RENDERED: MAY 5, 2023; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2022-CA-0621-MR
HOME BUYERS WARRANTY CORPORATION APPELLANT
APPEAL FROM BULLITT CIRCUIT COURT
v. HONORABLE RODNEY DARREL BURRESS, JUDGE
ACTION NO. 21-CI-00526
CRYSTAL ROBERTS; COMMONWEALTH
DESIGNS, LLC, A CO-DEFENDANT IN
THIS ACTION; AND MATTHEW MULLINS APPELLEES
OPINION
REVERSING
AND REMANDING
** ** ** ** **
BEFORE: COMBS, EASTON, AND ECKERLE, JUDGES.
COMBS, JUDGE: Home Buyers Warranty Corporation appeals from an order of
the Bullitt Circuit Court denying its motion to compel arbitration in an action filed
by Crystal Roberts and Matthew Mullins. After our review, we reverse and
remand.
On June 29, 2020, Roberts and Mullins purchased a home in Mt.
Washington. The home was built and sold to them by Commonwealth Designs,
Inc. (Commonwealth Designs or homebuilder). Commonwealth Designs provided
Roberts and Mullins a one-year, express warranty against defects in workmanship
and materials. Additionally, Roberts and Mullins paid for a separate ten-year
structural warranty.
The parties’ pre-printed contract for purchase of the house included
space to indicate which of several warranties was being provided. The pre-printed
form identified the homebuilder’s one-year warranty as “Written Warranty
provided by Builder.” The additional structural warranty was identified by a hand-
written notation under the pre-printed section entitled “Other Additional
Warranty(ies)” and designated “2-10 structural warranty.” The contract included
the following provision:
BUYER AND BUILDER AGREE THAT SUCH
WARRANTY SHALL CONSTITUTE THE SOLE
WARRANTY FROM BUILDER TO BUYER AND
THE WARRANTY IS GIVEN IN LIEU OF ALL
OTHER WARRANTIES. BUILDER reserves the option
to replace with equal quality, repair or pay reasonable
sums for any warranty item. If defects are claimed by
BUYER, BUYER and BUILDER shall comply with the
claim procedures in the warranty, including but not
limited to the notice requirements. If BUILDER fails to
comply with the claim procedures in the warranty or if
the parties are unable to mutually resolve any question
with respect to the performance of this Agreement,
BUYER may contact the Home Builders Association of
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[Louisville or Lexington] and request conciliation. The
provisions of this last sentence shall not apply unless
BUILDER is at all times during the conciliation
procedure a member of the Home Builders Association
of [Louisville and Lexington]. . . . If the parties are
unable through conciliation to mutually resolve any
controversy or claim arising out of or relating to the
limited warranty, or an alleged breach thereof, then it
shall be settled by arbitration administered by the
American Arbitration Association. . . .
Roberts and Mullins signed an application for enrollment of the newly
constructed home in a structural warranty program created and administered by
Home Buyers Warranty Corporation (HBW). While the property and the
homebuyers were properly identified on the application, the builder was identified
as Barlow Homes, LLC -- not Commonwealth Designs. Both homebuilding
enterprises are owned by John Barlow, and Barlow signed the application
individually as “builder/seller.” Roberts and Mullins provided electronic
signatures.
Shortly thereafter, a certificate of warranty coverage issued. The
coverage is provided by New Home Warranty Insurance Company. The terms of
the warranty agreement provide that any “claim, complaint, controversy, or
dispute” between or among the homebuyer, the homebuilder, the warranty insurer,
and/or the warranty administrator concerning the agreement will be resolved
exclusively through binding arbitration. The arbitration clause applies broadly to
“[d]isputes based upon contract, tort, consumer rights, fraud and other intentional
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torts, negligence, constitution, statute, regulation, ordinance, common law and
equity.” The agreement provides that arbitration proceedings must be conducted
by DeMars & Associates, Ltd., or Construction Dispute Resolution Services, LLC.
Finally, the warranty agreement provides as follows:
After the repair, replacement or payment for the repair of
any structural defect, you must provide a full and
unconditional written release of the builder/seller,
warranty administrator, warranty insurer and related
parties, in recordable form, of all legal obligations with
respect to the structural defect and conditions arising
from such structural defect.
