Graham v. Scissor-Tail, Inc.
28 Cal.3d 807, 171 Cal. Rptr. 604, 623 P.2d 165 (1981)
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Rule of Law:
An arbitration clause within a contract of adhesion is unconscionable and unenforceable if it designates an arbitrator who is presumptively biased in favor of one party, as such an arrangement fails to meet the minimum levels of integrity required for a nonjudicial dispute resolution system.
Facts:
- Bill Graham, a prominent concert promoter, entered into several contracts with Scissor-Tail, Inc., a corporation representing musician Leon Russell.
- The contracts were on a standard American Federation of Musicians (A.F. of M.) form B, which Graham was required to use for all concert artists who were members of the union.
- These form contracts were presented on a take-it-or-leave-it basis for key terms, including compensation and dispute resolution.
- The contracts contained a clause requiring all disputes arising from the agreement to be submitted for final and binding arbitration before the International Executive Board of the A.F. of M., the union to which Russell belonged.
- After two concerts were performed, one resulted in a significant financial loss and the other a significant profit.
- A dispute arose between Graham and Scissor-Tail over which party was responsible for the loss from the first concert and whether it could be offset against the profits of the second.
- Due to this unresolved dispute, Scissor-Tail refused to perform under the remaining two contracts.
Procedural Posture:
- Graham filed suit for breach of contract and other claims against Scissor-Tail in the superior court, a trial court of first instance.
- Scissor-Tail filed a petition to compel arbitration pursuant to the contract's arbitration clause.
- The trial court granted the petition and ordered the parties to arbitrate their dispute before the American Federation of Musicians (A.F. of M.).
- The A.F. of M.'s international executive board issued an arbitration award in favor of Scissor-Tail.
- Scissor-Tail filed a petition in the superior court to confirm the arbitration award, and Graham filed a petition to vacate it.
- The superior court confirmed the award and entered a judgment in favor of Scissor-Tail.
- Graham, as the appellant, appealed the judgment confirming the arbitration award to the California Supreme Court.
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Issue:
Does a provision in a contract of adhesion that requires arbitration before an arbitrator presumptively biased in favor of the stronger party render the provision unconscionable and unenforceable?
Opinions:
Majority - The Court
Yes, a provision in a contract of adhesion that requires arbitration before a presumptively biased arbitrator is unconscionable and unenforceable. The court first determined the contract was one of adhesion because Graham, despite his prominence, had to accept the standard A.F. of M. form with its non-negotiable arbitration clause to do business with any major union artist. The court then applied a two-part test for enforceability: whether the challenged provision falls outside the adhering party's reasonable expectations, and whether it is unduly oppressive or unconscionable. While the court found the arbitration clause was within Graham's reasonable expectations due to his extensive experience, it concluded the clause was unconscionable. Designating one party's union (A.F. of M.) as the arbitrator creates an inherent bias, as the union's primary function is to protect its members' interests. This arrangement fails to provide the 'minimum levels of integrity' necessary for a fair arbitral forum and is inimical to the concept of arbitration, rendering the agreement illusory and unenforceable on grounds of unconscionability.
Analysis:
This case significantly shaped California contract law by clarifying the limits on the enforceability of arbitration clauses in contracts of adhesion. It establishes the principle that substantive unconscionability, particularly through a biased dispute resolution mechanism, can render a contract term unenforceable even if it doesn't violate the weaker party's reasonable expectations. The decision tempers the state's strong policy favoring arbitration with a requirement for fundamental fairness, ensuring that arbitral forums maintain 'minimum levels of integrity.' This precedent provides a crucial defense for weaker parties against oppressive terms in standardized contracts that designate a biased arbitrator.
