Facts
- Homebuyers purchased homes from a developer and later sued alleging construction defects.
- Each transaction used a preprinted, two-page form sales agreement in very small font.
- The front page contained price/financing terms and signatures, plus a notice that paragraphs on the reverse side were part of the contract.
- The back page, in even smaller font, included a limited warranty clause and a mandatory binding arbitration provision referencing Nevada arbitration law and the Federal Arbitration Act and adopting AAA Construction Industry Arbitration Rules.
- The arbitration clause broadly covered any disputes between buyer and seller, including tort and contract claims related to the transaction and warranty.
- The clause imposed $10,000 “liquidated damages” if the buyer filed any legal action without first seeking arbitration.
- The developer moved to compel arbitration; the district court denied the motion, finding the clause adhesive and unconscionable.
- On appeal, the homebuyers conceded the agreement was not adhesive because some buyers had negotiated removal of the arbitration clause; the dispute centered on unconscionability.
Issues
- Whether the mandatory arbitration provision in the home purchase agreements was unconscionable and therefore void and unenforceable.
- Whether the clause’s presentation (placement and small type) supported procedural unconscionability.
- Whether the clause’s substance—especially its breadth and the $10,000 liquidated-damages term—was overly harsh or one-sided so as to be substantively unconscionable.
Decision
- The Nevada Supreme Court affirmed the district court’s order denying the motion to compel arbitration.
- The court held the arbitration clause was unconscionable and therefore void and unenforceable.
- The court relied on both the clause’s manner of presentation and its harsh, buyer-penalizing terms, including the $10,000 liquidated-damages provision.
Legal Principles
- Arbitration provisions are subject to generally applicable Nevada contract defenses, including unconscionability.
- Unconscionability has procedural and substantive components; a court may invalidate a clause when the contracting process creates unfair surprise or lack of meaningful choice and the term is overly harsh or oppressive.
- A broadly written arbitration clause coupled with a significant monetary penalty for filing suit without first arbitrating may be substantively unconscionable, particularly in a consumer home-purchase setting.
- Contractual references to Nevada arbitration statutes and the Federal Arbitration Act do not bar application of state unconscionability doctrine to invalidate an arbitration clause.
Conclusion
The court refused to compel arbitration because the clause’s small-print, back-page placement and its oppressive $10,000 penalty for initiating litigation without first arbitrating rendered the arbitration provision unconscionable and unenforceable.