Saving the Legislature from its own sloppy phrasing, the Second District Court of Appeal concludes that Business & Professions Code §7191 absolutely prohibits a residential contractor from enforcing an arbitration clause when that clause is not presented in precisely the form required by that statute. In passing, the Court also affirms that attorneys are entitled to the same protections as other consumers, despite their presumed superior knowledge and negotiating skills.
Business and Professions Code §7191 was enacted in 1994 to ensure that consumers who accepted arbitration clauses in contracts for residential construction would do so knowingly, fully informed that they are giving up their rights to jury trial and other potential benefits of litigation in court. The statute imposes formal requirements on such clauses, including requirements that the provision be specifically entitled "ARBITRATION OF DISPUTES," that the effect of the clause be stated in prescribed language, ALL CAPITALIZED, and that the clause be initialed by the parties. Subdivision (c) of the statute sets forth the effect if the contractor (referred to as the "licensee") utilizes an arbitration clause that does not comply with the statute's requirements:
(c) A provision for arbitration of a dispute between a principal in a contract for work on a residential property with four or fewer units that does not comply with this section may not be enforceable against any person other than the licensee.
(Italics added.)
Paul Woolls entered into a contract for work on his home with a licensed contractor, Thomas Turner and T&T Construction. The contract contained an arbitration clause, but the clause was not individually initialed and did not include the title, use the typefaces, or incorporate the prominent disclosures mandated by §7191. Disputes arose concerning the work and Woolls filed suit. Turner and T&T commenced an arbitration proceeding. Despite written objections by Woolls and despite the pendency of a motion to stay the arbitration, the arbitrator held a hearing and issued a decision in favor of the contractor. Woolls sought an order from the trial court vacating the arbitration award, but that court declined. Woolls then petitioned the Court of Appeal to vacate the award and the Court did so, relying on §7191.
In the Court of Appeal, Turner and T&T argued that the Legislature had used the phrase "may not" in a "permissive" sense, not in a prohibitory one. That is, they argued that the trial court had discretion to enforce the clause against Woolls, or not, and that the court had not abused its discretion in choosing to affirm the arbitrator's award. After all, they argued, despite his objections Woolls had participated in the arbitration and had had the opportunity to present his side of case to the arbitrator. The Court of Appeal disagreed with the contractor's position, concluding that the Legislature had intended to enact an absolute prohibition on the enforcement of non-compliant clauses against anyone other than the contractor.
Here, the disclosure requirements contained in section 7191, subdivisions (a) and (b), are mandatory. Section 7191 repeatedly provides those provisions “shall” appear in the contract. [Citation.] Therefore, to construe section 7191 as optional would render it ineffective, a construction we must avoid. [Citation.]
Consequently, we construe the language in section 7191 that a noncompliant arbitration provision 'may not be enforceable', to mean that a failure to comply with section 7191 renders an arbitration provision per se unenforceable 'against any person other than the licensee.'
The Legislature could, of course, have saved a good deal of trouble if instead of saying that a non-compliant clause "may not be enforceable" it had chosen either "shall not be enforceable" or "may not be enforced".
Also of note is Turner's argument, rejected by the Court, that because Woolls is an attorney -- he is a well-established and respected insurance coverage attorney in the Los Angeles area -- he should be deemed to have known and understood that he was agreeing to arbitrate future disputes, the absence of the required language notwithstanding. Sometimes an attorney is just another consumer:
As explained, section 7191 prescribes the consequence for noncompliance therewith. A noncompliant arbitration provision is not “enforceable against any person other than the licensee.” [Citation.] We decline to rewrite the statute to provide that a noncompliant arbitration provision is also enforceable against a consumer who, due to education, training or experience, is aware that by agreeing to arbitration he or she is waiving the right to a court or jury trial. This court’s role is simply to interpret the statute as it was enacted, not to add to, detract from, or fine-tune it.
(Italics added; original emphasis omitted.)
The decision in Woolls v. Superior Court (Feb. 28, 2005), Case No. B177992, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]
Elsewhere: The ABC Evening News and Peter Jennings have just finished spending most of a week warning consumers of the dangers of arbitration clauses "hidden in the fine print."
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