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Two Agreements Yield Very Different Results

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By RICHARD WEATHERINGTON

When agreements were drafted in the past, payday lenders may not have paid a lot of attention to the design and layout of the form. But in some cases, the attention to the design can be important to the very enforcement of some of the agreement’s previsions.

Recently, two very different agreement layouts resulted in contrasting enforcement outcomes.

Two check cashing corporations operated a company engaged in delayed deposit check cashing. The payday lender was licensed in Mississippi and governed by the Mississippi Check Cashers Act.

A number of payday loan transactions took place in Clarke County and Newton County, Miss. In Clark County, 20 customers contracted with the lender for cash advance services. Twelve customers did the same in Newton County.

Both sets of customers signed one of two specific agreements with the lender.

The first version of the agreement was signed by eight of the 32 customers. It was one page, front and back, with a variety of font sizes, and was the older of the two agreements; it was last revised on April 12, 2001.

The remaining 24 customers signed the second agreement, which appeared to have been created on May 31, 2005. The entire second agreement was contained on one side of a single page.

Apart from the transactional terms listed at the top of the page and the eight bolded headings, the text of the agreement was essentially uniform in size and style. Each agreement also contained an arbitration provision. But the wording and style of the provisions were noticeably differed.

Two Lawsuits

The two groups of customers filed separate lawsuits, one in Clarke County, the other in Newton County. They claimed the lender had fraudulently represented the terms of its service charges and fees and exhibited a pattern of “predatory lending,” trapping the customers in a never-ending cycle of debt repayment.

Both suits alleged the lender had (1) breached the covenant of good faith and fair dealing; (2) negligently handled the customers’ accounts; (3) caused the customers to suffer emotional distress and mental anguish, (4) negligently hired, trained, and supervised its employees; and (5) fraudulently misrepresented the terms of the service charges and fees.

Citing the arbitration provisions in the two delayed deposit agreements, the lender filed a motion to compel arbitration in each case.

But the Clarke County Court entered a written order denying the lender’s motion to compel, finding the two arbitration provisions procedurally and substantively unconscionable.

The Newton County Court followed suit and also denied arbitration.

The Newton County Court “piggy backed” the Clarke County Court’s specific reasoning for denying arbitration.

The lender then appealed the denial of arbitration in both cases to the Mississippi Court of Appeals, and the Appeals Court consolidated the two cases on appeal.

Because the grant or denial of a motion to compel arbitration raises an issue of law, the Appeals Court review is from a fresh point of view.

According to the Federal Arbitration Act, arbitration agreements shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. Doubts about the availability of arbitration must be resolved in favor of arbitration.

Does the FAA Apply?

Because the customers challenged the applicability of the FAA, the Appeals Court said it must first determine if the FAA applied to the arbitration provisions in the delayed deposit agreement.

The FAA governs the arbitrability of contracts evidencing a transaction involving commerce, and Mississippi has endorsed the undisputed dominion of the FAA, recognizing that it controls those agreements formed in interstate commerce in which a contractual provision provides for alternative dispute resolution.

Concerning the applicability of the FAA to these particular contracts in dispute, the Appeals Court said its threshold determination is whether the delayed deposit agreements between the lender and the customers “involve commerce” and thus fall within section 2 of the FAA.

Here, the customers argued that the circuit court incorrectly found the FAA applied to what they deem were wholly intrastate contracts.

As they saw it, because all parties were Mississippi residents, the delayed deposit agreements were not contracts “evidencing a transaction involving commerce.” The Appeals Court disagreed.

The court noted that, there must be some involvement with commerce, but it need not be substantial in each particular transaction.

The United States Supreme Court has interpreted the phrase “involving commerce” within section 2 of the FAA as the “functional equivalent” of “affecting commerce.” And the requisite connection for FAA governance of a contract’s arbitrability is met if in the aggregate the economic activity in question would represent a general practice subject to federal control.

Banking and related financial activities are of profound local concern. Nonetheless, it does not follow that these same activities lack important interstate attributes.
Thus, for purposes of application of the FAA, when assessing whether the contract involves commerce, only the “general practice need bear on interstate commerce in a substantial way.”

