Opinion
Civil Action No. 02-1492 Section "K" (4)
November 12, 2002
ORDER AND REASONS
Before this Court the defendants Residential Warranty Corporation ("RWC") and Western Pacific Mutual Insurance Company ("WPIC") bring a Motion for Order Compelling Arbitration and Staying Proceedings. For the foregoing reasons RWC and WPIC's Motion for Order to Compel is GRANTED.
Factual Background:
Frankie and Kelly Costanza ("the Costanzas parents") purchased a home on or about July 14, 1995 in Mandeville, Louisiana from Homes by Haney Corporation ("Haney Corporation"), the builder. The plaintiffs allege that Haney Corporation negligently installed an exterior insulation and finish system ("EIFS") in their home and that the EIFS was defectively manufactured. As a result of the negligent installation and/or defects in the EIFS, the Costanzas contend that water leaked into their home causing damages and personal injuries to the Costanzas and their two minor children Brooke and Summer ("the Costanza children"). The Costanzas are suing the manufacturer of the EIFS, Pleko Soutwest and/or Pleko International, Haney, Haney Corporation, Glenn Dupuy, the subcontractor who installed the EIFS, Allstate Insurance Company, the flood insurance provider who allegedly failed to pay their entire claim, and Residential Warranty Corporation ("RWC") and Western Pacific Mutual Insurance Company ("WPIC") along with the Federal Emergency Management Agency.
Hereinafter, the Court will refer to Kelly and Frankie Costanza, the parents, as "the Costanza parents." Brooke and Summer Costanza will be called, "the Costanza children." The Court will refer to all members of the Costanza family as "the Costanzas."
Hereinafter, the Court will refer to RWC and WPIC collectively as "the Defendants."
When the Costanza parents purchased their home they signed an Application for Warranty which contained a Limited Warranty Program administered by RWC and insured by WPIC, and containing a binding arbitration clause. The scope and terms of the arbitration clause form the basis of the dispute between the Costanza parents and RWC and WPIC. The issues in contention are 1) whether the arbitration clause is binding as to the Costanza parents' claims, 2) whether the Costanza parents' personal injury claims are within the scope of the arbitration clause, 3) whether the arbitration provision is unconscionable, and 4) whether the Costanza children must submit their personal injury claims to binding arbitration.
The defendants, RWC and WPIC have filed a Motion for Order Compelling Arbitration and Staying Proceeding.
The Claims of the Costanza Parents
In deciding this Motion to Compel, the Court must first determine whether the Federal Arbitration Act ("FAA") or Louisiana Arbitration Law, LSA-R.S. 9:4201 et seq., applies. The Defendants argue that the dispute in question is governed by the FAA. The Costanzas do not counter this contention. The Supreme Court has held that the FAA governs all contracts that are within the reach of the Commerce Clause. Allied Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 277 (1995). The Court concluded that any contract "involving" interstate commerce falls within the ambit of the FAA, and that "involving" should be read broadly and functionally equivalent to the term "affecting." Id. at 839. In a case with similar facts as the instant case, the Fifth Circuit held that a homeowner's action to recover damages to their home allegedly covered under a home buyer's structural warranty fell within the scope of the FAA. McKee v. Homebuyer's Warranty Corp., 45 F.3d 981, 984 (5th Cir. 1995). This Court finds that the Limited Warranty Application is a contract involving interstate commerce and as such, the FAA, not Louisiana Arbitration Law, applies.
The next step in evaluating a Motion to Compel Arbitration, is determining whether the parties agreed to arbitrate. This process involves two considerations: 1) whether there is a valid agreement between the parties; and 2) whether the dispute in question falls within the scope of the agreement. Fleetwood Enters. v. Gaskamp, 280 F.3d 1069, 1072 (5th Cir. 2002).
The Costanza parents contend that there is no valid agreement because they did not sign the Application for Warranty and thus did not agree to the terms of the Limited Warranty. (Plaintiff's Opposition, p. 3, Rec. Doc. 23). This argument is without merit. In their opposition, the Costanza parents concede that they in fact "printed" their names on the form in the space marked "signature line." In reviewing the application, the Court perceives that there is no significant difference between their handwritten printed names of the Costanza parents and their signatures, unless the Costanza parents are suggesting that they did not actually write their names on the form, and that their names were forged. However, the Costanzas have not shown or even contended that their names were forged.
