No. 92-540
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
MARLENE CHOR and MARTIN ANDRE,
Plaintiffs and Respondents,
PIPER, JAFFRAY & HOPWOOD,
INCORPORATED, and JOHN
LAWRENCE SCHULTZ,
Defendants and Appellants.
APPEAL FROM: District Court of the Second Judicial District,
In and for the County of Silver Bow,
The Honorable James E. Purcell, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
John G. Crist and James L. Jones, Dorsey
& Whitney, Billings, Montana
For Respondents:
Gregory 0 Morgan and Charles F. Proctor,
.
Bozeman, Montana
Submitted: July 15, 1993
Decided: October 18, 1993
Filed:
Chief Justice J. A. Turnage delivered the Opinion of the Court.
The District Court for the Second Judicial District, Silver
Bow County, refusedto enforce three arbitration agreements entered
between Harlene Chor and Piper, Jaffray & Hopwood, Inc. (Piper).
Piper appeals. We reverse and remand.
The issues are:
1. Did the court err by refusing to enforce the agreements
because Piper did not fully comply with Rule 21 of the National
Association of Securities Dealers?
2. Did the District Court err by relying on Choresintent not
to be bound by the legal consequences of the arbitration clauses in
the agreements she signed?
3. Did the court err by concluding the arbitration agreements
are void because they are ixxxz?scionable or contracts cf adhesicn?
4. Did the court err by concluding that the agreements are
void because Piper committed actual and constructive fraud by not
explaining the legal implications of the arbitration clauses to
Chor when she signed the agreements?
Marlene Chor was forty-seven years old when this matter was
heard in the District Court. Although she was not a sophisticated
investor in securities, she has a college degree and was president,
part-owner, and operator of a million-dollar-a-year gambling
machine business. She and her brother, Martin Andre, became owners
of the business after their father's death in 1985.
In 1988, Chor became acquainted with defendant John Schultz.
Schultz was a broker for Piper and was registered as a securities
salesman. Relying on Schultz's advice, Chor invested in stock and
bought an annuity through Piper. Chor testified that she signed
many papers with Piper and that Schultz pointed out the important
items in the documents and explained their impact to her.
In August of 1989, based upon Schultz's advice and direction,
Chor wrote a check for $25,000 to "The Terran Corporation" for
purchase of one of the Terran investments. The following month,
she wrote a check to "Terran Financial Groupw in the amount of
$25,000 and delivered it to Schultz for a second Terran investment.
Chor received certificates of a limited partnership interest in
"Terran Partners I Limited Partnership."
In August of 1990, the Nontana State Auditorlc Officc issucd
a cease and desist order in connection with the sale of the Terran
Partnership I Limited Partnership. Chor and Andre (who had also
invested in Terran) filed this suit against Piper and Schultz.
Because Andre did not sign any agreements containing arbitration
clauses, Piper has not challenged the District Court's jurisdiction
to decide his claim.
Piper contends it had no role in marketing the Terran invest-
ments and that Schultz was acting independently in selling them to
Chor. The validity of that defense has not yet been decided.
Here, Piper argues that if it is held responsible in this action,
Chor's claims are subject to arbitration, pursuant to three
agreements she signed.
The first agreement, denominated a "Co-owner Account Agree-
ment," was executed on June 17, 1988. Chor testified that she was
led to believe the only purpose for the agreement was so that she
and her husband could hold an account jointly. The third page of
the agreement includes a paragraph entitled "Arbitration:"
We agree to arbitrate any disputes between PJH and us.
We specifically agree and recognize that all controver-
sies which may arise between PJH, its agents, representa-
tives or employees and us, concerning any transaction,
account or the construction, performance or breach of
this or any other agreement between us, whether entered
into prior, on, or subsequent to the date hereof, shall
be determined by arbitration to the full extent provided
by law. Such arbitration shall be in accordance with the
rules then in effect of the Arbitration Committee of the
New York Stock Exchange or the National Association of
Securities Dealers, Inc., as we may elect. We authorize
PJH, if we do not make such election by registered mail
addressed to PJH at its main office within fifteen (15)
days after receipt of notification from PJH requesting
such election, to make such election on our behalf.