On June 28, 2021, Roberts and Mullins filed a civil action against
Commonwealth Designs and HBW. In their complaint, Roberts and Mullins
alleged that they had given the homebuilder notice of multiple problems with their
new home. They acknowledged that Commonwealth Designs had responded to
their concerns. Robert and Mullins also noted that they had reported perceived
structural defects to HBW. Pursuant to its obligation under the terms of the
warranty agreement, HBW submitted the claim to the warranty insurer.
With respect to Commonwealth Designs, Roberts and Mullins
asserted claims of negligence, intentional misrepresentation, negligent
misrepresentation, breach of good faith and fair dealing requirements, breach of
express warranty of habitability, and breach of contract. They sought to return the
property to Commonwealth Designs in exchange for its full purchase price and to
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recover punitive damages against the homebuilder. With respect to HBW, the
complaint stated that Roberts and Mullins “make a demand to submit this matter to
mediation and/or arbitration.” Furthermore, they specifically requested that “any
claim against [HBW] be held in abeyance until said defendant completes its review
of the claim and makes a decision regarding [their] coverage under the warranty.
In the event of a dispute, [Roberts and Mullins] request the warranty matter be
referred to arbitration.”
In correspondence dated July 2021, counsel for Roberts and Mullins
advised out-of-state counsel for HBW that there was no need to hire local counsel
“or file an answer now.” In October 2021, counsel for Roberts and Mullins again
reassured HBW’s counsel that there was no need to file an answer. However,
HBW informed Roberts and Mullins that their claim under the terms of the new
home warranty could not be paid without a release of the legal claims asserted
against the home’s builder. At that point, their counsel advised HBW that it must
“enter an appearance and file an answer within 10 days.”
Instead, HBW filed a motion to dismiss the action against it and to
compel arbitration. In its written memorandum to the court, HBW observed that
Roberts and Mullins conceded in their complaint that the parties’ agreement
required that any dispute concerning a structural warranty claim be resolved
through an arbitration proceeding. Invoking the express terms of the agreement,
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HBW sought to recover attorneys’ fees and costs incurred in bringing the motion to
compel.
In response, Roberts and Mullins filed a motion requesting the trial
court to declare the arbitration provision of the parties’ warranty agreement
unenforceable. HBW challenged the motion, arguing that Roberts and Mullins
were estopped from arguing that the arbitration clause of the structural warranty
agreement was unenforceable. In September 2021, Roberts and Mullins had filed a
demand for arbitration of the dispute concerning the homebuilder’s one-year
warranty with the American Arbitration Association.
In an order entered May 19, 2022, the trial court held that the
arbitration clause contained in the structural warranty agreement was
unenforceable. It concluded that the provision was unconscionable because
Roberts and Mullins had been “unable to observe the terms requiring inconsistent
arbitration [forums] . . . .” The structural warranty agreement with HBW required
arbitration with DeMars & Associates, Ltd., or Construction Dispute Resolution
Services, LLC; but the homebuilder’s one-year warranty for workmanship and
materials required arbitration conducted by the American Arbitration Association.
Nevertheless, the court granted the motion of Commonwealth Designs to compel
arbitration of the claims asserted against it by Roberts and Mullins. The court also
granted the motion of Roberts and Mullins to file an amended complaint.
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Although the court observed that “a review of the First Amended Complaint shows
that there are not substantial changes from the allegations contained in the original
Complaint,” the amended complaint now included numerous additional claims:
breach of contract, intentional misrepresentation, negligent misrepresentation, civil
conspiracy, and violation of the unfair claims settlement practices act against New
Home Warranty Insurance Company. It also alleged that the arbitration clause
included in the warranty agreement administered by HBW was unconscionable
and, consequently, unenforceable. This appeal followed.
On appeal, HBW argues that the trial court erred by concluding that
the arbitration clause of the parties’ warranty agreement is unenforceable because
it is unconscionable. HBW contends that the court’s conclusion is based upon
clearly erroneous factual findings. Additionally, HBW argues that Roberts and
Mullins are estopped from making this argument because they had expressly relied
upon the arbitration clause in asserting their demand for arbitration in the
complaint that they filed against HBW.
