicable to construction defect claims, found on pages 9-10 of the
home’s separate limited warranty. The limited warranty’s arbitration
clause provides as follows:

DisPUuTE SETTLEMENT

‘This Dispute Settlement provision sets forth the
exclusive remedy of all disputes or controversies
under this LIMITED WARRANTY.

If the Plan Administrator is unable to successfully
mediate the dispute, the Plan Administrator will
inform THE HOMEOWNER and THE BUILDER that
the dispute is unresolved and that Binding
Arbitration is provided as a remedy for resolving
the dispute.

 

Any binding arbitration proceeding willbe
conducted pursuant to the United States

 

 
Arbitration Act (9 U.S.C. § 1 et seq.) (‘the Act”) by
an independent, nationally recognized, arbitration
organization designated by the Plan.
Administrator. ‘The rules and procedures followed
will be those under the Act, which may be
supplemented by the arbitration organization's
rules. A copy of the applicable rules and
procedures will be delivered to you upon your
request to the Plan Administrator.

The arbitration will determine THE
HoMBOWNER's, THE BUILDER’s and (if applicable)
the Insurer's rights and obligations under this
Lintrep WARRANTY. These rights and obligations
include, but are not limited to, those provided to
‘THE HOMEOWNER or THE BUILDER by local, state
or federal statutes in connection with this LIMITED
WARRANTY. ‘The award of the arbitrator(s) will be
final, binding and enforceable as to THE
HoMEOWNER, THE BUILDER and Gf applicable) the
Insurer, except as modified or vacated in
accordance with the Act or the arbitration
organization's rules. A judgment rendered by the
arbitrator(s) may be confirmed, entered and
enforced in any court having jurisdiction,

In their opposition, the Gonskis argued that both the purchase
agreement's and the limited warranty’s arbitration provisions were
unconscionable and, thus, unenforceable. In so arguing, they described
the circumstances under which the purchase agreement was signed,
noting that they had paid a $10,000 deposit to join a lottery system to
purchase a home in the specialized subdivision. A few days later, they
were notified of an available residence and instructed to come to the office
in five days. According to the Gonskis, when they arrived at the office,
several other people were waiting; they wore handed a stack of 25

preprinted forms, totaling over 469 papers, and told that if the documents

 

 
were not signed and executed at that time, “there were several other
people waiting to step in and purchase the residence.” The Gonskis
asserted that they were not given adequate time to review the documents
provided to them or sufficient explanation of their contents, and they were
directed to leave the documents in the office after signing. They then
pointed to several aspects of the arbitration clauses that they argued were
unconscionable, including the clauses’ obscurity, confusing and conflicting
terms, and failure to inform both that significant rights were being waived
and of potentially significant arbitration costs. The Gonskis argued that,
when viewed in light of the warranty provisions limiting the scope of
covered defects! and limiting Pulte Homes’ liability to the costs of repair or
replacement, the arbitration provisions left them without any remedy for

many of their claims.

 

After considering the parties’ arguments, the district court
determined that the arbitration provisions were not unconscionable and
entered an order compelling arbitration pursuant to the purchase
agreement's arbitration provision. In particular, the district court found
that no great disparity in bargaining power existed, since the Gonskis
could choose another developer or refuse to buy the residence; the Gonskis
had failed to establish that Pulte Homes refused to negotiate the contract's
terms; the Gonski

 

initialed the arbitration provision, which was not

“In particular, the Gonskis pointed to a provision explaining that
structural elements will not be considered defective and in need of repair
unless deemed “unsafe.”

 

 
hidden or inconspicuous;? and the arbitration provision’s language was
clear and unambiguous. The court concluded that the arbitration clause
did not limit the Gonskis’ rights “under Nevada law” because it expressly
allowed application of NRS Chapter 40, governing construction defects;
the clause was binding on all parties to the contract and could benefit any
of them, and both sides were to bear their own attorney costs; the clause
contained no liquidated damages provision; and although the clause failed
to disclose potential arbitration costs, that failure alone did not amount to
unconscionability.

Consequently, the Gonskis filed the instant petition for a writ
of mandamus, challenging the district court's order. As directed, Pulte
Homes timely filed an answer to the petition, and the Gonskis were
permitted to file a reply.

