Mohammad Rafiei bought a new house from Lennar Homes in 2018. Three years after purchase, Rafiei alleges that the garbage disposal exploded, injuring him.
Rafiei sued Lennar for damages over $1 million. The lawsuit was asserted in a Texas District Court.
The contract executed between Lennar and Rafiei required that all disputes be submitted to arbitration, including claims of personal injury and issues regarding the enforceability and validity of the arbitration provision. The arbitrator was vested with sole authority to decide everything.
The provision incorporated the rules and procedures of the AAA, following its construction industry regulations. If claimed damages exceed $250,000, three arbitrators must resolve the dispute.
Each party is required to pay its own costs and expenses of arbitration.
Lennar requested that the trial court stop the litigation proceedings, and instead require arbitration as provided in the contract. Rafiei opposed Lennar’s motion, arguing that the arbitration provisions are unconscionable because arbitration costs are prohibitively expensive.
To support his response Rafiei submitted evidence that arbitration would cost him $8,025. And that all he could afford was $6,000. If Rafiei is required to use only arbitration he would effectively be precluded from pursuing his claim.
The trial court denied Lennar’s motion to stop the lawsuit and instead, require arbitration. Lennar appealed.
The court of appeals analyzed the situation and concluded that the trial court was correct. It is unconscionable that Rafiei was forced to use a dispute-resolution forum that he could not afford. This meant that, on a practical basis, he had no access to justice as he could not pay the fees and costs.
The court of appeals affirmed in 2022. Lennar again appealed.
The Supreme Court considered the concept of unconscionability. A contract is unconscionable and unenforceable when a transaction is so one-sided, with so gross a disparity in values exchanged, that no rational contracting party would have entered it. When a court applies an unconscionability standard to arbitration, the critical issue is whether arbitration is an adequate and accessible substitute for litigation.
To be enforceable, the alternative to litigation must be a forum where parties can effectively vindicate their rights. Anything less fails.
At trial, Rafiei presented no evidence that he sought a waiver or reduction of AAA arbitration fees and related costs. The court transcripts indicated that Rafiei failed to include a comparison of costs between litigation and arbitration. Further, Rafiei offered no testimony regarding his ability to afford litigation, but not arbitration.
Lacking submittals from Rafiei regarding costs between both alternatives other than the conclusion of Rafiei’s lawyers that arbitration costs are “astronomically higher” than litigation, out-of-pocket expenses in litigation are “minimal,” and litigation hearings and trials are “free,” the Supreme Court concluded that Rafiei failed to establish that he could afford litigation but not arbitration.
The Judgments of the trial court and court of appeals are reversed. Lennar wins this round but Mohammad Rafiei will have another chance to present evidence that arbitration costs preclude him from seeking justice. The case is sent back to the trial court for further proceedings consistent with the Opinion of the Supreme Court.
See Lennar Homes of Texas v. Rafiei; Texas Supreme Court; Case 22-0830, April 5, 2024: https://scholar.google.com/scholar_case?case=3185182584592779686&hl=en&as_sdt=6&as_vis=1&oi=scholarr.
Questions / Issues / Comments:
1. It seems basic that Rafiei would furnish evidence of the cost disparity between litigation and arbitration, and his ability to afford only litigation. Could this have been a trial strategy, hoping Lennar would settle instead of appealing to the Supreme Court? Because if this had gone poorly for Lennar, it could mean that all of its contracts containing arbitration procedures are subject to challenge.
2. I am not a trial lawyer. But I am constantly discussing trial and arbitration strategies with litigators in my Firm. It feels like corporate America prefers arbitration for reasons of privacy and the perceived inability of a claimant to present facts to a jury, hoping to receive punitive and exemplary damages. And that plaintiffs typically prefer litigation, wanting to avoid the situation where a win in arbitration results in merely a Decree, which still requires conversion to Judgment via litigation to be capable of court-ordered enforcement.
3. In general, Courts find a way to uphold the enforceability of arbitration provisions. Builders, engineers, architects, surveyors, and construction contractors continue to insist on adding arbitration into their contracts. Mandatory arbitration provisions are difficult to challenge.
Stuart A. Lautin, Esq.** Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
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