On September 30, 1988, Chor signed another Co-owner Account Agree-
ment, for an account she held with her son. That agreement
contained the same arbitration provision set forth above.
The third arbitration agreement was contained on page 4 of a
Margin Agreement Chor signed in February 1991. Chor testified she
believed the purpose of the Margin Agreement was to clear up a
debit balance on her account. She further testified that she
believed the arbitration provision in the Margin Agreement would
apply to future disputes only.
The District Court denied Piper's motion to compel arbitra-
tion, stating that it first needed to rule on the validity of the
arbitration agreements. It held a joint hearing on that question
for purposes of this case and another case which was also appealed
to this Court, Mueske v. Piper, Jaffray & Hopwood (Mont. 19931,
P.2d , 50 St. Rep. 1009.
After the hearing, the District Court ruled that the arbitra-
tion agreements are invalid. The court concluded that: Piper
failed to correct its procedures and amend its account forms to
reflect new disclosure requirements under the Rules of the National
Association of Securities Dealers; Chor did not intend that the
arbitration claase wo~jld he %utilized in the event that she
defrauded by Piper or one of its agents: the Co-owner Account
Agreements are adhesion contracts which do not state their effect
of waiving the right to trial by jury, and enforcement of the
arbitration clauses would therefore be unconscionable; and Chor's
consent to the Co-owner Account Agreements was obtained through
actual and constructive fraud. Piper appeals.
Before we discuss the issues raised in this case, we point out
that contracts requiring arbitration of disputes are as enforceable
in Montana as are any other contracts. Section 27-5-114, MCA.
Further, this Court has acknowledged the federal policy favoring
arbitration. E.g., Vukasin v. D.A. Davidson & Co. (1990), 241
Mont. 126, 133, 785 P.2d 713, 718; Passage v. Prudential-Bache
Securities, 1nc. {1986), 223 Mont. 60, 64, 727 P.2d 1298, 1300,
cert. denied 480 U.S. 905.
Did the court err in refusing to enforce the agreements
because Piper did not fully comply with Rule 21 of the National
Association of Securities Dealers?
The arbitration agreements between Piper and Chor are
governed, through operation of their terms, by the rules of the
National Association of Securities Dealers (NASD). Effective
September 7, 1989, NASD Rule 21(f)(3) required that:
A copy of the agreement containing any such [arbitration]
clause shall be given to the customer who shall acknowl-
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Piper did not obtain Chor1s signature acknowledging receipt of a
copy of any of the three arbitration agreements she signed.
However, by its own terms, NASD Rule 21 does not apply
retroactively. The rule provides at subsection (f)(5) that: "The
requirements of this subsection (f) shall apply only to new
agreements signed . . . after September 7, 1989.'' Therefore, the
first two arbitration agreements, which Chor signed in 1988, are
not subject to the requirements of Rule 21.
The Margin Agreement, on the other hand, is subject to Rule
21. We held in Mueske that failure to comply with controlling law
incorporated into an arbitration agreement, such as an NASD rule,
renders a pre-dispute arbitration clause invalid. Mueske, -
P.2d a t , 50 St.Rep. at 1013. Based on our holding in Mueske,
we hold that the arbitration provision in the Margin Agreement
between Chor and Piper is invalid for violation of NASD Rule
21(f) (3).
Without citing authority, the District Court concluded that
the Xargin Agreement superseded the two previous agreements. Chor
does not defend that conclusion. Because there is nothing in the
Margin Agreement to indicate it supersedes or nullifies the first
two agreements, and in the absence of any citation to legal
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that the court was in error. We will therefore proceed to analyze
the remaining issues as to the first two arbitration agreements.
II
Did the District Court err by relying on Chor's intent not to
be bound by the legal consequences of the arbitration clauses in
the agreements she signed?
