Arbitration Clauses Must Be Fair

The court of appeal opinion in Lhotka v. Geographic Expeditions, Inc. is a cogent reminder to any drafting a contract clause requiring arbitration of disputes. In the Geographic Expeditions case, the court refused to order arbitration, finding that the contract clause in question, which purported to require arbitration as a dispute resolution procedure, was unfair and biased against the plaintiff.

The case arose when a 37-year old man died of altitude related sickness while on a trip to Mt. Kilimanjaro that was organized by the defendant. As part of the process to sign up for the trip, the deceased was required to sign a contract that did several things. First, it released any potential claims against the organizer and waived all rights to claim damages; second, it provided that any dispute would be submitted to a neutral mediator, with the parties splitting the cost; and third, the agreement stated that if mediation did not resolve the issues, the matter was to be arbitrated before the American Arbitration Association in San Francisco.

But the provisions for arbitration were very restrictive. Among other things, they provided that the maximum recovery would be the sum of land and air cost of the trip. In addition, the agreement provided that the plaintiff would pay the company's attorney's fees if he lost (and not the other way around) and that the plaintiff indemnify the company against any and all claims he might bring.

The court found that the arbitration agreement was both procedurally and substantively unfair. On the procedural side, the court was bothered by the fact that the agreement was presented on a "take it or leave it" basis, coupled with statements from defendant’s representatives that the agreement was consistent with industry practices and that all tour companies would require the same terms. The defendant’s representations were designed to, and did, deprive plaintiffs of a meaningful opportunity to negotiate different terms or seek out other tour operators.

On a substantive level, the court found that the clause required the plaintiff to indemnify the defendant against claims; included a one-sided attorneys’ fees clause (only defendant’s could recover fees); and required plaintiffs, who lived in Colorado, to arbitrate in San Francisco. As the court said, “absent reasonable justification for his arrangement – and none is apparent – we agree with the trial court that the arbitration clause is so one-sided as to be substantively unconscionable.”

Finally, the court noted that because the unconscionable terms could not be severed from the rest of the arbitration agreement, the entire arrangement must fail.

Drafting a binding contract requires legal skill and a deft touch. The attorneys at Slote and Links are experienced and ready to assist you with both contract negotiation and drafting services as well as a full menu legal counseling options.

A copy of the court’s opinion in the Geographic Expeditions. case is attached.

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