Opinion ID: 1743657
Heading Depth: 2
Heading Rank: 2

Heading: defenses to arbitration

Text: The de los Santoses assert the defenses of unconscionability, duress, fraudulent inducement, and revocation. We again note that these defenses must specifically relate to the Arbitration Addendum itself, not the contract as a whole, if they are to defeat arbitration. [20] Defenses that pertain to the entire installment contract can be arbitrated. [21] We further note that the de los Santoses' defenses against the Addendum are governed by Texas law. [22] Again, since the law favors arbitration, the burden of proving a defense to arbitration is on the party opposing arbitration. [23] The de los Santoses contend that the Arbitration Addendum is unconscionable because arbitration might subject them to substantial costs and fees. On this issue, in Green Tree Financial Corp. v. Randolph , the United States Supreme Court recognized that the existence of large arbitration costs could preclude a litigant ... from vindicating her federal statutory rights.... [24] Nonetheless, the Supreme Court concluded that an arbitration agreement's mere silence with respect to costs and fees, by itself, is a plainly insufficient basis for invalidating the agreement. [25] Instead, the party opposing arbitration must prove the likelihood of incurring such costs. [26] To hold otherwise would undermine the liberal federal policy favoring arbitration agreements. [27] While the Supreme Court did not specify how detailed the showing of prohibitive expense must be, there is no doubt that some specific information of future costs is required. [28] In Green Tree, the party resisting arbitration cited what she claimed were American Arbitration Association (AAA) figures on arbitration costs, but she provided no evidence that the AAA would actually conduct the arbitration or charge her the fees she identified. [29] Because of this uncertainty, the Supreme Court deemed the evidence insufficient to defeat arbitration. [30] Here, the de los Santoses testified, in two sworn affidavits, that the AAA charged a minimum $2,000 filing fee and a $250/day/party hearing fee, along with several other unspecified fees, for hearings before a three-member panel. But we need not decide whether these costs would be excessive. As in Green Tree, the de los Santoses provided no evidence that the AAA would actually conduct the arbitration or charge the specified fees. The Arbitration Addendum does not state that the AAA will conduct the arbitration, and it makes no mention of arbitration costs. We also note that the most recent AAA commercial arbitration rules provide that the AAA may, in the event of extreme hardship on the part of any party, defer or reduce the administrative fees. [31] Moreover, in the event the de los Santoses do not avail themselves of FirstMerit Bank's choice of arbitrators, the FAA permits the trial court to choose an alternate set of arbitrators. [32] The de los Santoses also complain that the requirement of three arbitrators is inherently costly. But again, without any specific information on what the costs will be, this requirement is not evidence of unconscionability. Finally, in agreeing to the Addendum, Pete and Janie de los Santos agreed that arbitration is a less expensive method of dispute resolution that decreases servicing costs of this loan.... Because the record contains no specific evidence that the de los Santoses will actually be charged excessive arbitration fees, we conclude that there is legally insufficient evidence that the plaintiffs would be denied access to arbitration based on excessive costs. The de los Santoses also argue that the agreement's terms are unconscionable because they force the weaker party to arbitrate their claims, while permitting the stronger party to litigate their claims. [33] They point us to decisions in other jurisdictions that have found this type of clause to be unconscionable. [34] Most federal courts, however, have rejected similar challenges on the grounds that an arbitration clause does not require mutuality of obligation, so long as the underlying contract is supported by adequate consideration. [35] In any event, the basic test for unconscionability is whether, given the parties' general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract. [36] The principle is one of preventing oppression and unfair surprise and not of disturbing allocation of risks because of superior bargaining power. [37] Here, the Arbitration Addendum allows the bank to seek judicial relief to enforce its security agreement, recover the buyers' monetary loan obligation, and foreclose. Given the weight of federal precedent and the routine nature of mobile home financing agreements, [38] we find that the Arbitration Addendum in this case, by excepting claims essentially protecting the bank's security interest, is not unconscionable. [39] We also recognize that the plaintiffs are free to pursue their unconscionability defense in the arbitral forum. Moreover, the de los Santoses cannot prevail on their duress defense, since there is no evidence that the sellers threatened to do anything they did not have a legal right to do. [40] At most, the sellers stated only that they would not sell the home if the de los Santoses would not sign the Addendum, which is not evidence of duress. [41] The de los Santoses also alleged fraud in the inducement of the Arbitration Addendum. The elements of fraud are: (1) that a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. [42] In this case, the de los Santoses alleged that the sellers fraudulently represented that they owned the land under the home, and that the home had a septic system and driveway. They also allege that the sellers' advertisements and pre-sale statements made no reference to an arbitration clause, and that the sellers did not adequately explain the consequences of signing the Addendum. However, there is no evidence that the sellers actually misrepresented the Addendum's terms, or that they made any false material representations with regard to the Arbitration Addendum itself. Accordingly, we decline to invalidate the Arbitration Addendum based on fraud. Finally, the de los Santoses argue that their alleged revocation of the installment contract also applies to the Arbitration Addendum, rendering it unenforceable. But this claim really pertains to the entire installment contract and not just the Arbitration Addendum. Again, the Arbitration Addendum's validity is a separate issue from the validity of the whole contract. [43] And given that the FAA's primary objective is to encourage the arbitration of contract-related issues, the issue of whether the underlying contract was revoked is an issue that should be arbitrated, since it arises from or relates to the contract. [44]