As Piper has pointed out, Chor does not address this issue in
her brief to this Court, effectively conceding it. When a contract
is reduced to writing, the intention of the parties is to be
ascertained from the writing alone, if possible. Section 28-3-303,
MCA. We hold that the District Court erred in relying upon Chor's
subjective intent not to be bound by the legal consequences of the
arbitration clauses in the agreements she signed.
111
Did the court err by concluding the arbitration agreements are
void because they are unconscionable or contracts of adhesion?
In Passaqe, this Court held that an arbitration clause may be
enforced even if the agreement in which the clause appears is an
adhesion contract, absent evidence that the arbitration clause was
not within the partiess reasonable expectations or that the clause
is oppressive or unconscionable. , 727 P.2d at 1302. Chor
maintains that this case presents an exception to the general rule
stated in Passaae because, here, the District Court specifically
conc.--'ed that t ,
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reasonable expectations. This conclusion was erroneous, based on
Chorss own deposition testimony.
Chor testified that she read the arbitration agreements before
signing them and that her understanding of the first agreement was
"if I were to have any problems, that we would agree to arbitrate
the problem." As to her claim that she did not fully understand
the legal impact of the arbitration clauses, a party cannot avoid
the legal consequences of an agreement simply by later claiming
that she did not understand the impact of the plain language of the
contract on her legal rights. See Wright v. Blevens (1985), 217
Mont. 439, 444, 705 P.2d 113, 117. More specifically, "[algree-
ments to arbitrate disputes in accordance with SEC-approved
procedures are not unconscionable as a matter of law." Cohen v .
Wedbush, Noble, Cooke, Inc. (9th Cir. 1988), 841 F.2d 282, 286.
Chor also claims that her agreements with Piper are contracts
of adhesion.
Contracts of adhesion arise when a standardized form of
agreement, usually drafted by the party having superior
bargaining power, is presented to a party, whose choice
is either to accept or reject the contract without the
opportunity to negotiate its terms.
Finkle and Ross v. A.G. Becker Paribas, Inc. (D.C.N.Y. 1985), 622
F.Supp. 1505, 1511, as cited in Passaqe, 727 P.2d at 1301. This
claim is not convincing in light of Chor's deposition testimony.
Chor testified that since 1983 she had investment accounts with
five other brokerage houses besides Piper, none of which required
her to consent to arbitrate future disputes. She clearly had the
ability to go elsewhere if the terms of the agreement with Piper
did not suit her. Indeed, she did so in the spring of 1990, when
Schultz left Piper. At that time, Chor terminated her accounts
with Piper and transferred them to another brokerage firm for a few
months, before returning to Piper.
The arbitration clauses here discussed, by their plain
meaning, concern stock transactions. By no stretch of judicial
fiction or fantasy does this opinion suggest that the clauses would
bind Chor to arbitrate a claim based on an automobile accident with
a Piper secretary, or other torts not related to stock transac-
tions, as postulated in the concurring and dissenting opinion.
We hold that the District Court erred in concluding the
arbitration agreements are void due to unconscionability or because
they are contracts of adhesion.
IV
Did the court err by concluding that the agreements are void
because Piper committed actual and constructive fraud by not
explaining the legal implications of the arbitration clauses to
Chor when she signed the agreements?
A prima facie case of actual fraud or constructive fraud would
require, among other elements of proof, evidence that Piper
misrepresented or omitted some material fact. Van Ettinger v.
Papin (1978): 180 Mont. 1, 10, 588 P.2d 988, 994 (actual fraud):
Hartfield v. City of Billings (1990), 246 Mont. 259, 263, 805 P.2d
1293, 1296 (constructive fraud). The District Court concluded that
Piper made a materially false representation to Chor by failing to
inform her that she waived her right to a jury trial by signing the
first two arbitration agreements.
In order for an omission, rather than an affirmative misrepre-
sentation, to constitute fraud, the plaintiff must first demon-
strate that the defendant had a duty to disclose the fact at issue.