DISCUSSION
Writ petitions are the appropriate means to challenge district
court orders compelling arbitration. Burch v. Dist. Ct,, 118 Nev. 438, 441,

49 P.8d 647, 649 (2002), Orders compelling arbitration typically involve
mixed questions of law and fact, which this court reviews under different
standards, even in the context of a writ petition. Marquis & Aurbach v,
Dist. Ct,, 122 Nev. 1147, 1156, 146 P.3d 1130, 1136 (2006); D.R. Horton,

“In so analyzing, the court's order noted that the arbitration
provision contained the “same size font, outlined in a table of contents,
prefaced by the title ‘WAIVER OF JURY TRIAL’ which appeared in larger
font and all capitals.” It appears that the waiver title was mistakenly
ascribed to the arbitration provision, however. ‘The waiver provision is
located in the limited warranty and purportedly applies to “any
claim . . . not subject to binding arbitration.”

 

 
ine. v. Green, 120 Nev. 549, 553, 96 P.3d 1159, 1162 (2004). ‘The district
court's factual findings are given deference, but questions purely of law
are reviewed de novo. D.R. Horton, 120 Nev. at 553, 96 P.3d at 1162,
‘The parties do not dispute that the arbitration clauses at issue
are governed by the Federal Arbitration Act (FAA), 9 US.C. §§ 1-16
(2006). While courts may not invalidate FAA-governed arbitration clauses
based on “state laws applicable only to arbitration provisions,” such
clauses are subject to “generally applicable contract defenses, such as
fraud, duress, or unconscionability.” Doctor's Associates, Inc. v. Casarotto,
517 US. 681, 687 (1996). Thus
enforcement exists, we rely on state law. See,e.g., Burch, 118 Nev, at 442-
43, 49 P.Sd at 650; Nagrampa v, Mailcoups, Inc,, 469 F.3d 1257, 1264-65,
1280 (9th Cir. 2006).

 

in determining whether a defense to

In Nevada also, strong public policy favors arbitration, and
arbitration clauses are generally enforceable. D.R, Horton, 120 Nev, at
553, 96 P.3d at 1162. The policy of enforcing arbitration clauses aris

 

however, only after an enforceable agreement to arbitrate is found to exist.

See, e.g, Baker v. Osborne Development Corp,, 71 Cal. Rptr. 3d 854, 861
(Ct. App. 2008). Although the party seeking to enforce an arbitration
clause bears the burden of proving the clause’s valid existence, any party

 

‘opposing arbitration must establish a defense to enforcement. D.R,
Horton, 120 Nev. at 553, 96 P.3d at 1162; see also Woodside Homes of Cal,
v. Superior Court, 132 Cal. Rptr. 24 35, 39 (Ct. App. 2003); Dallas
Cardiology Associates v. Mallick, 978 S.W.2d 209, 212 (Tex. App. 1998);
Motsinger v. Lithia Rose-FT, Inc., 156 P.3d 156, 159-60 (Or. Ct. App.
2007); Salley v. Option One Mortg. Corp., 926 A.2d 115, 119-20 (Pa. 2007),

 

 
Here, the Gonskis assert that the general defense of
unconscionability renders the arbitration provisions unenforceable.
Unconscionable arbitration agreements will not be upheld; in reviewing an
agreement's conscionability, we look for both procedural and substantive
unconscionability. D.R, Horton, 120 Nev. at 553, 96 P.3d at 1162. An

8The concurring and dissenting justice would remand this matter to
the district court to decide if the limited warranty's arbitration provision
delegates to the arbitrator the determination of whether the arbitration
provisions are unconscionable, citing the U.S. Supreme Court's decision in
Rent-A-Center, West, Inc. v. Jackson, 561 U.S. __, 130 S. Ct. 2772 (2010).
But as that opinion recognized, “courts should not assume that the parties
agreed to arbitrate arbitrability unless there is “clear and unmistakable”
evidence that they did so.” Id. at ___n.1, 180 S. Ct. at 2777 n.1 (quoting
‘ret_Option: i v. Kaplan, 514 U.S, 938, 944 (1995), and
citing AT&T Technologies v. Communications Workers, 475 U.S. 643, 649
(1986)). “Where the assertion by the claimant is that the parties excluded
from court determination not merely the decision of the merits of the
grievance but also the question of its arbitrability, vesting power to make
both decisions in the arbitrator, the claimant must bear the burden of a
clear demonstration of that purpose.” Steelworkers v. Warrior & Gulf Co.,
363 U.S. 574, 583 n.7 (1960),

