Maryland Court Holds Arbitration Clause in a Contract Partially Unenforceable
In College Park Pentecostal Holiness Church v. General Steel Corp., Civ. No. PJM 09-2070 (D. Md.), the United States District Court for the District of Maryland struck down several portions of an arbitration clause in a standardized construction contract as unconscionable. The case was filed by the plaintiff church after the defendant construction company failed to erect a new building on the church’s property as required by the parties’ contract. After being pressured to sign the standardized contract used by the construction company, the church paid the construction company a $45,000.00 deposit. A year later, the church paid an additional $50,000.00 for what the defendant characterized as a “building change order.” The construction company thereafter refused to construct the building and, moreover, did not return any of the church’s money.
The church filed suit in Maryland federal court, asserting various claims for relief. The construction company filed a motion to enforce the arbitration clause in the contract which provided, inter alia that arbitration and enforcement of any award occur exclusively in Denver, Colorado and that the church, as the party “initiating” the dispute, advance all costs of the arbitration. The church argued that these portions of the arbitration clause were “unconscionable” and, therefore, unenforceable.
Applying Colorado state contract law, the choice of law selected by the parties in the contract, the Court agreed with the church and held the provisions in dispute unenforceable. Among other things, the Court noted that the Church was given a one-day turn around time to sign the agreement and thus had little time to familiarize itself with the onerous terms of the arbitration clause. In fact, the Court noted that the arbitration provisions were the most “oppressive” the Court had ever seen as the contract required the church to: (1) arbitrate its claims solely in Denver, Colorado, some 1,400 miles away from its College Park location, (2) advance all costs of the arbitration, and (3) pay the attorney’s fees and costs of defense incurred by the construction company, regardless of whether the church prevailed or not. Given these and other factors, as well as the economic disparity between the parties, the Court struck the fee-shifting provisions entirely, and ordered that the arbitration take place in Maryland, not Colorado.
While this case was decided under Colorado state law, arbitration clauses have been challenged as unconscionable under Maryland law too. See, e.g., Walther v. Sovereign Bank, 872 A. 2d 735 (Md. 2005). Under Maryland law, a court will not enforce an agreement on grounds of unconscionability where it is both “procedurally” and “substantively” unconscionable, that is where “extreme unfairness” is found in both the formation and substance of the contract. Doyle v. Finance America, 918 A. 2d 1266, 1273 (Md. Sp. Ct App. 2007). While “[u]nconscionability is an amorphous concept that evades precise definition”, id., a court could nonetheless hold the arbitration clause terms in General Steel unconscionable under Maryland law given the unfairness in the substance of those terms and more generally in the formation of the contract itself.