The wording of an arbitration clause can make all the difference when it comes to whether the clause will stand up in court if it is challenged as unenforceable. As a matter of practicality, it is important for business owners to be mindful of guidelines to follow when drafting an enforceable arbitration clause. A recent case involving a dispute between New Hope Community Church and Patriot Energy Partners highlights the need for drafting an arbitration clause using precise words to avoid a strained interpretation that could subject a business to unwanted and avoidable litigation, even after taking the steps to ensure disputes are subject to arbitration.
As background, Ohio Courts will ignore an agreement to arbitrate if (1) the circumstances under which the parties agreed to arbitrate are such that it is deemed unconscionable to enforce the agreement, such as when one party has superior bargaining power, sophistication and knowledge to the party seeking to void the agreement, (procedurally unconscionable) AND (2) the arbitration clause itself is misleading or deficient to demonstrate a meeting of the minds between the parties (substantively unconscionable). In New Hope Community Church v. Patriot Energy Partners, 2013-Ohio-5882 (7th Dist. Dec. 20, 2013), the Court of Appeals held that an arbitration clause that was deemed only substantively unconscionable, but not procedurally unconscionable, was valid and enforceable. This case revolved around claims filed by landowners in Columbiana and Carroll counties (“Property Owners”) against Patriot Energy Partners, LLC (“Patriot”) and Chesapeake Exploration, LLC (“Chesapeake”), seeking rescission of leases they had entered into that gave the companies leasehold rights to oil and gas located on the Property Owners’ lands. Patriot and Chesapeake jointly moved to stay the proceedings pending arbitration. Each of the leases contained an identical arbitration clause, which was set forth in the same size print and format as every other lease clause. The Property Owners opposed the motion, arguing that the arbitration provision was unconscionable and thus unenforceable.
The trial court denied the motion to stay proceedings, finding that the arbitration clause was substantively and procedurally unconscionable. The Seventh District agreed with the trial court that the language used in the arbitration provision was substantively unconscionable. The Court of Appeals agreed that the phrase contained in the arbitration clause, “either party may initiate arbitration proceeding by notifying the other party in writing”, was misleading because, in reality, the initiating party had to do more than simply give notice. The party demanding arbitration has to also follow the complex rules of the American Arbitration Association. The Court concluded that such misleading language, in addition to high administrative costs associated with AAA arbitration and lack of specificity in the clause, rendered the arbitration provision substantively unconscionable.
The Court of Appeals, however, chose to enforce the arbitration clause. The Court found that although none of the Property Owners had any past training in oil and gas leases, since many had executed oil and gas leases in the past, since they were given time to review these leases and ask questions prior to signing, with some even proposing amendments to the leases, and since some conceded they could have sought outside counsel before signing and chose not to do so, there was no procedural unconscionability.
The case is an example of why it is important to ensure business owners and those involved with preparing agreements containing arbitration provisions are mindful of avoiding misleading language and focusing on accurately describing the forum and process. Specifying arbitration to be held with the American Arbitration Association, in accordance with its rules, regulations, and fees existing at the time of the dispute, will minimize the argument that the clause is misleading, or substantively unconscionable. Also, using a certain level of specificity in drafting the arbitration clause will make it less likely that a court will subject the clause to such scrutiny. While the clause was ultimately enforced in New Hope Community Church, taking precautionary drafting measures can help parties avoid the time and cost associated with a court choosing to analyze the potential unconscionability of an arbitration provision.
If you have any questions concerning New Hope Community Church v. Patriot Energy Partners, or would like a copy of the Court’s opinion or have any questions with respect to arbitration clause drafting issues in contracts, please contact a member of our Corporate and General Business Practice Group; Oil, Natural Gas and Energy Practice Group; or Health Care Practice Group.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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