Chiarella v. United States (1980), 445 U.S. 222, 228, 100 S.Ct.
1108, 1114, 63 L.Ed.2d 348, 356. According to Chor, a duty arose
from the commercial nature of the relationship between herself and
10
Piper, the admissions of Piper, and 5 30-10-301(1), MCA, concerning
prohibited practices in securities transactions.
Char cites McJunkin v. Kaufman & Broad Home Systems (1988),
229 Mont. 432, 748 P.2d 910, as authority establishing a duty on
the part of Piper to disclose the legal effect of the arbitration
clause to her, as a result of the commercial relationship between
them. In McJunkin, the buyer of a mobile home alleged that the
seller failed to inform him of structural defects therein, This
Court stated:
We have recognized that a sufficient duty can arise in a
commercial transaction such as the one at hand. [Cita-
tion omitted.] We find the defendants had a duty to
refrain from intentionally or negligently creating a
false impression by words or conduct. [Citations
omitted. ]
McJunkin, 748 P.2d at 915.
The admissions of Piper upon which Chor relies are contained
in the deposition of her Piper stockbroker. He "admitted" that he
owed her a duty to assess her needs and to recommend to her
appropriate investments to fit those needs. He also ttadmittedv
that it is reasonable for a customer to rely upon her broker's
information and that the broker owes a duty to use reasonable care
in giving information to customers.
Section 30-10-301(1), MCA, provides:
It is unlawful for any person, in connection with the
offer, sale, or purchase of any security, directly or
indirectly, in, into, or from this state, to:
(a) employ any device, scheme, or artifice to defraud;
(b) make any untrue statement of a material fact or omit
to state a material fact necessary in order to make the
statements made, in the light of the circumstances under
which they are made, not misleading; or
[c) engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person.
This Court has stated that 5 30-10-301(1), MCA, creates an implied
code of conduct for brokers, violation of which may constitute a
breach of the duty that a broker owes to his customer. Brown v.
Merrill Lynch, Pierce, Fenner, Etc. (1982), 197 Mont. 1, 9-10, 640
P.2d 453, 457. Brown involved a broker's alleged failure to warn
a customer of the amount of risk involved in a "tax straddle"
investment.
We are unwilling to construe this Court's rulings in McJunkin
and Brown so broadly as to state that a stockbroker has a duty to
disclose to his customers every possible misunderstanding which
might be reached upon signing a contract. Nor do the "admissions"
of Chor's Piper stockbroker establish a duty to inform a customer
of the specific legal ramifications of an agreement to arbitrate.
His "admissions" only emphasize that the central focus of a
relationship between a stockbroker and an investor is the wise
investment of funds according to the goals of the investor.
In Cohen, the Ninth Circuit Court of Appeals considered
investors' claims of fraud against their stockbroker for persuading
them to sign an agreement to arbitrate future disputes with the
broker. The investors alleged that the broker had told them the
agreement to arbitrate would "not compromise any of [their]
rights." -,
Cohen 841 F.2d at 286. The Ninth Circuit stated:
We know of no case holding that parties dealing at arm's
length have a duty to explain to each other the terms of
a written contract. We decline to impose such an
obligation where the language of the contract clearly and
explicitly provides for arbitration of disputes arising
out of the contractual relationship.
Cohen, 841 F.2d at 287. We agree with the Ninth Circuit Court of
Appeals.
The plaintiffs' case in &&,en was stronger than that of Chor,
because Chor has only alleged an omission, rather than a positive
misrepresentation. Further, there is no evidence that Piper or its
agents concealed information from Chor. She testified that she had
ample opportunity to ask questions of Schultz and that he responded
to all questions she asked.
