Should California Courts Scrutinize the Terms of Difficult-to-Read Contracts?

In the recent decision in Fuentes v. Nissan, the California Supreme Court recognized that to establish that a contract is unenforceable because it is unconscionable, the party opposing enforcement must show unfairness both in the procedure by which the contract was formed and the substance of its terms.

The trial court relied on Davis v. TWC Dealer Group, Inc., to conclude that small, difficult-to read print supports a finding of substantive unconscionability as well as procedural unconscionability.

Disagreeing with Davis, the Court of Appeal held that “tiny and unreadable print” is a problem of procedural unconscionability only and should not be double counted as a problem of substantive unconscionability relying on Fuentes v. Empire Nissan, Inc.

Resolving this conflict, the Supreme Court held that a contract’s format generally is irrelevant to the substantive unconscionability analysis, which focuses on the fairness of the contract’s terms, but that courts must closely scrutinize the terms of difficult-to-read contracts for unfairness or one-sidedness. 

When applying to work at Empire Nissan, Evangelina Yanez Fuentes signed a document titled “Applicant Statement and Agreement.” The document contains a provision mandating arbitration of “all disputes which may arise out of the employment context.” The document also provided that any future modification of its terms must be in writing and signed by the President of the Company.

The document is printed in a very small font and its text is so blurry and broken up that it is nearly unreadable. Its arbitration provision is a lengthy, densely printed paragraph consisting of complex sentences filled with legal jargon and statutory references.

The trial court described the document as visually impenetrable to the point that it challenges the limits of legibility.

The document was part of an employment application packet that Empire Nissan gave Fuentes only five minutes to review. Fuentes spent most of this time filling out the employment application form.

She was told that the documents in the packet had to do with her employment application, contacting her references, and a drug testing requirement, that she had to complete the documents to work for Empire Nissan, and that she should hurry because the drug testing facility was about to close.

She was not offered an opportunity to ask questions. She did not receive a copy.

Fuentes later signed — at Empire Nissan’s request — two confidentiality agreements that are substantially identical to each other. The documents provide that Fuentes will not “usurp, for personal gain, any opportunities in the Dealership’s line of business.” They also prohibit her from using or disclosing confidential information and trade secrets. Each document provides that it “supersedes any and all prior agreements” on the covered subjects.

When Fuentes had been working for Empire Nissan for about two and a half years, she went on medical leave for cancer treatment. A year later, Fuentes requested a brief extension of her leave before returning to work. Empire Nissan terminated her employment, and Fuentes filed a complaint in court alleging wrongful discharge and related claims.

Empire Nissan responded with a motion to compel arbitration, which Fuentes opposed. She argued, first, that Empire Nissan had not proved that there was a valid agreement to arbitrate because enforcing the agreement would be contrary to public policy due to the agreement’s illegibility and the fact that Empire Nissan gave her so little time to review it.

Second, Fuentes argued that even if there was a valid arbitration agreement, it was unenforceable because it was unconscionable.

The trial court denied Empire Nissan’s motion, concluding that the arbitration agreement was unconscionable; it did not reach Fuentes’s argument that Empire Nissan had not proved that the arbitration agreement was valid.

The court found that the agreement’s text was barely legible, it was difficult to understand, and Empire Nissan had not provided Fuentes a meaningful opportunity to review it or negotiate its terms.

Empire Nissan appealed and the Court of Appeal reversed in a divided opinion. The majority concluded that arguments about illegibility go exclusively to procedural unconscionability — not to substantive unconscionability, as the trial court had concluded.

The general principles of unconscionability are well established. A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party.

The Supreme Court has referred to these two aspects of unconscionability as its “procedural and substantive elements.”

The procedural element concerns “the circumstances of contract negotiation and formation,” particularly “oppression or surprise due to unequal bargaining power.”

The substantive element, by contrast, concerns “the fairness of an agreement’s actual terms,” i.e., whether those terms “are overly harsh or one-sided.”

Both procedural and substantive elements must be present to conclude a term is unconscionable, but these required elements need not be present to the same degree.

The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.

Some procedural unconscionability is present whenever an agreement is a contract of adhesion, i.e., a standardized contract which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

Empire Nissan acknowledged that the agreement at issue is a contract of adhesion and conceded, as it must, that Fuentes has proved at least some procedural unconscionability.

The question then became one of the degree of procedural unconscionability, and by extension, the degree of scrutiny with which we search the substance of the agreement’s terms for unfairness and one-sidedness.

A greater degree of procedural unconscionability is present when the circumstances of a contract’s formation evince “oppression” or “surprise” beyond that usually present in a contract of adhesion.

Oppression occurs where a contract involves lack of negotiation and meaningful choice.

Courts must be “particularly attuned” to this danger in the employment setting, where economic pressure exerted by employers on all but the most sought-after employees may be particularly acute.

Where, as in this case a prospective employer directs an applicant to sign an arbitration agreement as part of the employment application process, the economic pressure on the applicant to sign the agreement is particularly high.

Empire Nissan did not provide Fuentes a meaningful opportunity to review the agreement or ask questions about it, much less to negotiate its terms. When presented with the application packet, Fuentes was told she should hurry because the drug testing facility was about to close. The company gave her only five minutes to complete the packet. It did not verbally inform her that the packet included an arbitration agreement or provide her a copy of the form after she signed it. These circumstances constitute significant oppression.