Specifically, said the Appeals Court, in the context of payday loan contracts between licensed check cashers and their customers, the Mississippi Supreme Court has previously found a sufficient connection to interstate commerce, partly based on the transactions being subject to the Truth in Lending Act.

The second delayed deposit agreement cited the FAA and noted that certain disclosures were made in accordance with the Truth in Lending Act. Although the first agreement lacked a similar expression, it disclosed the same information as the second.

Still, noted the Appeals Court, regardless of whether the particular federal protective regulations were cited, because the lender — a lender of money to consumers — must operate in accordance with the Truth in Lending Act, its lending activities involve commerce.

When viewed in the aggregate, the Appeals Court found that the general check cashing services performed by the lender affected interstate commerce. Therefore, the circuit judges correctly held that the FAA applied to both arbitration provisions.

External Legal Constraints

Having found the FAA applied, the Appeals Court said it next must decide if the motion to compel arbitration was properly denied as substantively and procedurally unconscionable.

The Appeals Court said its review would begin with a two pronged test focusing on the specific arbitration agreements and whether legal constraints external to the agreements bar arbitration.

Under the first prong, there are two considerations: (1) whether there is a valid arbitration agreement and (2) whether the parties’ dispute is within the scope of the arbitration agreement.

Under the second prong, the court would decide whether legal constraints external to the parties’ agreement bars arbitration of the claims. To evaluate if such legal constraints exist, courts generally should apply ordinary state law principles that govern the formation of contracts.

The Appeals Court said it agreed with the circuit judges that the disputes were within the scope of the arbitration agreements.

But whereas the circuit judges found the provisions substantively and procedural unconscionable under the first prong, the Appeals Court said that it was more appropriate to address these state law based external legal constraints, which, if applicable, would preclude abritrability under the second prong.

Unconscionability

Unconscionability has been defined as an absence of meaningful choice on the part of one of the parties together with contract terms that are unreasonably favorable to the other party.

There are two recognized types of unconscionability, said the court, “procedural and substantive.” Here, the circuit judges found the two arbitration provisions were both procedurally and substantively unconscionable.

In reviewing these findings, the Appeals Court pointed out the differences between procedural and substantive unconscionability.

Procedural unconscionability may be proved by showing a lack of knowledge, lack of voluntariness, inconspicuous print, the use of complex legalistic language, disparity in sophistication or bargaining power of the parties, and/or a lack of opportunity to study the contract and inquire about the contract terms.

Procedural unconscionability is most strongly shown in contracts of adhesion or more commonly known as a “take it or leave it contract.”

Substantive unconscionability, on the other hand, may be found when the terms of the contract are of such an oppressive character as to be unconscionable.

Substantive unconscionability is present when there is a one sided agreement whereby one party is deprived of all the benefits of the agreement or left without a remedy for another party’s nonperformance or breach.

First Agreement

The Appeals Court noted that the first delayed deposit agreement was signed by eight of the 32 customers. It is one page, front and back, and is entitled “Agreement.”

The front page lists the basic terms of the contract, including the annual percentage rate, finance charge, amount financed, and total amount owed. The front of the page also provides signature lines for the customer and the lender’s employee to sign, acknowledging their acceptance of the agreement’s terms.

The back of the page lists additional terms, including the arbitration provision. These additional terms are in paragraph form, but there are no separate headings, no bolded words, no capitalized words, and no distinguishable provisions.

The print used on the back page is smaller than on the front. The arbitration clause, which is found in the fifth of these nine nondescript, small print, back page paragraphs, states:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association (AAA) and judgment on the award rendered by the arbitration may be entered in any court having jurisdiction thereof.”

The Clarke County judge noted the arbitration clause was intermingled with other non-distinguishable provisions and that it did not even distinguish the paragraph with the arbitration language as an Arbitration Provision.

There was nothing in that first contract that would draw the readers’ attention to the arbitration language, nor was the paragraph highlighted from the rest of the text.

Furthermore, the Clark County judge labeled the agreement one of “adhesion” or lopsided bargaining power because the lender had offered it to the customers on a “take it or leave it” basis, with no real opportunity to bargain about its terms. Both judges found the first arbitration provision was procedurally unconscionable.


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