Posted In: Litigation & Real Estate
Industry: Construction

RE&C in Review and Business Litigation Advisory: Eighth District Finds Oral Hearing Unnecessary Before Compelling Arbitration

By Teresa G. Santin on May 3, 2021

On April 8, 2021, the Eighth District Court of Appeals affirmed a trial court decision denying a motion to compel arbitration and/or stay the matter pending arbitration. AJZ’s Hauling, L.L.C. v. TruNorth Warranty Program of N. Am., 8th Dist. Cuyahoga No. 109632, 2021-Ohio-1190. Appellant contended that the trial court erred when it (1) determined that res judicata did not apply; (2) failed to hold a hearing prior to making its decision; and (3) found the arbitration provision at issue both procedurally and substantively unconscionable. This blog will focus on the second and third assignments of error. The Eighth District found that it was not a reversible error for the trial court to decide the motion to compel arbitration without holding an oral hearing. Reviewing the unconscionability issue de novo, it affirmed the trial court’s decision finding the arbitration provision both procedurally and substantively unconscionable.

In TruNorth, the plaintiff/appellee, AJZ’s Hauling, filed suit against TruNorth in the Cuyahoga County Common Pleas Court after it bought a 2011 truck from Premier Truck Sales & Rental, Inc. for approximately $120,000. The purchase agreement with Premier included a two-year warranty by TruNorth. Despite encountering significant engine- and transmission-related issues briefly after taking possession of the truck, and submitting five warranty-related claims to TruNorth, TruNorth denied each of those claims, and AJZ’s Hauling was forced to pay for the repairs. Shortly after AJZ’s Hauling filed suit, TruNorth moved to stay proceedings, pursuant to R.C. 2711.02, and compel arbitration, pursuant to R.C. 2711.03.

The trial court analyzed the arbitration provision at issue in the warranty agreement and determined from the parties’ written submissions that the provision was both procedurally and substantively unconscionable, and therefore unenforceable. Thus, it denied TruNorth’s motion to stay and compel arbitration. TruNorth appealed.

No Oral Hearing, No Reversible Error

First, TruNorth argued that the trial court erred by failing to hold a hearing before reaching its decision on the motion to stay/compel. TruNorth argued that, not only did it request a hearing, but R.C. 2711.03 requires a hearing on a motion to compel arbitration. The Eighth District analyzed the language of the statutes at issue and related case law to determine the necessity of an oral hearing on the motion. It noted that a motion to stay pending arbitration and a motion to compel arbitration constitute requests for distinct remedies under separate statutes. It observed that the Ohio Supreme Court has found a motion to stay pending arbitration under R.C. 2711.02 does not require a hearing. It then acknowledged that R.C. 2711.03—the statute governing a motion to compel arbitration—does require the trial court to hold a hearing when the enforceability of the arbitration agreement is at issue. However, the Eighth District determined that TruNorth’s generic indication on its motion of “hearing requested” did not amount to a specific request for an oral or evidentiary hearing. Additionally, the Eighth District found that the trial court “heard” the parties by reviewing their documentary submissions, as evidenced by the trial court’s thorough and complete analysis of the issues in its decision. Thus, the Eighth District concluded that the trial court’s failure to hold an oral hearing did not constitute reversible error.

Both Procedural and Substantive Unconscionability

Second, TruNorth argued that the trial court erred when it determined that the arbitration provision was both procedurally and substantively unconscionable. Appellate courts review unconscionability determinations de novo. Procedural unconscionability exists where one of the parties lacks meaningful choice to enter into the arbitration provision. Substantive unconscionability concerns the terms of the arbitration agreement itself and exists where the terms are unfair and unreasonable. For an arbitration provision to be rendered unenforceable, a party must demonstrate both procedural and substantive unconscionability.

As evidence to support procedural unconscionability, AJZ’s Hauling submitted an affidavit reflecting that they did not review or receive the warranty agreement containing the arbitration provision until four days after it entered into the purchase agreement and took possession of the car. The purchase agreement itself did not contain an arbitration provision. AJZ’s Hauling received the warranty agreement by email and no one explained to them that the warranty agreement contained an arbitration clause, which was located on the last page. Additionally, the affidavit reflected that AJZ’s Hauling is a small family-owned business whose only members and employees are a husband and wife who are both unfamiliar with arbitration. In light of this evidence, the Eighth District concluded that the trial court’s decision finding the clause procedurally unconscionable was reasonable.

To support substantive unconscionability, AJZ’s Hauling focused on the prohibitive cost of the arbitration. The arbitration provision required that it occur in North Carolina, even though AJZ’s Hauling is a Pennsylvania company that does not do business in North Carolina. It also required the parties to equally bear the expense of three arbitrators, even though the dispute involved only $25,000, nothing in the provision capped the arbitrator fees, and the arbitration filing fee alone was $2,500. Additionally, AJZ’s Hauling would bear all expenses associated with travel to North Carolina for the arbitration, witnesses and legal representation there. For these reasons, the Eighth District agreed that the cost of the arbitration would be prohibitively expensive for AJZ’s Hauling and found that the trial court did not err in determining that the arbitration provision was substantively unconscionable.

Conclusion

Your Brouse attorney can ensure that your commercial or construction-related arbitration clause is not procedurally or substantively unconscionable and can assist in reviews and negotiations of your commercial and construction agreements to ensure that you may bring your disputes in the most desirable forum. Finally, your Brouse litigation attorney will ensure that your interests are effectively represented, regardless of the forum you select to litigate your dispute.

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2023 Brouse McDowell. All rights reserved.

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