Having decided that the Costanza parents agreed to arbitrate, the Court now turns to the second step required in evaluating a motion to compel: whether the dispute in question falls into the scope of the arbitration agreement. In determining whether the dispute falls within the scope of the arbitration agreement, "ambiguities . . . [are] resolved in favor of arbitration." Fleetwood Enters. Inc. v. Gaskins, 280 F.3d 1069, 1073 (5th Cir. 2002). The Costanzas make the following claims against the Defendants:
1. Failure to pay insurance claims;
2. Negligence;
3. Breach of warranty of workmanlike performance;
4. Breach of contract;
5. Redhibition;
6. Personal Injuries of the Costanzas arising from the negligence of Homes by Haney Corporation and their subcontractor.
With the exception of the claim for personal injuries, the Costanza parents' claims clearly fall within the scope of the arbitration clause. The Limited Warranty Program, incorporated by reference in the Application for Warranty, contains a binding arbitration provision that explains:
THIS AGREEMENT INCLUDES PROCEDURES FOR INFORMAL SETTLEMENT OF DISPUTES, INCLUDING BINDING ARBITRATION, IN ACCORDANCE WITH THE PROCEDURES OF THE FEDERAL ARBITRATION ACT.
Section (g) of the Limited Warranty Program sets forth that "[a]ny 'unresolved dispute' (defined below) that you may have with the Builder, RWC, or WPIC shall be submitted to binding arbitration governd by the procedures of the Federal Arbitration Act." The Limited Warranty defines an "unresolved dispute" as
all claims, demands, disputes, controversies, and differences that may arise between the parties of this Agreement of whatever kind or nature, including without limitation, disputes: (1) as to events, representations, or omissions which predate this Agreement; (2) arising out of this Agreement or other action performed or to be performed by the Builder, RWC or WPIC pursuant to this Agreement; (3) as to repairs or warranty claims arising during the term of this Agreement; and/or (4) as to the cost to repair or replace any defect covered by this agreement.
(See Defendants' Motion to Compel, Exhibit D). The Costanza parents' claims against the Defendant, with the exception of the personal injury claims, fall clearly within the definition of "unresolved dispute" as set forth in section (g) of the Limited Warranty Program.
The Personal Injury Claims of the Costanzas
The next question the Court will consider is whether the Costanza parents' personal injury claims fall within the arbitration agreement. The Defendants argue that the Costanza parents' personal injury claims are within the scope of the arbitration agreement because the language in the arbitration clause is broad, including disputes of "whatever kind or nature." The Defendants urge the court to interpret the language of the arbitration clause to include the Costanza parents' claims for personal injuries. Additionally, the defendants assert that the Court should stay these claims as well as the others unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.
The Costanza parents contend that personal injury claims are tort claims, and by definition do not "arise out of the contract" and are not within the scope of the arbitration agreement. The Costanzas cite Dennis v. CHM Mfg., Inc., 99-1626 (La.App. 3d. Cir. 11/14/00) for the proposition that personal injury claims are claims arising subsequent to the signing of the contract and are therefore not subject to arbitration. The Costanza's reliance on Dennis is misplaced becauseDennis construed an arbitration agreement under Louisiana Arbitration Law, not the FAA.
In construing an arbitration agreement under the FAA, the Fifth Circuit has held that determining whether a dispute falls within an arbitration clause requires the court to characterize the clause as "broad" or "narrow." Hornbeck Offshore Corp. v. Coastal Carriers Corp., 981 F.2d 752, 755 (5th Cir. 1993). If the court finds that the clause is broad, then any dispute between the parties falls within the scope of the clause if it is connected with or related to the contract. Id. Examples of broad clauses are those that cover: "any dispute or difference between the parties," "any dispute . . . with respect to the interpretation or performance of" the contract, "any controversy or claim arising out of or relating to this Agreement." See Penzoil Exploration Production Co. v. Rambo Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998); See also Hornbeck Offshore Corp. v. Coastal Carriers Corp., 981 F.2d 752, 755 (5th Cir. 1993). A narrow clause restricts requires the dispute to literally "arise out of the contract" and relate to the parties performance of the contract. Penzoil Exploration Production Co. v. Rambo Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998). The main difference between these two characterizations is that a broad clause considers the facts underpinning the dispute and allows the arbitration agreement to embrace all disputes between the parties that have a "significant relationship to the contract regardless of the label attached to the dispute." Id. The dispute must only "touch" matters covered by the Limited Warranty Program. Id. In this case, the Costanza parents' personal injury claims arise from the Defendants' obligation under the Limited Warranty Program for defects in the structure of the home. As a result, the personal injury claims are related to the Limited Warranty Program and fall within the definition of an unresolved dispute which covers "all claims, demands, disputes, controversies, and differences that may arise between the parties of this Agreement of whatever kind or nature. . . ."