The formation of Fuentes’s agreement involved an unusually high degree of surprise. The agreement is printed in a tiny, blurry font, making it very difficult to read. Once the text is deciphered, the agreement’s language presents a further barrier to understanding: The reader is confronted with a collection of complex sentences replete with legal jargon and statutory references.

Taken together, the agreement’s difficult-to-read text and prolix language presented a substantial barrier to understanding its terms. Indeed, it is hard to understand why an employer would present an important legal agreement to its employees in such a form.

Here, the significant oppression and unusually high degree of surprise involved in the agreement’s formation undermine the policies that normally favor enforcement. The agreement’s formatting and the way Empire Nissan presented it to Fuentes did not promote voluntary or informed agreement to its terms.

Because the circumstances under which Fuentes signed the agreement involved such a high degree of procedural unconscionability, even a low degree of substantive unconscionability may render the agreement unenforceable.

Fuentes argued that the arbitration agreement’s terms are unfairly one-sided, particularly when viewed through the prism of the high degree of procedural unconscionability present here.

Empire Nissan contended that Fuentes has not shown any substantive unconscionability.

The substantive unconscionability analysis examines the fairness of a contract’s terms. This analysis ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided.

All of these formulations point to the central idea that the unconscionability doctrine is concerned not with “a simple old-fashioned bad bargain, but with terms that are “unreasonably favorable to the more powerful party.

Where, as here, the written agreement has been prepared entirely by the employer, it is a well established rule of construction that any ambiguities must be construed against the drafting employer and in favor of the nondrafting employee.

Fuentes first argued that the agreement’s tiny print and almost illegible format rendered it substantively unconscionable.

As to the arbitration agreement at issue here, the Supreme Court agreed with Empire Nissan that its tiny print and almost illegible format do not indicate substantive unconscionability. An otherwise fair and mutual term is not made substantively unconscionable by printing it in a manner that makes it difficult to read; the fact that a term is printed in tiny, blurry font does not alone make it harsh, one-sided, or otherwise unreasonably unfair.

Because font size does not affect the substance of an agreement’s terms, it cannot render a contractual term substantively unconscionable.

Fuentes next argued that the arbitration agreement is substantively unconscionable because, when considered together with the confidentiality agreements, it is unfairly one- sided.

Nothing in the text of the confidentiality agreements limits Empire Nissan’s right to bring its claims under the agreements in court. Indeed, the agreements specify that Empire Nissan may seek any remedies available at law or in equity and that the prevailing party in a “legal action” to enforce the agreements may recover attorney fees and costs. The Supreme Court understands “legal action” in its ordinary, popular sense, which is a proceeding in court, not an arbitration.

The confidentiality agreements’ silence about the forum for dispute resolution indicates that the parties did not intend disputes to be subject to mandatory arbitration.

Reading the confidentiality agreements together with the arbitration agreement, revealed an ambiguity concerning whether the parties intended claims under the confidentiality agreements to be subject to mandatory arbitration.

Reading the agreements together, it is not clear whether the parties intended to supersede the arbitration agreement as to Empire Nissan’s potential claims for breach of the confidentiality agreements.

The Court of Appeal’s reliance on the policy favoring arbitration as an interpretive presumption was misplaced. The policy “favoring” arbitration is not one of promoting arbitration over litigation, but instead of ensuring that arbitration agreements are not disfavored, i.e., that they are treated like other contracts.

In sum, the Supreme Court agreed with the Court of Appeal that the trial court erred in relying on the arbitration agreement’s illegibility to support a finding of substantive unconscionability. A contract’s legibility generally does not affect the substance of its terms.

Nevertheless, it held that the Court of Appeal erred in two ways. First, it erred by relying on a presumption in favor of arbitration to conclude that the agreement’s terms were not substantively unconscionable, while declining to rule on whether the agreement was procedurally unconscionable.

The court should instead have treated the arbitration agreement like any other contract and closely scrutinized the agreement’s terms for unfairness or one-sidedness, given the high degree of procedural unconscionability, and construed any ambiguous provisions against Empire Nissan, as the drafting party.

Second, the court erred by directing the trial court to grant Empire Nissan’s motion to compel arbitration rather than permitting the trial court to consider on remand Fuentes’s argument that the written agreement did not give rise to a valid contract.

LESSONS:

1.         It is always important to carefully read a contract and inquire about any issues that seem unclear, including provisions requiring arbitration of disputes.

2.         The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.

3.         Here, the significant oppression and unusually high degree of surprise involved in the agreement’s formation undermine the policies that normally favor enforcement. The agreement’s formatting and the way Empire Nissan presented it to Fuentes did not promote voluntary or informed agreement to its terms.

4.         Where the written agreement has been prepared entirely by the employer, it is a well established rule of construction that any ambiguities must be construed against the drafting employer and in favor of the nondrafting employee.

5.         Reading the confidentiality agreements together with the arbitration agreement, revealed an ambiguity concerning whether the parties intended claims under the confidentiality agreements to be subject to mandatory arbitration.