In Rent:A-Center, the parties conceded that the arbitration
provision called for such disputes to be decided by the arbitrator. Rent-A-
Center, 561 US. at __n.1, 190 8. Ct. at 2777 n.1. But here, Pulte Homes
has not made any such claim or demonstrated any such purpose, and thus,
it may have waived any right to arbitrate arbitrability. In any case, the

sue is not before this court, and if it were, we would conclude that the
purported agreement to arbitrate whether “an issue” should be submitted
to arbitration does not clearly and unmistakably commit to the arbitrator
questions of the two arbitration provisions’ enforceability. Rent-A-Center,
561 U.S. at __n.1, 130 S. Ct. at 2777 n.1; see Greenspan v. LADT. LLC,
111 Cal. Rptr. 3d 468, 486 (Ct. App. 2010) (recognizing that interpreting
an arbitration provision is a legal matter subject to de novo review by an
appellate court, unless the credibility of extrinsic evidence is at issue).

 

 
arbitration clause is procedurally unconscionable when a party has no
“meaningful opportunity to agree to the clause terms either because of
unequal bargaining power, as in an adhesion contract, or because the
clause and its effects are not readily ascertainable upon a review of the
contract.” Id, at 654, 96 P.3d at 1162. Thus, for example, the use of fine
print and/or misleading or complicated language that “fails to inform a
reasonable person of the contractual language’s consequences” indicates
procedural unconscionability. Id, Substantive unconscionability, in
contrast, is based on the one-sidedness of the arbitration terms. Id. at
564, 96 P.3d at 116263. Generally, in considering substantive

 

‘unconscionability, courts look for terms that are “oppressive.” Bureh, 118
Nev. at 444, 49 P.3d at 651 (quoting 24 Hour Fitness, Inc. v. Superior
Court, 78 Cal. Rptr, 2d 533, 541 (Ct. App. 1998)). Although a showing of
both types of unconscionability is necessary before an arbitration clause
will be invalidated, in D.R. Horton, Inc. v. Green, we noted that a strong
showing of procedural unconscionability meant that le
unconscionability was required. Id, at 553-54, 96 P.Sd at 1162, The

substantive

 

reverse is true also: the stronger the showing of substantive

 

unconscionability, the less necessary is a strong showing of procedural
unconscionability, See, e.g., Armendariz v. Foundation Health Pyschcare,
6 P.3d 669, 690 (Cal. 2000) (“Essentially a sliding scale is invoked which
disregards the regularity of the procedural process of the contract

formation . .. in proportion to the greater harshness or unreasonableness
of the substantive terms themselves.” (quoting 15 Williston on Contracts §
1763A, at 226-27 (3d ed. 1972). Using that sliding scale here, we
conclude that both procedural and substantive unconscionability are

 

 
 

present, such that the Gonskis cannot be compelled to arbitrate their
claims.
Procedural unconscionability

‘The Gonskis assert that the circumstances at signing—
numerous documents and limited time for review, competition from other
buyers, and unclear and understated terms—precluded them from even
attempting to bargain over, and from truly agreeing to, the arbitration
terms. Although Pulte Homes asserts that its sales proce

 

ensures
careful review of the sales documents with purchasers, it does not dispute
that the Gonskis were given a large number of documents to review within
a relatively short time frame and that they were informed that other
buyers were waiting in case they failed to timely execute the documents.
Instead, Pulte Homes argues that its arbitration clauses are conspicuous
and clear.

In D.R. Horton, this court provided that, “to be enforceable, an
arbitration clause must at least be conspicuous and clearly put a
purchaser on notice that he or she is waiving important rights under
Nevada law.” 120 Nev. at 557, 96 P.3d at 1164. In that case, we agreed
that the arbitration clause was inconspicuous because nothing drew the
reader's attention to its importance—it was printed in very small font on
the back side of the agreement and contained the same bolded and
capitalized headings as the agreement's other paragraphs, even though
certain other provisions were entirely capitalized. Id, at 551-52, 556, 96
P.3d at 1161, 1164. The clause’s inconspicuousness, together with the
district court's finding that the seller had misrepresented its nature and
failed to put the homebuyers on notice that they were foregoing certain
rights under Nevada law, such as the right to a jury trial and NRS
Chapter 40 attorney fees or other proximate damages, led us to uphold the

u

  

 
district court’s finding of procedural unconscionability. Id, at 556-57, 96
P.8d at 1164-65,