Chor argues that Schultz's role as her investment advisor
supports a finding that a fiduciary relationship existed between
them and that his breach of his duty as a fiduciary to explain to
her the effect of the arbitration clause justifies her claim of
constructive fraud. Absent special circumstances, a fiduciary duty
is required to prove constructive fraud. Bottrell v. American Bank
(1989), 237 Mont. 1, 20-21, 773 P.2d 694, 706. However, "a
fiduciary relationship is not automatically established in a
stockbroker-client relationship." United Methodist Church v. D.A.
Davidson (1987), 228 Mont. 288, 296, 741 P.2d 794, 799 (Sheehy, J.,
dissenting). In the absence of discretionary authority by a
stockbroker to buy and sell in a customer's account, no fiduciary
relationship is created in a broker-customer relationship. Caravan
Mobile Home Sales v. Lehman Bros. Kuhn Loeb (9th Cir. 1985), 769
F.2d 561, 567.
Chor has not alleged that Piper stockbrokers had discretionary
authority over her accounts. She stated that Schultz "acted as if
he did," but that she made it clear to him that he did not have the
authority to buy and sell stocks in her account without her
permission. The District Court's finding that Piper had de facto
control over Chor's accounts is therefore clearly erroneous.
Chor has provided no legal or factual reason for this Court to
ignore Cohen and the general rule binding a person to the written
agreements she enters. We conclude that no duty has been estab-
lished on the part of Piper to explain to Chor, at the time the
first two arbitration agreements were entered, that by signing the
agreements to arbitrate future disputes, she waived her right to a
jury trial. We therefore hold that the District Court erred in
concluding that the arbitration agreements are void based upon
actual or constructive fraud.
Finally, Chor maintains in her brief to this Court that the
language of the arbitration agreements is too narrow to include
matters outside the contracts themselves. This claim was not
raised in the court below. It therefore will not be considered.
We hold that the arbitration agreements entered between Chor
and Piper on June 17, 1988, and on September 30, 1988, are binding
14
and enforceable. Reversed and remanded for further proceedings
consistent with this Opinion.
We concur:
Justices
Justice James C. Nelson specially concurs and dissents.
I concur with the Court's discussion and holding on issues 2.,
3. and 4 . I respectfully dissent from the Court's discussion and
holding on issue 1. on the basis of my dissent in Mueske v Piper,
.
Jaffray & Hopwood, Cause No. 92-539, decided August 27, 1993.
Specifically, in Mueske, we held that a failure to comply with
controlling law incorporated into an arbitration agreement, such as
an NASD rule, renders a pre-dispute arbitration clause invalid.
However, if the NASD rule is "controlling lawi', as held by the
Court here and in Mueske, then all of the NASD rules should
control. The NASD rules provide that a violation of Rule 21 can
result in sanctions being issued against the violating dealer.
There is no provision for invalidating the arbitration agreement in
its entirety.
If there is some legal basis for the Court to determine that
a violation of a choice of law provision' can result in a remedy
not provided for by that law, this legal basis should be clearly
articulated. If there is no legal basis for allowing this remedy,
one should not be artificially created.
For the foregoing reasons, I respectfully d sent from the
Court's decision on Issue 1.
Justice Karla M. Gray concurs i,
fj
;& foregoing special concurrence
& K
and dissent. 3
1
I do not believe that the reference by the District our&^
or by this Court to the provision at issue as being one of nchoice
of law*' is accurate in the context in which that concept is usually
understood.
Justice Terry N. Trieweiler concurring in part and dissenting in
part.
I concur with the majority's conclusions under Issues I
and 11.
I dissent from the majority's conclusions under Issues I11
and IV.
However, it is not necessary to conclude that the arbitration
clauses at issue are contracts of adhesion, nor that they were
induced by fraud. Neither federal nor state law permits
enforcement of any provision so broad as the arbitration agreements
relied on in this case. In fact, I conclude that the arbitration
clauses in plaintiffs' contracts with Piper, Jaffray & Hopwood,
Inc., are void by reason of the fact that they violate public
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necessary, further factual background is helpful.
