|
ATTORNEY FEE
PROVISIONS IN CONSUMER CONTRACT ARBITRATION CLAUSES
Introduction:
If one reads the
small print on many consumer contracts, one finds that if there is a
dispute between the company selling the product and the customer, the
customer is required to seek relief in arbitration and that the party
that prevails in the arbitration will receive reasonable attorneys fees
from the losing party.
The reader should
review our article on
arbitration
before proceeding further.
The legislature has
been most uncomfortable with contractual provisions that restrict
consumer rights or act as a chilling effect on the ability of consumers
to seek legal redress for their grievances. The loss of the right to a
jury trial that is inherent in arbitration is seen as restricting
consumer remedies. There is a contrary argument that arbitration is
actually a plus for the consumer in that it avoids the cost and delay of
court and, of course, if one spends five thousand dollars in attorney
fees to win two thousand from the opponent, one has not “won” at all.
Thus, receiving attorneys fees from the losing party can actually help
consumers seek relief.
But the Legislature
decided that the fear of having to pay the legal fees of the company one
is fighting is of such magnitude that they enacted a statute voiding
such provisions in a consumer contract. Instead, the legislature made
any provision in a consumer contract that awards attorneys fees to the
prevailing party (the usual provision under California law) into a one
way attorney award provision. If the consumer wins the arbitration,
he or she gets attorneys fees. If the company wins the arbitration, it
does not.
Practically
speaking, this means most companies simply eliminate all such attorney
fees clauses entirely in all their forms. Thus no one gets attorneys
fees and many consumers will simply not spend the money to enforce their
rights.
This article shall
outline the law.
The Basic Law:
In 2002 the
California legislature enacted new legislation affecting mandatory
arbitration
in consumer cases.
One of the new statutes is Code of Civil Procedure section 1284.3
which became effective January 1, 2003. This statute applies to
mandatory arbitration in consumer cases and provides new and amended
rules regarding private mandatory arbitration including the award of
attorney fees to the prevailing party.
Code of Civil
Procedure section 1284.3(a) provides that “[N]o neutral arbitrator or
private arbitration company shall administer a consumer arbitration
under any agreement or rule requiring that a consumer who is a party to
the arbitration pay the fees and costs incurred by an opposing party if
the consumer does not prevail in arbitration, including, but not limited
to, the fees and costs of the arbitrator, provider organization,
attorney, or witnesses.” This means is that in a consumer agreement
that provides that the “prevailing party” recovers attorney’s fees from
the other party, the attorney fee provision will not be enforceable
against the consumer, but the consumer can enforce the fee
provision against the other non-consumer party to the agreement.
Code of Civil Procedure section 1284.3(c) further applies along with
1284.3(a) to all consumer arbitration agreements and to all consumer
arbitration proceedings conducted in California. Therefore, the new
statute appears to prohibit consumer arbitration in which the
arbitration agreement has a reciprocal attorney fee provision. Unless
that provision is not a part of the arbitration process.
The reforms enacted
in 2002 may reflect the trend in several recent appellate cases that
refused to enforce mandatory arbitration agreements on the grounds that
they were one sided and unfair such as Armendariz v Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83 and
Szetela v. Discover Bank (2002) 97 Cal.App. 4th 1094.
While many of the
statutory changes that became effective in 2003 primarily concerned
private arbitration companies and the way in which they may administer
consumer arbitrations and the information they must provide consumers,
California Code of Civil Procedure §1284.3 (a) will have the most
significant impact on businesses and their utilization of arbitration as
a means of dispute resolution. As California Code of Civil Procedure
§1284.3(a) provides that even if a consumer loses, the consumer will not
have to pay the attorney fees and costs of the opposing party even if
the arbitration agreement or contract provides for the recovery of
attorney’s fees and costs, businesses that sell to consumers will
carefully review their contracts and arbitration clauses and should
revise them to reflect this new legislation.
PRACTICALITIES:
Most consumer
conflicts involve relatively small amounts of money. Since attorneys
usually cost between two hundred and five hundred dollars per hour, and
since the typical court action costs in the tens of thousands and the
typical arbitration about half that, it is essential for a party to
recover attorney fees in the action if they are to make a net gain from
even winning the arbitration.
In California law,
the old standard business provision that awarded fees only to the
business or the landlord was voided and replaced under California Code
of Civil Procedure 1717 to indicate that the prevailing party would
receive attorney’s fees and costs. Thus any attorney fees provision in
California must award attorney’s fees to the prevailing party…good and
intelligent law since it will make the party that wins truly “whole.”
That is also the law in many European nations, even in court. Here, it
must be in the contract unless certain limited statutes apply.
But this variation
on the law may essentially eliminate arbitration entirely in most
consumer cases and the awarding of attorney’s fees will be restricted to
court cases which are often too expensive for consumers to utilize. In
an effort to “help” consumers, the government has probably compelled
businesses to eliminate what was an excellent alternative means to
resolve their problems involving businesses.
If you are a
business selling to consumers, it would be wise to eliminate all your
attorney fees provisions if you wish to use arbitration. If you are a
consumer with a problem and an old contract from a business still
awarding attorneys fees to the prevailing party…well, you have a decided
advantage.
But do not expect
businesses to offer attorney’s fees to the prevailing party in consumer
arbitration much longer….they will sooner or later all alter their
forms. |