Like the arbitration provision at issue in D.R, Horton, the
purchase agreement's arbitration provision here in no way draws the
reader's

 

fention: it is printed in normal-sized font and located on page 15
of an 18-page document and in the midst of identically formatted
paragraphs, even though other paragraphs and sentences, including ones

 

describing “buyer structural/non structural changes,” punch list items,
inspection and cancellation, limitations on liability, and a termites and
environmental notice/disclaimer, are called out through the use of all
capital letters and bolding, and/or required the buyers to specially initial,
Thus, even though the Gonskis initialed the pages on which the
arbitration clause was located along with the other pages of the purchase
agreement, nothing drew their attention to the importance of what those
pages contained,

Moreover, with regard to the arbitration clause that
specifically governs construction defect claims, the Gonskis received the
limited warranty with a stack of other papers and were not required to
initial or sign that they had read it. Like the purchase agreement's
arbitration clause, the limited warranty’s arbitration provision is not
particularly called out on the pages. And although the limited warranty
provision was mentioned in the purchase agreement's arbitration clause,
neither that clause, nor any other in the purchase agreement, highlighted
and clearly explained the limited warranty’s arbitration provision and its
binding effect. For instance, although the purchase agreement's
arbitration provision points out that NRS Chapter 40 includes a mediation

process, it does not indicate that the limited warranty’s arbitration

 

 
provision sets different mediation terms, calling for a plan administrator
to mediate the dispute. Compare NRS 40.680 (governing mediation under
NRS Chapter 40, including how a mediator is chosen). As a result, the
Gonskis were not adequately put on notice that they were agreeing to
forego important rights under Nevada law with respect to claims under
the limited warranty. These facts, coupled with the circumstances at
signing, amount to procedural unconscionability. While the procedural
unconscionability is not overwhelming, its presence means that we must
next consider substantive unconscionability,
‘Substantive unconscionability

At least two aspects of the arbitration clauses at issue are
substantively unconscionable as to construction defect claims: their
arbitration expense terms and the clauses’ misrepresentation and implied
waiver of NRS Chapter 40 rights,

Arbitration expenses

‘The purchase agreement is misleading as to arbitration
expenses under the limited warranty. In the purchase agreement's clause
labeled “ATTORNEYS' FEES,” which immediately follows the
arbitration clause, the agreement provides that Pulte Homes will advance
‘the fees necessary for “the” arbitration, even though each party is
responsible for its own attorney fees and costs.* By referring simply to

 

‘The relevant provision reads

ATTORNEYS’ FEES: We will advance the fees
necessary to initiate and conduct the arbitration.
If We are the prevailing party in the arbitration,
the arbitrator may, to the extent permitted by law
and the rules, direct you to reimburse Us for up to
continued on next page...

 

 
“the” arbitration, the purchase agreement's fees provision appears to apply
to any arbitration, including arbitration under the limited warranty.° ‘The
limited warranty, however, provides that the party initiating arbitration
must pay the necessary fees. The fee provision, especially in light of the

discrepancy between it and the purchase agreement, is one-sided.

 

Moreover, as the district court noted, the documents fail to
mention the potentially high amount of the arbitration costs. While that
failure alone does not amount to substantive unconscionability, D.R.
Horton, 120 Nev. at 559, 96 P.3d at 1166 (stating that “the absence of

language disclosing the potential arbitration costs and fees, standing

 

alone, may not render an arbitration provision unenforceable”), in this

 

~ continued
one half of the fees We have advanced. Each party
shall bear their own attorney fees and costs,

®Although the purchase agreement states that claims under the
limited warranty are to be arbitrated in accordance with the provision in
that document, it does so following a paragraph describing which
arbitration rules apply and the mediation prerequisite, Thus, it would be
reasonable to expect the limited warranty’s arbitration provision to denote
the applicable rules and any mediation requirement, not a fees and costs
division.

The limited warranty provision provides

Each party shall bear its own expenses for the
arbitration, including the remittance of an
arbitration filing fee which will be paid by the
party requesting arbitration. If THE HOMEOWNER
requests arbitration and the arbitrator(s) finds in
‘THE HOMEOWNER's favor, the amount THE
HOMEOWNER advances for an arbitration filing fee
will be reimbursed by THE BUILDER.