The federal Uniform Arbitration Act is codified in Kentucky at KRS1
417.045-240. It provides that arbitration agreements are to be enforced according
to the standards applied to other contracts. Id. The provisions of KRS 417.050
specifically declare that qualifying agreements are “valid, enforceable, and
1
Kentucky Revised Statutes.
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irrevocable, save upon such grounds as exist at law for the revocation of any
contract.” KRS 417.060(4) provides that “[a]ny action or proceeding involving an
issue subject to arbitration shall be stayed” if an application for arbitration has been
made under this section. Finally, KRS 417.220 provides that an appeal may be
taken immediately from an order denying an application to compel arbitration. On
appeal, we must defer to the trial court’s factual findings where they are supported
by substantial evidence. Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d
335, 342 (Ky. App. 2001). However, we review the trial court’s identification and
application of legal principles de novo. Id.
In their initial complaint, Roberts and Mullins made numerous and
specific allegations against Commonwealth Designs in support of a variety of
causes of action asserted against the homebuilder. However, in Count 8 of their
initial complaint entitled REQUEST FOR MEDIATION AND ARBITRATION,
Roberts and Mullins demanded repeatedly that their dispute with HBW be
submitted to arbitration in accordance with the arbitration clause included in the
structural warranty agreement. They alleged that they had submitted a claim to
HBW pursuant to the terms of the warranty agreement, and they represented to the
court that any dispute that might arise with respect to that claim was required to
be submitted to arbitration. Accordingly, HBW readily agreed with the
concessions made by Roberts and Mullins. Under these circumstances, pursuant to
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the provisions of KRS 417.060 quoted above, HBW could have rationally expected
that the civil action against it would be stayed by order of the trial court. Instead,
HBW filed a motion to dismiss the action. This motion sparked the inconsistent
allegation asserted by Robert and Mullins that the arbitration clause was
unenforceable. HBW contends that by virtue of their demand for arbitration,
Roberts and Mullins were estopped from asserting the directly contradictory
argument that the clause is unenforceable.
A party seeking to compel arbitration bears an initial burden of
establishing the existence of a valid agreement to arbitrate. Conseco, supra.
Because it is a formal act taken in the context of a judicial proceeding, an
admission included in a party’s pleading constitutes a judicial admission. Center v.
Stamper, 318 S.W.2d 853, 855 (Ky. 1958). A judicial admission is conclusive, and
the pleading party is barred from disputing it. Id. The opponent of the pleading
party is relieved of the obligation to produce evidence relevant to it. Id.
We conclude that the demand to arbitrate its disagreements with HBW
included in the initial complaint filed by Roberts and Mullins established the fact
that a valid agreement to arbitrate their disputes existed. Consequently, Roberts
and Mullins are bound by the averments in their pleading indicating that the
arbitration clause included in the parties’ structural warranty agreement governs
resolution of any dispute between them. Under the circumstances, any issue
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concerning the enforceability of the arbitration provision was resolved as a matter
of law.
Nevertheless, the trial court erred by concluding that the arbitration
clause included in the structural warranty is unenforceable because it is
unconscionable. “[A]bsent fraud in the inducement, a written agreement duly
executed by the party to be bound, who had an opportunity to read it, will be
enforced according to its terms.” Conseco, 47 S.W.3d at 341 (citing Cline v. Allis-
Chalmers Corp., 690 S.W.2d 764 (Ky. App. 1985)). The doctrine of
unconscionability provides a narrow exception to this rule. Id. The doctrine
applies only to “oppressive and unfairly surprising contracts[.]” Id. (citing
Louisville Bear Safety Service, Inc., v. South Central Bell Telephone Company,
571 S.W.2d 438, 440 (Ky. App. 1978) (quoting Wille v. Southwestern Bell
Telephone Co., 219 Kan. 755, 549 P.2d 903 (1976))).