Furthermore, the Court agrees with the Defendants' assertion that disputes involving the scope of an arbitration clause governed by the FAA, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." J.J. Ryan Sons, Inc. v. Rhone Poulenc Textile, 863 F.2d 315, 320 (4th Cir. 1988). "Unless it maybe said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute" a stay should be granted on appropriate motion. Andrew Martin Marine Corp. v. Stork Werkspoor Diesel, 480 F. Supp. 1270, 1278 (E.D.La. 1979) (quoting United Steelworkers of America v. American Manufacturing Co., 363 U.S. 564, 582-583 (1960). It cannot be said with positive assurance that there is no possible way to construe the arbitration clause to find that the Costanza parents' personal injury claims are within the scope of the arbitration clause.
Because the language of the arbitration agreement is broad, it cannot be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the dispute. Therefore, this Court finds that the Costanza parents' claims for their personal injuries are within the scope of the arbitration agreement.
The arbitration clause in the Limited Warranty Program covers "unresolved disputes" which the contract defines as
all claims, demands, disputes, controversies, and differences that may arise between the parties of this Agreement of whatever kind or nature, including without limitation, disputes: (1) as to events, representations, or omissions which predate this Agreement; (2) arising out of this Agreement or other action performed or to be performed by the Builder, RWC or WPIC pursuant to this Agreement; (3) as to repairs or warranty claims arising during the term of this Agreement; and/or (4) as to the cost to repair or replace any defect covered by this agreement.
Unconscionability of the Limited Warranty Program
The Costanza parents next argue that even if the Court finds that they consented to being bound by the arbitration clause, and that their claims fall within its scope, the Court should invalidate the arbitration clause because procedurally and substantively unconscionable. The Costanza parents claim that the arbitration clause is procedurally unconscionable due to the unequal bargaining position of the parties. They claim that it is substantively unconscionable because it requires the Costanzas parents to arbitrate their claims and advance the costs of both parties in proceeding with the arbitration.
In determining whether the arbitration agreement is valid, the Court must apply "[o]rdinary contract principles determine who is bound."Fleetwood v. Gaskamp, 280 F.2d 1069, 1073, 1074 (E.D.La. 2000) (quotingDaisy Mfg. Co., Inc., v. NCR Corp., 29 F.3d 389, 392 (8th Cir. 1994));see also Volt Info., 489 U.S. at 478, 109 S.Ct. 1248 ("[T]he FAA does not require parties to arbitrate when they have not agreed to do so."). Therefore, in determining whether the arbitration agreement was procedurally or substantively unconscionable the Court will apply Louisiana principles of contract law.
The Court applies ordinary contract law because the purpose of the Federal Arbitration Act is "to make arbitration agreements as enforceable as other contracts, but not more so." Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 404 n. 12 (1967); see also Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, 473 U.S. 614, 625-26 (1985) ("The preeminent concern of Congress in passing the Act was to enforce private agreements into which parties had entered.").
To support their argument that the Limited Warranty Program is procedurally unconscionable, the Costanzas cite Sutton Steel Supply, Inc. v. BellSouth Mobility, Inc., 00-511 (La.App. 3d Cir. 12/13/00). Sutton involved a class action lawsuit in which the plaintiffs claimed that BellSouth improperly charged them for cellular services and that the arbitration agreement was a contract of adhesion. Id. at 594. The Court is not persuaded by this case because it is distinguishable from the instant matter. In Sutton, the agreement to arbitrate was in exceedingly small print and the terms were lopsided in favor of BellSouth. Id. at 597. The arbitration provision bound the plaintiffs to arbitrate any and all claims, but reserved unto BellSouth the right to pursue an open account or any type of debt owed by the BellSouth customers. Id.
The adhesion contract is procedurally unconscionable when there is an equal bargaining process. Saul Litvinoff, Consent Revisited: Offer Acceptance Option Right of First Refusal and Contracts of Adhesion in the Revision of the Louisiana Law of Obligations, 47 La. L. Rev. 699, 757-59 (1987). For instance, a "private person applying for electricity for his home . . . is in no bargaining position at all . . . In that kind of situation the lack of balance between the parties' positions, is evident as one of them, quite unquestionably, is in a position stronger than the other. . . . A contract of adhesion is usually contained in a standard form, which is justified by the volume of business transacted by those concerns. Some clauses printed in those forms . . . may present difficulties of interpretation concerning the advantages allowed to the party in the stronger position . . . [t]he real question is whether the other party truly consented to all the printed terms." Id.