 

 
 

instance, the plan administrator is to determine the arbitration
organization, and thus, the Gonskis were apparently unable to estimate
potential costs at the time of signing, since they had to ask the plan
administrator for a copy of the applicable arbitration rules. In D.R.
Horton, this court noted its agreement with a Ninth Circuit ruling that
invalidated a provision, in part because it required the arbitrating parties
to split the foes. 120 Nev. at 557-58, 96 P.3d at 1165 (citing Ting v. AT&T,
319 F.3d 1126, 1148-49 (9th Cir. 2008)). Here, the Gonskis were not
required merely to split the fees, but to pay the fees up front. Thus, the
limited warranty’s arbitration provision is substantively unconscionable
because it required the Gonskis to pay the initial arbitration costs,

NRS Chapter 40 rights

NRS Chapter 40's construction defect provisions, NRS 40.600-

 

70, were created to ensure a speedy and fair process for resolving
construction defect disputes between homeowners and contractors. To
further that objective, the Legislature enacted provisions governing
prelitigation notice, inspection, right to repair, mediation, settlement
offers, and disclosures, among other things, incorporating advantages and
penalties designed to encourage homeowners and contractors to resolve
their disputes before resorting to the courts. See. e.g., Senate Daily
Journal, 68th Leg., at 14-16 (Nev., June 17, 1995) (remarks by Senator
James).

As we have previously pointed out, NRS Chapter 40 is
designed “to protect the rights of homebuyers by providing a process to
hold contractors liable for defective original construction or alterations.”
Westpark Owners’ Ass'n v. Dist. Ct, 123 Nev. 349, 359, 167 P.3d 421, 428
(2007) (citing Hearing on S.B. 395 Before Assembly Comm. on the
Judiciary, 68th Leg., at 23 (Nev., June 23, 1995) (statement of Valerie

15

 
ome

 

Cooney), and interpreting the chapter so as not to defeat or undermine
this purpose), ‘To that end, in contrast to the common law, NRS Chapter
40 allows homeowners to bring negligence claims against contractors for
construction defects. Olson v. Richard, 120 Nev. 240, 243-44, 89 P.3d 31,
38 (2004), Further, the chapter provides successful claimant homeowners
with certain rights and benefits, including attorney fees, costs, and several
other types of consequential damages. NRS 40.655 (limiting the
homebuyers’ recovery of anything not listed in the statute).

NRS Chapter 40's provision

 

ipply to “any” construction defect
claims, NRS_40.635(1) (exempting personal injury and wrongful death
claims from NRS Chapter 40's purview); Olson, 120 Nev. at 243, 89 P.3d
at 33, and the chapter's provisions “[pJrevail over any conflicting law
otherwise applicable.” NRS 40.635(2). ‘Thus, we have recognized that, in
enacting NRS Chapter 40, the Legislature did “not limit a homeowner's
recovery to defects covered by contract or warranty.” Skender_v,
Brunsonbuilt_ Constr, & Dev, Co,, 122 Nev. 1430, 1435, 148 P.3d 710,
714 (2006); Olson, 120 Nev. at 243, 89 P.3d at 83. Nor, we now conclude,
may contractors limit a homeowner's recovery to defects covered by
contract or warranty, To allow such exculpatory terms would defeat the
protective purposes behind the statutes and thwart the public policy of
this state, as expressed by the Legislature in NRS Chapter 40.

In this case, the purchase agreement arbitration provision
states that, with respect to construction defect claims, NRS Chapter 40's
construction dispute provisions apply, “if and to the extent” that the
limited warranty covers the alleged defect. In limiting NRS Chapter 40's
application to only those defects covered by the limited warranty, the

16

 
 

provision is substantively unconscionable, as it attempts to avoid NRS
Chapter 40 liability and violates public policy.

In Armendariz v. Foundation Health Pyscheare, 6 P.3d 669,
679-80 (Cal. 2000), the California Supreme Court analyzed an arbitration
agreement's applicability to unwaivable statutory rights in light of US.
Supreme Court language on the subject:

Assuming an adequate arbitral forum, we agree
with the Supreme Court that “[bly agreeing to
arbitrate a statutory claim, a party does not forgo
the substantive rights afforded by the statute; it
only submits to their resolution in an arbitral,
rather than a judicial, forum.” [quoting Mitsubishi
Motors v, Soler Chrysler-Plymouth, 473 U.S. 614,
628 (1985)].... That is, {the U.S. Supreme
Court's language] sets a standard by which
arbitration agreements and practices are to be
measured, and disallows forms of arbitration that
in fact compel claimants to forfeit certain
substantive statutory rights.