An unconscionable agreement is characterized as “one which no man
in his senses, not under delusion, would make, on the one hand, and which no fair
and honest man would accept, on the other.” Id. at 342 (citing Louisville Bear, 571
S.W.2d at 440 (quoting BLACK’S LAW DICTIONARY, 1694 (4th ed. 1976))). This
fact-based determination is typically made on a case-by-case basis. Id. (citing
Forsythe v. BancBoston Mortgage Corporation, 135 F.3d 1069 (6th Cir.1997)).
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In this case, the trial court correctly observed that the distinct clauses
of the separate warranty agreements identified different arbitration forums. Any
disagreements concerning the structural warranty agreement, applicable to a
catastrophic failure of the home’s load-bearing infrastructure and administered by
HBW, required arbitration with DeMars & Associates, Ltd. or Construction
Dispute Resolution Services, LLC. The homebuilder’s one-year warranty,
applicable to defects in workmanship and materials, required arbitration conducted
by the American Arbitration Association.
Although the warranties applied to distinctly different aspects of the
newly constructed home, the court expressed concern that “referral to separate
arbitrators subjects [Roberts and Mullins] to inconsistent arbitration findings.”
Furthermore, it found that Roberts and Mullins were provided with only a “Sample
Warranty” at closing and were “unable to observe the terms requiring inconsistent
arbitration agreements until provided with it [sic] actual language.” Upon this
basis, the trial court concluded that the arbitration clause included in the warranty
agreement administered by HBW was “one sided, oppressive, and surprising.” It
concluded that “to hold a party to a waiver of a right to jury trial, and restrict their
access to the judicial system, when they are not provided the actual terms of the
agreement at the time the contract is entered is unconscionable.”
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In their application for the structural warranty administered by HBW,
Roberts and Mullins explicitly agreed that they had read a copy of the warranty
contract and that they gave “CONSENT TO THE TERMS OF THAT
DOCUMENT INCLUDING THE BINDING ARBITRATION PROVISION
contained therein.” There is no evidence to indicate that the copy of the warranty
contract provided to Roberts and Mullins and read by them was different -- in any
respect -- from the copy of the structural warranty contract that they received once
their application was accepted. In fact, Roberts and Mullins never made such a
claim before the trial court. Consequently, there is no basis upon which to
conclude that the arbitration clause included in the structural warranty agreement is
oppressive or unfairly surprising.
Moreover, there is no evidence to support the court’s finding that
Roberts and Mullins were “unable to observe the terms requiring inconsistent
arbitration agreements until provided with it [sic] actual language.” It was readily
apparent that the arbitration clauses included in the two warranty agreements were
separate and distinct. While each of the warranty providers designated a different
forum for arbitration proceedings, this fact is immaterial because the separate
warranties pertained to discrete aspects of the home’s construction: the
homebuilder’s warranty to defects in workmanship and materials; the structural
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warranty to the catastrophic failure of designated load-bearing elements of the
home -- regardless of any workmanship and materials issues.
The inclusion of the arbitration clause in the structural warranty
agreement was not abusive or unfair. The clause was not concealed or disguised;
its provisions were simply explained; it did not affect the principal bargain in an
extreme or surprising way. See Conseco, supra. Designation of an arbitration
forum is not unreasonable; on the contrary, it is standard. The fact that Roberts
and Mullins contracted for more than one warranty, each designating a different
forum for resolution of disputes relative to their coverage, does not render the
distinct clauses unenforceable. For these reasons, we are constrained to reverse the
trial court’s order denying the motion to compel arbitration.
Finally, Roberts and Mullins concede in their brief to this Court that
the terms of the parties’ agreement provide that “the prevailing party in any court
action brought for the enforcement or interpretation of the arbitration provision . . .
shall be entitled to receive from the losing party a reasonable sum for its attorneys’
fee and costs.” Consequently, we reverse the order of the Bullitt Circuit Court
denying the motion to compel arbitration and we remand for an award of attorneys’
fees and costs.
ALL CONCUR.
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BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE
COMMONWEALTH DESIGNS:
Jessalyn H. Zeigler
Nashville, Tennessee John W. Hays
Lexington, Kentucky
Chacey R. Malhouitre
Lexington, Kentucky
BRIEF FOR APPELLEE
CRYSTAL ROBERTS AND
MATTHEW MULLINS:
Nader George Shunnarah
Louisville, Kentucky
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