In contrast, in the instant case, the terms of the arbitration agreement are not in exceedingly small print. The caption introducing section (g), the arbitration provision of the Limited Warranty, is in all capital letters, underlined, and reads: "BINDING ARBITRATION PURSUANT TO THE FEDERAL ARBITRATION ACT." Furthermore, the bargaining position of the Costanzas is not akin to the classic examples of disparate bargaining power between parties to adhesion-type contracts such as private individuals applying for electricity in their homes or purchasing airline tickets. "Where a party had no power to negotiate a contract, [courts] may disregard a particular clause in the contract when that clause is unduly burdensome or extremely harsh." Sutton's Steel Supply, Inc. v. BellSouth Mobility, Inc., 00-511 (La.App. 3 Cir. 12/13/00) (quoting Saul Litvinoff, Consent Revisited: Offer Acceptance Option Right of First Refusal and Contracts of Adhesion in the Revision of the Louisiana Law of Obligations, 47 La. L. Rev. 699, 757-59 (1987)). However, the Costanza parents have not convincingly advanced the argument that they were unable to bargain over the terms in the Limited Warranty Program, nor have they shown that the situation is exceedingly coercive, because, presumably, the Costanza parents were free to look at other homes if they were dissatisfied with the Limited Warranty that Haney Homes Corp. was willing to extend.
In addition, the Costanza parents cannot persuasively contend that they were not aware of the terms of the Limited Warranty Program. The Court must proceed as if the parties have read the terms of the agreement. If the Costanza parents misread or miscalculated the terms of the arbitration clause, "[i]t is not within the province of the courts to relieve the parties of their bad bargains." Gill v. Jim Walter Homes of La., Inc., 187 F. Supp.2d 618, 624 (M.D.La. 2002) (quoting Hanover Petroleum Corp. v. Tenneco, Inc., 521 So.2d 1234 (La.App. 3 Cir. 1988). "The law does not compel people to read or inform themselves of the contents of an instrument which they may choose to sign, but it holds them to the consequences in the same manner and to the same extent as though they had exercised those rights." Id. (quoting McGoldrick v. Lou Ana Foods, Inc., 649 So.2d 455 (La.App. 3 Cir. 1994).
As to the Costanzas' assertion that the Limited Warranty was substantively unconscionable because it required them to advance the costs of the arbitration proceeding, the Court finds that the duty to advance the costs does not make the clause unconscionable and does not invalidate the agreement to arbitrate. The cases the plaintiffs cite to support their assertion that obligating the plaintiff to advance the costs of arbitration is unconscionable are inapposite because they arise in the context of employment and Title VII claims.
This Court finds the reasoning in Gill v. Jim Walter Homes of La., Inc., 187 F. Supp.2d 618, 624 (M.D.La. 2002) more persuasive than those the plaintiff cites. In Gill the plaintiff contended that the cost of pursuing his state-law claims under the arbitration procedures was prohibitive, thereby making the agreement invalid as unconscionable. Id. The plaintiff, however, did not cite any binding authority for this proposition. Id. Instead, the plaintiff concluded that he would not be able to afford the fees. The court in Gill found that this assertion alone was insufficient to render the arbitration agreement unconscionable. Id. See Williams v. Cigna Fin. Advisors, 197 F.3d 752, 764-65 (5th Cir. 1999). The Fifth Circuit has held that the mere possibility a plaintiff may have to share in the payment of the arbitrator's fees, without more, is not a sufficient reason to invalidate an arbitration agreement. See Williams v. Cigna Fin. Advisors, 197 F.3d at 764. Further, in the instant case, the arbitration clause of the Limited Warranty Program expressly provides that the cost of arbitration shall be equally divided among the parties to the arbitration. The mere fact that plaintiff faces the possibility of being charged arbitration fees, including sharing, does not render the clause unconscionable.
The Claims of the Costanza children for their personal injuries
The Costanzas contend that even if the Court orders arbitration of the claims brought by Frankie and Kelly Costanza, the arbitration agreement does not cover the claims of the Costanza children because the children are not parties to the agreement. The Defendants do not cite any cases or set forth any arguments to counter the Costanza's contention.
As mentioned previously, the first step in evaluating a motion to compel arbitration is to determine whether the parties agreed to arbitrate. Fleetwood Enters. Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002). This determination involves two factors; (1) whether there is a valid agreement, and (2) whether the dispute in question falls into the scope of the agreement. Id.
As to the first step, the Constanzas contend that there is no valid agreement between the Defendants and the Costanza children because the children did not agree to arbitrate. The Costanzas argue that the children are not bound because they did not sign the Application for Warranty containing the Limited Warranty agreement and the arbitration provision.
