Wednesday, September 4, 2013

Kentucky Supreme Court Upholds Arbitration Against Challenge on Basis of Merger Clause and Against Non-Signatory

Kentucky Supreme Court Upholds Arbitration Against Challenge
on Basis of Merger Clause and Against Non-Signatory


      In a decision rendered last week by the Kentucky Supreme Court, it determined that an agreement to arbitrate disputes arising out of the purchase of a mobile home entered into subsequent to the purchase and signed by only one of the purchasers would be enforced.  Energy Home, Division of Southern Energy Homes, Inc. v. Peay, No. 2001-SC-000462-DJ, 2013 WL 4608187 (Aug. 29, 2013) (To Be Published).
      Brian and Lori Peay purchased a manufactured home from American Dream Housing, that home having been manufactured by Southern Energy Homes, Inc. (“SEHI”).  The Purchase Agreement identified the purchasers as Brian and Lori, but it was signed only by Brian.  SEHI was not a party to that Purchase Agreement.  That Purchase Agreement did provide a merger and integration clause, namely:
This agreement contains the entire understanding between the dealer and the buyer and no other representation or inducement, verbal or written, has been made which is not contained in this contract.
      Several weeks later, the home was delivered by SEHI to American Dream, and American Dream in turn delivered it to the Peay’s home site, there placing it on a foundation that had been separately contracted for by the Peays.  After delivering of the home to the Peays, there was a final closing to effect the transfer of ownership.  Thereat, SEHI offered certain written warranties on the home to the Peays in exchange for their agreement that any disputes would be submitted to binding arbitration.  Brian Peay accepted those warranties and signed the agreement to arbitrate.  As part of that closing, Mr. Peay also watched a “closing video” that described closing matters including the Arbitration Agreement.

      After that closing, the Peays began noticing flaws in the home.  In response thereto, Lori requested and received warranty services from SEHI, signing acknowledgments thereof.  Those remedial efforts were apparently unsuccessful, and in 2008 the Peays filed suit naming SEHI as one of the defendants.  SEHI moved to enforce the Arbitration Agreement, a motion that was denied by the trial court.  The Court of Appeals affirmed the trial court on a trio of bases, namely that:
·                     The Arbitration Agreement violated the merger and integration provisions of the Purchase Agreement;
·                     The Arbitration Agreement was not enforceable because it was unconscionable;  and
·                     Lori Peay did not sign the Arbitration Agreement and therefore could not be bound by its waiver of her rights to bring suit.
This appeal to the Supreme Court then followed. 
      The Court first addressed and disposed of the argument that the integration/merger clause of the original Purchase Agreement somehow precluded enforcement of the subsequently entered into Arbitration Agreement.  Rejecting this argument, the Court noted that a merger clause functions to preclude variation of the written agreement by prior agreement; it does not preclude the parties from making a subsequent modification or even rescission of the agreement, citing both Vinaird v. Bodkin’s Adm’x, 72 S.W.2d 707 (Ky. 1934) and Elliot on Contracts §§ 1987, 1989.  From there the Court noted that the Arbitration Agreement is itself a valid contract for which there was consideration in the exchange of the express warranties for the agreement to arbitrate rather than litigate.  The Peays were free to reject the express warranties and the agreement to arbitrate.
       Turning to the argument of unconscionability, the Court rejected the determination by the Court of Appeals that the agreement to arbitrate was unconscionable.  Describing both procedural and substantive unconscionability, the Court found neither to be present.  Rather, the Arbitration Agreement was conspicuous and fully explained and the fact that it was proposed after the delivery of the home did not create procedural unconscionability.  Rather, in this instance, the Peays were offered the opportunity to enhance the value of the manufactured home they had purchased by the receipt of express warranties from the manufacturer, which warranties required as well arbitration of disputes.  Such a combination is not unconscionable and the fact that the Peays were not permitted to negotiate the independent provisions thereof did not created unconscionability.

      With respect to the argument that Lori Peay is not bound by the Arbitration Agreement on the grounds that she did not sign either the Purchase Agreement or the Arbitration Agreement, the Court began by noting that there is no general requirement that a party sign a contract in order to be bound thereby.  From there, while noting that language of the interrelated agreements could indicate that Lori was a party to the Arbitration Agreement, or that Brian may have acted as her agent, points ultimately not resolved, the Court placed reliance upon the fact that she requested and signed acknowledgments of warranty services.  Having accepted the benefits of the express warranties that were provided in conjunction with the agreement to arbitration, “We conclude that by her actions in accepting the warranty services expressly agreed to by Brian, Lori Peay assented to the Arbitration Agreement and bound herself to its terms and conditions.”



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