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.
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.