In furtherance of their position, the Costanzas bring the Court's attention to two Louisiana cases that suggest that nonsignatories are not bound by an arbitration provision in a contract they did not sign, provided that they are not: 1) third-party beneficiaries, or 2) suing to enforce the contract. In Ciaccio v. Cazayoux, 519 So.2d 799 (La.App. 1 Cir. 1986), the court held that a husband and his minor children were not bound by an agreement that his wife had signed compelling her to arbitrate any controversy arising out of the negligence or medical malpractice of the obstetricians and hospital treating her during her pregnancy. The court found that, "ordinary contract principals govern the question of who is bound by an arbitration agreement, and a party cannot be required to submit to arbitration any dispute that he has not agreed to submit." Ciaccio, 519 So.2d at 804 (quoting United Steeworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574 (1960)). The court reasoned that since the husband had not signed the agreement and his wife had not signed it in his behalf, or as a representative of her minor children, they did not agree to submit to the arbitration clause.Id.
Dina Ciaccio was admitted to St. Tammany Parish hospital due to premature labor. Her twins both died shortly after delivery. Following their deaths, Dina and her husband both filed wrongful death actions and survival actions individually and as natural parents of the deceased minor children. Ciaccio, 519 So.2d at 799. When the defendant physicians sought to enforce the arbitration agreement, the court found the wife was bound to submit her claims to arbitration.
Similarly, in Fleetwood Enters. v. Gaskamp, 280 F.3d 1069, 1075 (5th Cir. 2002), the Gaskamp children sued to recover for their personal injuries caused by defects in the mobile home they lived in with their parents. The Court did not require minors to submit to arbitration on the basis of their parents' arbitration agreement. Id. The Court reasoned that a non-signatory could not be bound to arbitrate in the absence of third-party beneficiary status or an attempt by the children to enforce the contract. Id. at 1076. For instance, in Shroyer v. Foster, 01-0985 (La.App. 1 Cir. 3/28/02) the Court stated that because the non-signatory wife was clearly a third-party beneficiary of the contract her husband signed, and because the wife sought to enforce contractual claims based on provisions in the agreement, she was bound by the arbitration clause in the agreement. The court reasoned that a plaintiff who sues to enforce a provision of a contract, subjects him or herself to the contract's terms. The party cannot have it both ways; he cannot rely on the contract when it works to his advantage and then repudiate it when it works to his disadvantage. Id. at 89.
In Shroyer, the husband signed a home inspection agreement containing an arbitration clause. The court found that because the husband incurred an obligation in the "common interest of the spouses for the interest of the other spouse" during the existence of a community property regime, both the husband and the non-signatory wife were bound by the arbitration clause in the agreement.
In the instant case, the Costanza children's claims for their personal injuries are not claims in which the children seek to enforce provisions of the contract. Nor are the children third-party beneficiaries of the contract. Therefore, they may properly bring their claims for personal injuries before this Court. However, to the extent the Costanza children intend to pursue claims that enforce rights under the Limited Warranty agreement, they are bound by the arbitration clause. They cannot avail themselves of the benefits of the contract and not be bound by its restrictions.
In order to have third party beneficiary status under Louisiana law, the intent of the contracting parties to stipulate a benefit in favor of a third party must be made manifestly clear. Shaw Constructors Inc. v. ICF Kaiser Engineers, 192 F. Supp.2d 545, 551 (M.D.La. 2001). A third party advantage must exist, and derive from the contract, not as a mere incident of the contract's formation, but as the consideration of the contract. Id. Third party beneficiary status will be found only when the contract clearly reflects the benefit to the third person as its condition or consideration. Id.
Accordingly,
IT IS ORDERED that the Defendants' Motion for Order Compelling or Staying Proceedings is hereby GRANTED. IT IS FURTHER ORDERED that the claims of the Costanzas against the other defendants, and the children's claims against WPIC, RWC, or any other defendants are STAYED and this matter is STATISTICALLY CLOSED pending the outcome of the arbitration. However, upon a showing of good cause, any party may move to reopen the case.
IT IS FURTHER ORDERED that initial disclosures are due on December 4, 2002.
IT IS FURTHER ORDERED that the parties shall proceed with inspections of the Costanza's home during the period of this stay.
IT IS FURTHER ORDERED that defendants WPIC and RWC shall advance all costs required to commence and continue the arbitration. WPIC and RWC's advancement of the initial costs is subject to modification by the arbitrator at the conclusion of the proceeding.