Arbitration Denied: Third Appellate District Holds Arbitration Clause Procedurally and Substantively Unconscionable

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In Cabatit v Sunnova Energy Corporation, the Third Appellate District held that an arbitration clause in a solar power lease agreement was unenforceable because it was procedurally and substantively unconscionable.

In Cabatit, Mr. and Ms. Cabitat entered into a solar power lease agreement (the “Agreement”) with Sunnova Energy Corporation (“Sunnova”). Ms. Cabitat, who signed the agreement, speaks English but does not understand complicated or technical terms. The salesperson scrolled through the agreement language and Ms. Cabatit initialed where the salesperson indicated, even though she did not understand most of what he was saying. The salesperson did not explain anything about the arbitration clause nor did he provide Ms. Cabatit with a copy of the Agreement.

Subsequently the Cabatits sued Sunnova, alleging Sunnova damaged their roof during installation, and that the replacement roof was inferior to the roof they had damaged.  In addition, the Cabatits alleged violations of the California Home Improvement Law, Home Solicitation Law, Unfair Competition Law, and Consumer Legal Remedies Act. Sunnova moved to compel arbitration based on an arbitration clause in the Agreement. The trial court found the arbitration clause unconscionable and denied Sunnova’s motion.

On appeal, Sunnova contended (1) the arbitration clause requires the Cabatits to submit to an arbitrator the question whether the clause is enforceable, (2) the trial court erred in finding the arbitration clause unconscionable, and (3) despite the trial court’s conclusion to the contrary, the rule announced in McGill v. Citibank, N.A. (2017) 2 Cal.5th 945 (McGill) — that an arbitration agreement waiving statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law is unenforceable — does not apply to the circumstances of this case.

In affirming the trial court, the Court of Appeal first discarded Sunnova’s argument that the arbitration clause requires the Cabatits to submit to an arbitrator the question whether the clause is enforceable because Sunnova failed to raise that argument to the trial court. The Court of Appeal then examined the clause itself and the surrounding circumstances, providing a two-step analysis in determining that the Agreement was procedurally and substantively unconscionable.

First, the Court of Appeal determined the Agreement was a contract of adhesion that indicated oppression and surprise. The Court quoted Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1142, for the proposition that “[o]ne common formulation of unconscionability is that it refers to an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (quotation marks omitted). The Court pointed to the following factors in making its determination, that (1) Sunnova drafted the Agreement and the Cabatits had no option other than to take or leave it; (2) Ms. Cabatit did not understand the Agreement; (3) the arbitration clause was not explained by the salesman, and (4) the Cabatits were not given a copy of the Agreement. The Court of Appeal rejected arguments from Sunnova that (1) Ms. Cabatit signed a statement that she had read the terms of the Agreement; (2) the arbitration clause is conspicuous; (3) there were no facts showing Sunnova had superior bargaining strength or that the Cabatits were without a meaningful choice whether to sign the Agreement; and (4) the Cabatits had the right to cancel the Agreement within seven days.

Second, the Court determined the arbitration clause was substantively unconscionable. In doing so, the Court relied upon Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910, for the proposition that substantive unconscionability focuses on whether the terms of an agreement are overly harsh, unduly oppressive, or so one-sided as to shock the conscience. Here, the Court found the arbitration clause to be clearly one sided because Sunnova reserved the right to take most of its claims to court but purported to deny the Cabatits the same opportunity.

Finally, the Court of Appeal rejected Sunnova’s argument that the rule announced in McGill, supra, 2 Cal.5th 945, applied. In McGill, the California Supreme Court held that an arbitration agreement waiving statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law is unenforceable. (Id. at pp. 951-952.) The Court determined general considerations of unconscionability, independent of the McGill rule, was sufficient to support the trial court’s denial of the motion to compel arbitration.

Cabatit is important for two reasons. First, it demonstrates the high-bar that allows a court to find a contract of adhesion. Second, it demonstrates the need for arbitration clauses not to favor the drafting party.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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