The arbitration clauses relied on by PJH and enforced by the
majority's decision were included in two co-owner account
agreements signed by plaintiff Marlene Chor. The first agreement
was entered into among PJH, Marlene Chor, and her husband, John
Michael Chor, on June 17, 1988. It related only to PJH account
number 730-194699-500. Its purpose was to authorize either of the
co-owners of that account to deal with PJH individually and
provided that each co-owner would be bound by the actions and
decisions of the other with regard to that account.
The second co-owner account agreement was entered into among
PJH, Marlene Chor, and her son, John Martin Chor. It related to
PJH account number 730-194696-500. Its purpose was the same as the
previous co-owner account agreement, but related to a different
account owned by different parties.
The fact that the two agreements were separate agreements
relating to different subject matters and involving different
parties is evident from the fact that two separate agreements were
required by PJH.
Referring to the two co-owner account agreements and the
margin agreement in its appellate brief, PJH's attorneys correctly
pointed out that "[elach agreement is a separate document, executed
at a different time. The three agreements created three separate
and disiinci accounts with different account numbers. Even rhe
parties are different."
The cause of action which is the subject of this appeal is
based on plaintiffst allegation that John Schultz, while employed
by PJH, sold Marlene Chor and her brother, Martin Andre,
unregistered Terran Partnership investments in violation of the
Montana Securities Act. This transaction was unrelated to any of
the three accounts for which Marlene Chor had signed co-owner
account agreements or a margin agreement. In fact, it is PJH1s
position that it neither underwrote nor marketed the Terran
Partnership securities and that Schultz was unauthorized by PJH to
sell them.
The point of all this background is that PJH is relying on an
arbitration provision in three account agreements to compel
arbitration of a dispute arising out of a transaction which is
unrelated to any of those accounts, and therefore, unrelated to
those specific agreements.
According to PJH, because the arbitration provision in its
co-owner account agreements is so broad, once Marlene Chor signed
them, she became bound to arbitrate every future dispute with PJH,
regardless of the basis for that dispute. In other words, based on
the arbitration agreement in the co-owner account agreements, if
one of PJH's secretaries ran over Marlene Chor while she was a
pedestrian crossing a Butte city street with a green light and a
dispute arose over liability for that collision, Marlene Chor would
be bound to drbiirdie indi dispute and would be denied her right of
access to Montana's courts and her right to a jury trial.
To approve enforcement of an arbitration provision so broad,
under the circumstances in this case, is unconscionable and shows
a blatant disregard for the importance of access to our courts and
the jury system.
The public policy in Montana is clearly set forth at
5 28-2-708, MCA, where it provides that:
Every stipulation or condition in a contract by which any
party thereto is restricted from enforcing his rights
under the contract by the usual proceedings in the
ordinary tribunals or which limits the time within which
he may thus enforce his rights is void. This section
does not affect the validity of an agreement enforceable
under Title 27, chapter 5.
Title 27, chapter 5, is known as Montana's Uniform Arbitration
Act. Section 27-5-114, MCA, of the Act provides that with some
exceptions, an agreement to submit a controversy to arbitration is
a valid and enforceable agreement. However, an important
qualification is found in subsection (4) which provides:
Notice that a contract is subject to arbitration
pursuant to this chapter shall be typed in underlined
capital letters on the first page of the contract; and
unless such notice is displayed thereon, the contract may
not be subject to arbitration.
Neither of the two co-owner account agreements complied with
this requirement. However, more importantly, a contract to
purchase an interest in the Terran Partnership was a separate
agreement for which no notice whatsoever was given that plaintiff
would be required to arbitrate disputes arising from that
transaction.
It is correct that, to the extent Montana's public policy
requiring a judicial forum for the resolution of claims is
inconsistent with federal policy, Montana's policy is preempted.
Sourhlalzd C o p v. Keating (1984), 465 U.S. 1, 104 S. Ct. 852, 79
L. Ed. 2 d 1. However, the Federal Arbitration Act is not
inconsistent in this respect.
