Appellate Case Puts an Important Spin on Arbitration, Retainers

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By William Peacock, Esq. on August 29, 2013 3:55 PM

With all of the pro-business and anti-consumer arbitration decisions lately (we're looking at you, SCOTUS), it's a bit refreshing to see a decision, albeit a California-only appellate court decision, go the other way, and fall on the side of the consumer. Even if the decision does seem to contradict, somewhat, the language of the contract. Lawyers should especially pay attention, as this case dealt with a retainer agreement.

The three plaintiffs here are elderly residents of a Section 8 (low income) apartment complex. They retained an attorney to deal with issues of mold. Their counsel later allegedly coerced them into taking a lesser settlement by attempting to have a guardian ad litem appointed to manage their affairs.

An arbitration agreement in the retainer provided that any dispute would be handled through arbitration, while the default rule, Code of Civil Procedure 1284.2 (not mentioned in the contract) is that parties share the expense.

As you may have suspected, elderly Section 8 residents can't afford the costs of arbitration.

At the trial level, the lower court merged the cases and enforced the clause. Later, after the court found the plaintiffs to be in forma pauperis, the plaintiffs requested a court order stating that they did not have to pay up-front costs of arbitration. That request was again denied, as the court noted that the in forma pauperis determination only applied to court fees, and arbitration, while expensive, was "life outside this courtroom."

The Appellate Court, after acknowledging the realities of life, and basic presumptions of contract law (parties have read the contract, laws in existence at the time of signing are incorporated into the agreement, etc.), cited another basic tenant of the law: access to the court system and legal remedies for all.

The court then cites quotes a case that holds an arbitration clause unconscionable where it provides no means for waiver of costs for the indigent, "[W]here a consumer enters into an adhesive contract that mandates arbitration, it is unconscionable to condition that process on the consumer posting fees he or she cannot pay."

Instead of outright holding the clause unenforceable however, the court takes a different route that respects the lower court's initial rulings regarding the enforceability of the clause pre-pauperis. That route, from what we can tell, is a truly unique remedy. After stating that it could not force the private arbitrator to waive its fees, it stated:

"What we can do, however, is give Callahan a choice: if the trial court determines that any of these plaintiffs is unable to share in the cost of the arbitration, Callahan can elect to either pay that plaintiff‟s share of the arbitration cost and remain in arbitration, or waive its right to arbitrate that plaintiff‟s claim."

Though this may result in higher arbitration fees for the law firm, the court notes that the plaintiffs were indigent Section 8 tenants at the time they signed the contract. Such a result was hardly unforeseeable. When balanced against the alternative (depriving the plaintiffs of a forum), this seems like the best choice.

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