P obtained loans from D with "single premium" (the borrower is charged the entire insurance premium at the time the underlying loan is originated, with the premium being financed into and over the life of the loan) credit life, disability, and unemployment insurance.
Later, NC General Assembly outlawed single premium credit insurance for loans.
P's loan agreement contained the standard arbitration clause that D includes with all loans. P was given no opportunity to negotiate the clause.
P filed suit against D claiming unjust enrichment, and breach of the duties of good faith and fair dealing. These claims rested on the assertion that D did not inform P that the insurance was optional.
D filed a series of motions to compel arbitration pursuant to the arbitration clause.
Procedural History:
The trial court denied D's motion to compel arbitration based on its conclusion that the arbitration clause contained in the P's loan agreement was unconscionable and unenforceable due to…
The prohibitively high arbitration costs borrowers might face in pursuing claims through arbitration
The fee-shifting provisions which expose borrowers to excessive arbitration and appeal costs
The arbitration clause is excessively one-sided and lacks mutuality in that it preserves access to the courts for the lender while prohibiting joinder of claims and class actions on the part of borrowers and restricts what claims of borrowers can be pursued in civil court."
NC Court of Appeals reversed, remanded to trial court to enter an order granting D's motion to compel arbitration.
NC Superior Court reversed, D's motion to compel arbitration denied.
Issues:
How can a contract/arbitration clause be deemed unconscionable?
Holding/Rule:
A court will find a contract to be unconscionable only when the inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and where the terms are so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.
A party asserting a contract is conscionable must prove both procedural (bargaining naughtiness, unfair surprise, lack of meaningful choice, inequality of bargaining power) and substantive unconscionability (harsh, one-sided, and oppressive contract terms).
Reasoning:
The provisions of the arbitration clause, taken together, render it procedurally and substantively unconscionable.
A court will find a contract to be unconscionable only when the inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and where the terms are so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.
A party asserting a contract is conscionable must prove both procedural (bargaining naughtiness, unfair surprise, lack of meaningful choice, inequality of bargaining power) and substantive unconscionability (harsh, one-sided, and oppressive contract terms).
Procedural -- There was no mention of credit insurance or the arbitration clause at loan closing. D would have refused to make a loan to P rather than negotiate with them over the terms of the arbitration agreement. The bargaining power was unquestionably unequal.
Substantive -- Because P's damage amounts are so low, it is unlikely that any attorneys would be willing to accept the risks attendant to pursuing these claims. The clause preserves D's ability to pursue its claims in court while denying P that same option. Prohibition of joinder of claims and class actions creates one-sidedness and contributes to the financial inaccessibility of the arbitral forum.
Dissent:
By holding the collective effect of provisions unique to arbitration agreements renders the instant agreement unconscionable, the majority treats this contract differently from other contracts.
Notes:
P was never told about the insurance.
This was the first time that the NC court system had thrown out a contract for being unconscionable.