Piper, Jaffray & Hopwood concedes that the Federal Act's
starting point for determining whether this claim must be
arbitrated is found at 9 U.S.C. 5 2 ( 1 9 2 5 ) . That section provides,
in relevant part, as follows:
A written provision in any ...
contract evidencing a
transaction involving commerce to settle by arbitration
a controversy thereafter arisina out of such contract or
transaction, or the refusal to perform the whole or any
part thereof, or an agreement in writing to submit to
arbitration an existing controversy arisina out of such
a contract, transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any
contract. [Emphasis added].
All that is authorized by 5 2 of the Federal Arbitration Act
is a contract provision requiring arbitration of disputes which
arise from the contract which includes the arbitration provision.
There is nothing in the Federal Arbitration Act which allows a
party to a contract to include in that contract the requirement
that the other party to the contract submit every future dispute
between the parties to arbitration regardless of whether the future
dispute relates to the contract in question. To include such a
sweeping provision in a contract of adhesion, like the one in
question, is simply unconscionable.
While on the subjects of adhesion and unconscionability, it is
important to take a look at this Court's previous analysis of
brokerage agreements in the context of the District Court's
findings in this case.
In Passage v. Prudential-Bache Securities, Inc. (1986), 223 Mont. 60, 727
P.2d 1298, we cited with approval the following rule from Finkleand
Ross v. A.G. Becker Paribus, Inc. (D.c.N.Y. 1985), 622 F. Supp. 1505,
Contracts of adhesion arise when a standardized form of
agreement, usually drafted by the party having superior
bargaining power, is presented to a party, whose choice
is either to accept or reject the contract without the
opportunity to negotiate its terms. (citation omitted.)
Here, the investor is faced with an industry wide
practice of including Arbitration Clauses in standardized
brokerage contracts. As the investor faces the
possibility of being excluded from the securities market
unless he accepts a contract with such an agreement to
arbitrate, such clauses come within the adhesion
doctrine.
Passage, 727 P.2d at 1301.
The District Court made the following findings of fact which
satisfy the above legal criteria of an adhesion contract:
19. . . . The co-owner account agreement was
drafted by PJH, printed on PJH form, and filled out by
Schultz. ...
20. Schultz presented the co-owner account
agreement to her representing that it was necessary to
sign it in order to open the account. Chor was given no
alternative to signing.
21. OsNeil further testified that the customer had
no choice in agreeing to arbitration. If a customer
refused to so agree, OINeil said he would refuse to
accept the account. He stated the customer would Isgo
down the roadssand do business elsewhere.
The above findings are supported by substantial evidence.
They clearly satisfy the requirements for an adhesion contract, as
set forth above. By finding that this contract was not a contract
of adhesion, the majority simply retried that issue of fact.
Establishment of an adhesion contract is, however, not the end
of our inquiry. The rule cited in Pussage goes on to provide:
However, mere inequality in bargaining power does not
render a contract unenforcible [sic], (citation omitted)
nor are all standardized contracts unenforcible [sic].
(citations omitted.) As a consequence of current
commercial realities, form forum clauses will control,
absent a strong showing it should be set aside.
(citation omitted.) For such a contract or clause to be
void, it must fall within judicially imposed limits of
enforcement. It will not be enforced against the weaker
party when it is: (1) not within the reasonable
expectations of said party or (2) within the reasonable
expectations of the party, but, when considered in its
context, is unduly oppressive, unconscionable or against
public policy.
Passage, 727 P.2d at 1301-02. While the arbitration agreements in
Passage and Finkle were found to be within the investor's expectation
and consistent with public policy, the arbitration provisions in
this case were neither. In this regard, the District Court made
the following findings, which were supported by substantial
evidence:
21. Marlene Chor testified that she understood the
purpose of this co-owner account agreement (Char's
Exhibit No. 4) was to create a joint account.
27. The document, on its face, is called a co-owner
account agreement. The "imwortant notice: wlease read
carefully" notice on the front page deals entirely with
the type of account. The identification of the name of
the account on the front page was printed by someone
else.
