Show Me the Money?: Washington Adopts the Cost Prohibitive Defense to Arbitration Clauses in Consumer Contracts

• Publication year: 2003

SEATTLE UNIVERSITY LAW REVIEWVolume 27, No. 3WINTER 2004

NOTE

Show Me the Money?: Washington Adopts the Cost Prohibitive Defense to Arbitration Clauses in Consumer Contracts

Merryn B. DeBenedetti(fn*)

When one has been threatened with a great injustice, one accepts a smaller as a favour.(fn1)

I. INTRODUCTION

Arbitration has rapidly become a preferred method of resolving disputes. The American Arbitration Association ("AAA") alone handled 230,255 cases in the last year, a figure representing over eleven percent of all the cases handled since 1926.(fn2) Since 1926, the AAA has administered over two million cases.(fn3) Proponents of arbitration often tout its efficiency and its ability to conserve judicial resources.(fn4) Nevertheless, arbitration may not provide some consumers these intended benefits when used by commercial entities in consumer contracts to prevent claims alleging the sale of defective goods and the use of improper financing practices.

In Conseco Finance Servicing Corp. v. Wilder,(fn5) the attorney for the consumers contesting the arbitration clause at issue wrote: "The vigorous assertions of Appellant notwithstanding, the Federal Arbitration Act ("FAA")(fn6) is not some all-encompassing panacea for litigation; to be blindly invoked and rotely applied simply because it has been incorporated into a consumer contract."(fn7) Although the legislative history surrounding the FAA suggests that this assertion is entirely accurate, commercial entities regularly misuse arbitration clauses to preclude consumer disputes from reaching a judicial forum, as the following hypothetical scenario illustrates.

Bobby Turner is a twenty-nine-year-old entry-level carpenter for a construction company doing business in Eastern Washington. Although he shows talent in his chosen vocation, he does not earn very much money because he is an apprentice, and his employment is seasonal. Emily, his twenty-eight-year-old wife, draws social security disability because she suffers from chronic fatigue syndrome and hypertension. Emily's monthly social security disability check contributes $600 to the family's income. The Turners have two children under the age of ten and receive an additional $400 per month for the two children from social security disability.

The Turners currently rent a small, two-bedroom house just beyond the town's city limits. Although money is tight, especially with two children, Bobby and Emily want to own their own home. However, after looking at a couple of houses with a real estate agent, the Turners realize that they cannot afford a conventional home. On their way home from another disappointing meeting with the real estate agent, the Turners stop off at the local mobile home dealer after seeing a large plastic banner and balloons proclaiming "Special Financing for First Time Buyers." If nothing else, they believe that they might be able to buy a mobile home and put it behind the home of Emily's parents, who own a five-acre tract of land out in the county. The mobile home salesman, anxious to meet his monthly sales quota, initially shows them a double-wide model with a dealer price of $65,000 before determining that the Turners can only afford a small three-bedroom, two-bath single-wide home with a price tag of $35,000. When the Turners try to negotiate a better price, the salesman tells them that this price includes all appliances, as well as a master bedroom suite and a living room suite.

The Turners are excited. The appliances are new and shiny, and they get to pick from several styles of furniture in the dealer office, which doubles as a small showroom. While Emily is choosing her carpet from several samples, Bobby asks the salesman about installation of the mobile home and some problems he saw in the interior wood trim. The salesman assures Bobby that the dealer's installation crew is one of the best in the area and that any small "cosmetic" interior problems will be fixed after delivery to the Turner's satisfaction. The salesman tells the Turners that the mobile home comes with a one-year warranty from the manufacturer and the dealer. Having been reassured, the Turners sign a purchase agreement and a loan application. Disappearing for a half-hour, the salesman returns and tells the Turners that his finance manager will not send in the application unless they can make a $5000 down payment or put up a tract of land as collateral to secure payment of the loan. The salesman asks the Turners to talk with Emily's parents about sub-dividing their tract and deeding them one acre of their own. He also tells them that a co-signor on the note or a small down payment of $1000 would guarantee that the deal would go through.

The Turners agree to talk to Emily's parents and, after much discussion, call the salesman the next day and tell him that her parents will deed them a one-acre tract and will loan them $1000 for a partial down payment. The Turners meet with the salesman and the finance manager approximately ten days later with a new deed and $1000 to sign the documents for the purchase of their new home. Within the fifty pages of closing documents are approximately twenty-five places for the Turners to sign or initial. The salesman makes it easy for them to wade through the morass of paperwork, pointing out where they need to sign or initial and telling them that their new home is being manufactured right now and should be ready for delivery in approximately thirty days. An hour later, the Turners emerge with a copy of all of their paperwork. Upon arriving home, they promptly put it in a box that they will read later after going to her parent's house to look at their new tract of land.

Later, Bobby briefly reviews some of the paperwork and is reassured to discover that their mortgage company, a national corporation specializing in financing mobile homes, will conduct a telephone audit after delivery of the mobile home to ensure that they have accepted delivery of their home. The Turners and Emily's parents spend the next four weekends doing their own site preparation. Shortly thereafter, the dealer's site installation crew arrives and installs the footers, followed three days later by their new mobile home. After the mobile home is installed, the Turners discover that most of the doors and windows are difficult to open and close and some windows will not open at all. During the telephone audit, Bobby mentions this to the mortgage representative, who assures him that these issues are covered by his warranty, and that he should immediately contact his dealer. After obtaining his recorded acceptance of the mobile home, the mortgage representative congratulates him on his purchase of a new home and reminds him that that his monthly mortgage payment must be made in a timely manner.

Over the next ten months, the Turners are unable to get the windows and doors repaired in addition to a leak that has developed in the wall in the master bedroom. The dealer tells them that the issues with the windows and doors are a manufacturer's problem and not an installation problem. When the manufacturer's local repair representative arrives, however, he informs the Turners that the home is not set up "right." Frustrated, the Turners begin taking turns calling the dealer, getting no response; calling the manufacturer, which tells them that it has made its repairs; and finally, calling the mortgage company, which tells them that it simply bought their contract and has no obligation to make any repairs. In addition, the mortgage company informs the Turners that they were late with their last monthly payment. In this call, Bobby tells this particular representative that he is not going to pay for a defective mobile home, and that he is going to see a lawyer. The representative tells Bobby that he had better read his contract again and hangs up.

Later, the Turners decide to visit a lawyer in town with all of their paperwork. After listening patiently to the Turners' story and reviewing their contract, the lawyer finally says that they cannot sue anyone, other than the manufacturer, because their contract contains an arbitration clause that they signed. Bobby Turner asks what that means, and the lawyer simply shakes her head and sighs.

Although this is only a hypothetical scenario, it is representative of the predatory manufacturing and financing tactics that some commercial entities employ and the use of arbitration clauses to avoid costly consumer claims that result from defective and rapacious manufacturing, sale, and financing practices. The Turners' situation is not unique. Manufacturers, dealers, and commercial financing institutions often bury arbitration clauses in fine print as a method to preclude a consumer from pursuing his or her claim, even though the sold goods are defective or the financing methods and lack of disclosure are reprehensible. Courts continue to struggle with whether arbitration is a comparable forum to litigation to protect consumer rights, and some courts have attempted to delineate new exceptions to the presumption in favor of arbitration in order to address these sharp business practices.(fn8)

In commercial-consumer contracts, arbitration may well be incapable of protecting consumers to the extent that litigation can create consumer awareness regarding defective products and predatory lending practices, assist in regulating these business...