Like the California court, we agree that arbitration agreements cannot be

 

 

used to avoid rights and liabilities imposed by statute when doing so
would violate the public policy of this state. Kindred v, Dist, Ct., 116 Nev.
405, 414, 996 P.2d 903, 909 (2000) (citing Mitsubishi Motors, 473 U.S. at
628). Indeed, contract terms that violate public policy are often one-sided
in favor of the more powerful party, rendering them substantively
unconscionable. See, e.g., State Farm Mut. Auto, Ins. v. Hinkel, 87 Nev.
478, 481-82, 488 P.2d 1161, 1153 (1971) (discussing a contractual
exclusionary clause in light of Nevada public protections under insurance
statutes and noting that “[iJt was not the intent of the legislature to
require the appellant to offer protection with one hand and then take a
part of it away with the other"); 8 Richard A. Lord, Williston on Contracts
§ 18:10 (4th ed. 2010) (pointing out that substantively unconscionable

wa

 
ee <a

terms are those that “are unreasonably favorable to the more powerful
party, such as terms that impair the integrity of the bargaining process or
otherwise contravene the public interest or publie policy”).

Further, even with respect to covered claims, the arbitration
provisions impermissibly fail to preserve the Gonskis’ statutory rights,
Although the purchase agreement's arbitration provision states that NRS
Chapter 40 applies to covered defects, the purchase agreement and limited
warranty arbitration provisions then limit Pulte Homes’ liability in a
manner inconsistent with Chapter 40's damages provision, rendering the
arbitration clause misleading, oppressive, and unenforceable as against
public policy. For example, the purchase agreement provision states that
the parties shall bear their own attorney fees, and the limited warranty
provision provides that the requesting party must initially pay for the
But under NRS 40,665, a
prevailing homeowner is entitled to recover reasonable attorney fees and
additional costs.* D.R, Horton, 120 Nev. at 556, 96 P.3d at 1164.

 

arbitration costs and its own expensi

"The limited warranty provision provides that, in the event the
homeowner prevails at arbitration, the filing fee will be reimbursed. No
similar provision awards the prevailing homeowner with attorney fees,
however,

*Purther, the purchase agreement and limited warranty limit Pulte
Homes’ liability to repair and replacement and provide that Pulte Homes
shall not be liable for “special. indirect or consequential damages,
including without limitation, damages based on a claimed decrease in the
value of the [hJome.” In contrast, NRS 40.655 allows a prevailing
homeowner to recover repair costs, reduction in market value, loss of use
damages, the value of other damaged property, and any available
statutory interest.

18

 
Accordingly, the arbitration provisions compel the Gonskis to forfeit their
statutory right to attorney fees and, potentially, costs, all the while
indicating that NRS Chapter 40 applies. As a result, the arbitration
provisions impliedly waive the Gonskis’ statutory rights under NRS
Chapter 40, such that substantive unconscionability exists. See Graham
Oil v, Arco Products Co., 43 F.3d 1244 (9th Cir. 1994) (invalidating an
arbitration agreement that waived si

 

tutory damages).
Based on the above, significant substantive unconscionability

exists, Such substantive unconscionability tips the balance so that the

 

arbitration clauses governing the Gonskis’ construction defect claims must

be declared unconscionable. Accordingly, the district court manifestly
abused its discretion in compelling arbitration.

CONCLUSION

While the procedural unconscionability stemming from the
circumstances at signing and the failure to highlight the arbitration
provisions is slight, the provisions’ failure to adequately address the
arbitration costs and disregard of NRS Chapter 40 rights strongly indicate
substantive unconscionability. Therefore, we conclude that the arbitration

°Even if NRS Chapter 40 waivers were lawful, notice is required
under D.R. Horton. 120 Nev. at 556-57, 96 P.3d at 1164. By stating that
covered defect claims were subject to NRS Chapter 40, the purchase
agreement failed to put the Gonskis on notice that the limited warranty’s
arbitration provision waived their right to NRS Chapter 40 attorney fees,
costs, and other proximate damages, a required, ‘Thus, the purchase
agreement failed to put the Gonskis on notice that they were agreeing to
forgo important rights under Nevada law, the NRS Chapter 40 waivers
were not clear, and the Gonskis were given no opportunity to agree to
them, resulting in the imposition of unbargained for, oppressive terms.