28. On the third page of the agreement (Chorls
Exhibit No. 4), there appears a paragraph entitled
"arbitration:" in the following language:
[Agreement deleted].
29. The insertion of the arbitration provision in
the co-owner account agreement alters the stated purpose
of the document from a joint account agreement to one
establishing a joint account and requiring arbitration of
"all controversies which may arise ....:I
30. Schultz did not point out or explain what the
arbitration clause meant. There is nothing on the front
page of the co-owner account agreement which indicates
that the document contains an arbitration clause. Nor is
there anything on the signature page of the document
which indicates that the document contains an arbitration
clause.
31. Marlene Chor testified that she thought the
effect of the arbitration clause was that if there were
a dispute that they would first negotiate it. As a lay
person, Marlene Chor interpreted the provision as merely
one step in the process prior to court action. She did
not understand that it meant she was waiving her right to
the courts and a jury trial.
32. Furthermore, the co-owner account agreement
does not state anywhere that she waived her right to a
jury trial.
33. Holland admitted in testimony that it would
take someone with legal training or actual experience
with arbitration to discern from the agreement that its
effect is to waive due process through the Montana court,
including the right to a jury trial. Yet, PJH apparently
still expected the customer to sign an agreement
containing an arbitration clause.
34. Both PJH's branch manager, Tom OfNeil, and
Chorvs current personal account representative, Mike
Holland, testified that they were not attorneys and
therefore could not explain how the arbitration clause
required waiving the right to a jury trial but that they
were aware that through their own experience that is the
effect.
35. PJH has stipulated in the record that Chor had
no input in drafting the co-owner account agreements she
signed. PJH took advantage of their superior bargaining
position with regard to Chor in that, as the drafter of
the document, PJH knew that the effect of the document
was to accomplish more than to set up a joint account.
Yet, PJH failed to inform Chor of that effect of the
document and now seeks to take advantage to the detriment
of Chor of their superior bargaining power and knowledge
which was not revealed by either their agent or the
document itself. Now, PJH wishes to deny Chor the right
to seek relief in the Montana courts.
The District Court clearly found that the result of the
arbitration provision, which the majority enforced, was not within
the reasonable expectations of Marlene Chor. Those findings were
supported by substantial evidence. Therefore, according to this
Court's prior authority, the arbitration clause is not enforceable.
Even if the clause had been found to be within Marlene Chor's
reasonable expectations, it would not be enforceable under the
authority of Finkle and Passage because it was unconscionable and
against public policy for the reasons set forth previously.
As a result of the majority's decision in this case, an
unsophisticated member of the consuming public can sign a form
agreement prepared by a large corporation with superior bargaining
power, assuming that it relates to a limited transaction, and later
find that they have lost all future rights of access to Montana's
courts in any future disputes with that corporation, no matter how
totally unrelated to the subject of the original contract.
With court dockets being as overcrowded as they are, the rush
of the federal judiciary and this Court to embrace arbitration is
understandable. However, the majority's willingness to, in the
process, ignore fundamental constitutional rights such as access to
our courts and the right to jury trial, is not so understandable.
For these reasons I dissent from the majority opinion.
I also conclude that the District Court correctly found that
Marlene Chor was induced by constructive fraud to enter into these
arbitration agreements, because PJH breached its duty to properly
inform her of the consequences of the agreement. However, because
I conclude that the arbitration provisions are unenforceable based
on the above discussion, I feel it is unnecessary to discuss
further that part of the majority opinion.
Justice William E. Hunt, Sr., joins in the foregoing concurrence
and dissent.
October 18, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
John G. Crist and James L. Jones
Dorsey & Whitney
P.O. Box 7188
Billings, MT 59103
Gregov 0 . Morgan and Charles F. Proctor
Attorneys at Law
P.O. Box 1530
Bozeman, MT 59771-1530
ED SMITH
CLERK OF THE SUPREME COIJRT