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California Appellate Court Upholds Auto Dealer’s Arbitration Clause in Sales Agreement
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California Appellate Court Upholds Auto Dealer’s Arbitration Clause in Sales Agreement

Gustavo E. Vasquez v. Greene Motors, Inc., et al.

The California Court of Appeal for the First District (Div. One) recently considered an appeal regarding an arbitration clause in a vehicle sales agreement. The court ultimately held that the arbitration clause was procedurally unconscionable, but not substantively unconscionable. On that basis, the appellate court remanded the matter to the trial court to enter an order directing the parties to engage in arbitration in accordance with the terms of the sales contract.

The underlying transaction that was the basis of the dispute occurred between Gustavo E. Vasquez, a consumer, and Greene Motors, Inc., an auto dealer. Vasquez purchased a used car on credit from Greene. Financing for the vehicle was assigned to American Honda Finance Corporation (Honda).

When the deal went south, Vasquez sued Greene and Honda in connection with the terms of the financing.

Greene and Honda petitioned the superior court to compel arbitration according to a clause in the sales agreement. Vasquez opposed the petition on the ground the arbitration clause, contained on the back of a complex, one-page, preprinted document, was procedurally and substantively unconscionable. The trial court agreed and denied the petition to compel.

Greene and Honda appealed. The appellate court held that because the arbitration agreement was imposed on Vasquez without the opportunity for negotiation, and was therefore adhesive, the transaction was, in fact, procedurally unconscionable, but only minimally so.

The court went on to discuss the second prong of the unconscionability test, which is whether the transaction was substantively unconscionable.

A transaction may be found substantively unconscionable when it compels overly harsh or one-sided results. The prevailing view is that procedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.

In reviewing the circumstances surrounding the transaction in question, the appellate court held:

“[T]he only suggestion of substantive unconscionability we found was the failure of the clause to permit an “appeal” arbitration in the event a buyer sought and was denied injunctive relief. Because this asymmetry is mitigated by the provision permitting a second arbitration if a buyer is denied a monetary recovery, we conclude it did not rise to the level of substantive unconscionability. Accordingly, there is no basis for declining to enforce the parties’ agreement to arbitrate.”

If Greene and Honda had not appealed their case, they would have been bound by the Superior Court’s decision not to enforce the arbitration clause.

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