 

 

 
omen

 

clauses are invalid as to the Gonskis’ construction defect claims, and we
‘grant the petition and direct the clerk of this court to issue a writ of
mandamus instructing the district court to vacate its order compelling

arbitration so that the Gonskis may pursue their district court action.

as ug lag a

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concur:

   

Hardesty

 
PICKERING, J., concurring in part and dissenting in part:

[agree that D.R. Horton, Inc. v. Green, 120 Nev. 549, 553, 96
P.8d 1159, 1162 (2004), requires reversal of the order summarily
compelling arbitration, However, I write separately to emphasize that the
limited warranty's arbitration provision contains a delegation clause that
appears to commit the decision of “whether an issue should be submitted
to binding arbitration” to the arbitrator, in addition to specifying
application of the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16,

‘The Supreme Court decided Rent-A-Center, West, Inc. v,
Jackson, 561 U.S. __, 130 8. Ct. 2772 (2010), after the briefing in this

case concluded. Rent-A-Center rejects. a Nevada-law-based
unconscionability challenge to the enforceability under the FAA of an
arbitration agreement containing a delegation clause, holding that unless
the party contesting arbitration “challenged the delegation provision
specifically, we must treat it as valid... and must enforce it .. ., leaving
any challenge to the validity of the [Arbitration] Agreement as a whole for
the arbitrator.” Id, at _, 180 S. Ct. at 2279. Using arbitration to decide

whether arbitration is appropriate seems counterintuitive, but the

 

 

‘Supreme Court has held that such clauses are enforceable if the parties
clearly agreed to it. _Howsam_v. Dean Witter Reynolds, Inc,, 537 U.S. 79,
83-85 (2002).

‘The majority denies that the delegation clause is before this
court and concludes that, even if it is, the evidence does not clearly and
unmistakably show that the parties agreed to arbitrate the enforceability

of the arbitration provisions. But the issue is before this court because the

 

 
on

 

Gonskis are challenging the arbitration agreement as a whole, which
includes the delegation clause. Although as-yet factually undeveloped, the
written agreement shows that the parties appear clearly to have agreed to
arbitrate enforceability of the arbitration provisions. Thus, the limited
warranty states:

This Dispute Settlement provision sets forth the
exclusive remedy of all disputes or controversies
under this LIMITED WARRANTY.

If the Plan Administrator is unable to successfully
mediate the dispute, the Plan Administrator will
inform THE HOMEOWNER and 'THE BUILDER that
the dispute is unresolved and that Binding
Arbitration is provided as a remedy for resolving
the dispute.* These disputes may include, but are
not limited to:

....5. Whether an issue should be submitted to
binding arbitration.

The Gonskis agreed to this provision by signing the purchase agreement
incorporating the limited warranty.

‘The majority finds substantive unconscionability in that the
arbitration agreement limits the application of NRS Chapter 40, citing to
Ammendariz v, Foundation Health Psvcheare, 6 P.3d 669 (Cal. 2000), a
California case, to support their contention, What the majority fails to
acknowledge is that California has statutes that explicitly prohibit
contracts that inhibit unwaivable statutory rights. Armendariz, 6 P.3d at
680 (citing Cal. Civ. Code §§ 1668, 3513). Nevada does not have such
statutes and thus we lack the legislative backing to judicially invalidate as
unconscionable an agreement that commits such disputes to arbitration.
Kindred v, Dist. Ct, 116 Nev. 405, 996 P.2d 903 (2000), also cited by the
majority, does not support the majority's conclusion because it only states

 
that statutory rights remain when the parties agree to arbitrate a
statutory issue. It says nothing about a court declaring an agreement as a
whole unconscionable in the face of an otherwise valid arbitration clause.
Kindred, 116 Nev. at 414, 996 P.2d at 909.

‘The Gonskis never explicitly challenged the delegation clause,
only the agreement to arbitrate. Although Rent-A-Center did not permit
Jackson to refocus his argument on the delegation clause specifically, that
aspect of the decision appears tied to prudential concerns unique to
certiorari practice before the Supreme Court, not the FAA itself, And,
while the Gonskis did not focus on the delegation clause, neither did Pulte.

On this record, I would not reverse outright. Instead, I would reverse and

 

remand for further briefing and argument on whether the agreements
contain an enforceable delegation clause under Rent-A-Center. Judicial
findings on other matters should abide resolution of the threshold Rent-A-
Center issue as to forum.