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Burch v. Second Judicial District Court of the State of Nevada

Nevada Supreme Court
49 P.3d 647, 118 Nev. 438, 118 Nev. Adv. Rep. 46 (2002)
ELI5:

Rule of Law:

An arbitration clause within a contract of adhesion is unenforceable if it is unconscionable. A contract is unconscionable when it is both procedurally and substantively unfair; the greater the procedural unfairness in the contract's formation, the less evidence of substantive unfairness in its terms is required to invalidate it.


Facts:

  • In March 1997, James and Linda Burch purchased a new home constructed by Double Diamond.
  • Approximately four months after closing, in October 1997, Double Diamond presented Linda Burch with a one-page 'Application for Home Enrollment' and a thirty-one-page Home Buyers Warranty (HBW) booklet.
  • Linda Burch signed the one-page application without having read the accompanying booklet.
  • The signed application stated that the homebuyer consented to all terms in the booklet, including a binding arbitration provision located on page six.
  • The arbitration clause stipulated that any disputes would be settled by final and binding arbitration and granted Double Diamond's insurer the unilateral right to select the arbitration service and its rules.
  • In January 1999, the Burches discovered serious water damage, mold, and saturation in their home's foundation and crawl space.
  • Double Diamond offered a remedy that the Burches found unsatisfactory to resolve the construction defects.

Procedural Posture:

  • The Burches and Double Diamond stipulated to waive mediation after attempts to resolve the dispute failed.
  • The Burches filed a complaint for damages against Double Diamond in the state district court (court of first instance).
  • Double Diamond filed a motion to stay the court proceedings and a motion to compel arbitration, based on the Home Buyers Warranty agreement.
  • The district court found the warranty agreement to be valid and granted Double Diamond's motion to compel arbitration.
  • The Burches (petitioners) petitioned the state's highest court for a writ of mandamus, asking it to order the district court to vacate its order compelling arbitration.

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Issue:

Is a mandatory arbitration clause contained within a home warranty agreement, presented to a homebuyer on a 'take it or leave it' basis months after closing, unenforceable as an unconscionable contract of adhesion?


Opinions:

Majority - Per Curiam

Yes, the mandatory arbitration clause is unenforceable. A contract of adhesion containing an arbitration clause is unenforceable if it is unconscionable. The court determined that the Home Buyers Warranty (HBW) was a contract of adhesion because it was a standardized form presented to the Burches on a 'take it or leave it' basis with no opportunity for negotiation. For a contract to be invalidated for unconscionability, it must generally be both procedurally and substantively unconscionable. The court found significant procedural unconscionability because the Burches received the documents four months after closing, were told the warranty was 'automatic,' had no meaningful opportunity to read the 31-page booklet before signing, and the arbitration clause was buried within the document. Given this high degree of procedural unfairness, only a small showing of substantive unconscionability was needed. The court found the clause substantively unconscionable because it gave Double Diamond's insurer the unilateral power to select the arbitrators and the governing rules, which is an oppressive and one-sided term.



Analysis:

This case illustrates how state-law contract defenses, specifically unconscionability, can override the strong federal policy favoring arbitration under the Federal Arbitration Act (FAA). It establishes that courts will scrutinize the formation of consumer contracts and will not enforce arbitration clauses that result from an unfair process and contain oppressive, one-sided terms. The decision solidifies the use of a 'sliding scale' analysis, where a high degree of procedural unconscionability lessens the evidentiary burden to prove substantive unconscionability. This precedent provides a crucial protection for consumers against boilerplate arbitration clauses hidden in lengthy contracts of adhesion.

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