In recent years, state and federal governments have renewed their focus on consumer protection, implementing a range of new laws and regulations targeting unscrupulous business practices. While well-intended, these laws also directly impact the relationships between ethical businesses and their customers. This is particularly true of contractual relationships.
So, what steps do Ohio businesses need to take to ensure that their customer contracts meet their own business needs while complying fully with existing consumer protection laws?
Is a one-sided contract term enforceable?
In business-to-consumer (B2C) transactions, the business frequently has superior bargaining power and can request terms that substantially favor it. While less true in business-to-business (B2B) transactions, situations still exist where the supplier business can craft one-sided terms that the business customer has little choice but to accept, mainly when a critical supply chain component is at issue.
But because a contract clause is one-sided, does that mean it’s inappropriate or unenforceable? Not at all. Well-crafted one-sided clauses, such as mandatory arbitration provisions, are good practice for many businesses. When crafted correctly, they won’t run afoul of general contract laws or consumer protection laws.
Under Ohio law, for a one-sided provision to be unenforceable, it must be so one-sided under the circumstances surrounding the negotiation and execution of the contract as to be unconscionable. Ohio Rev. Code § 1302.15 (cmt. 1). In essence, the one-sided term has to be unreasonably favorable to one party while also depriving the other party of a meaningful choice.
Ohio courts ask two questions when determining whether contract provisions are unconscionable:
- Are the terms themselves the problem (substantive unconscionability)?
- Was the process of concluding the agreement the problem (procedural unconscionability)?
See Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶ 34.
Notably, both substantive and procedural unconscionability must exist to render a contract term unconscionable. See Taylor Bldg. Corp. of Am., 117 Ohio St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶ 34.
Businesses considering highly favorable contract terms, however, should determine the relative bargaining positions of the parties. When assessing whether the difference in bargaining power is so significant as to pose a problem, the business should ask several questions, including:
- How old is the other contracting party?
- What is the intelligence and education level of the other party?
- How much business experience and knowledge does the other party have?
- Which party drafted the potentially problematic term(s)?
- Were the terms adequately explained to the other party?
- Can the other party alter the terms?
See Taylor Bldg. Corp. of Am., 117 Ohio St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶ 44.
The Ohio Consumer Sales Practices Act (CSPA) also prohibits unconscionable terms in consumer contracts, although it defines the term “unconscionable” slightly more broadly. See R.C. 1345.03(A). The CSPA also considers the age, general intelligence and education levels of the consumer, as well as physical or mental infirmities that could affect their negotiating ability. See R.C. 1345.03(B). But when specifically considering bargaining power, the CSPA assesses whether the contract terms were “substantially one-sided in favor of the supplier” and whether the supplier knew it at the time. R.C. 1345.03(B)(5). (For more on the CSPA, see our blog post here.)
So, while favorable or even one-sided terms are not inherently unconscionable or unenforceable, they do require a little extra thought and care. Businesses should ensure that their attorneys have reviewed and approved the language of such terms before entering into agreements containing them.
Watch for these contract clauses
There are several types of contract provisions that are likely points of dispute between businesses and their customers:
Dispute resolution requirements
One of the provisions most subject to challenge by consumers as unconscionable is a term that mandates alternative dispute resolution mechanisms such as arbitration rather than bringing suit in court. Consumers frequently argue that they have no choice but to accept mandatory arbitration clauses, which constitutes an unreasonable abuse of the business’s superior bargaining power.
Mandatory arbitration provisions are commonplace in consumer contracts, and Ohio courts frequently uphold them, “[a] presumption favoring arbitration arises when the claim in dispute falls within the scope of the arbitration provision.” Williams v. Aetna Fin. Co., 83 Ohio St.3d 464, 471, 700 N.E.2d 859, 865 (1998) Federal law also favors appropriate arbitration provisions, and the Federal Arbitration Act preempts any state law that “disproportionately impacts” the Act’s objective of supporting arbitration. See Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (federal policy favors arbitration); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 342, 131 S.Ct. 1740, 1747, 179 L.Ed.2d 742 (preemption analysis) But federal law does not prevent courts from considering whether arbitration clauses are unconscionable. Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S.Ct. 1421, 1426, 197 L.Ed.2d 806 (courts may invalidate arbitration provisions based on generally applicable contract defenses” like fraud or unconscionability).
Businesses that intend to use mandatory arbitration clauses must take care when negotiating with the consumer to make sure that the courts enforce the provision. Among the steps business should take include:
- Make it clear that the consumer knows the provision exists before entering the contract or signs a page expressly indicating they have read the condition.
- Provide the consumer with the express terms of the arbitration agreement before they execute the contract and have them acknowledge receipt.
- Make clear what procedural rules apply and, where possible, use commonly accepted arbitration practices such as those of the American Arbitration Association.
- Ensure that the consumer understands and acknowledges who has the right to appoint the arbitrator(s), particularly when it is the sole right of the business.
Businesses do not need to give the consumer a complete education on arbitration and contract law, nor do they have to specifically highlight every term that favors the business rather than the consumer. Indeed, it’s the consumer’s responsibility to know and understand the terms of a contract before they sign it. And, for its own best protection, a business should do what it can to create a record of the consumer’s knowledge and understanding.
Limitations of liability
Many consumer contracts seek to limit a business’s liability for all potential breaches. As with mandatory arbitration clauses, limitation of liability provisions are fully enforceable and compliant with the Ohio CSPA when done to minimize any imbalance in bargaining power. Courts, however, can refuse to enforce these provisions using the same unconscionability analysis. See Collins v. Click Camera & Video, Inc., 86 Ohio App.3d 826, 833–36, 621 N.E.2d 1294, 1299–300 (2nd Dist.1993) (upholding the enforceability of a limitation of liability provision because the provision was not unconscionable or against public policy).
Just as with mandatory arbitration provisions, liability limitation clauses should be prominent in the contract. But, again, the business should ask the consumer to acknowledge having read and understood them (even if they don’t).
Even very broad limitation of liability clauses are enforceable in Ohio. Indeed, businesses can even limit liability for certain negligent behavior. But these clauses cannot exempt a business from willful, wanton, or reckless conduct, or as the Ohio Supreme Court put it, for “fail[ure] to exercise any care whatsoever toward those to whom he owes a duty of care.” Richard A. Berjian, D. O., Inc. v. Ohio Bell Tel. Co., 54 Ohio St.2d 147, 158, 375 N.E.2d 410, 416 (1978).
Draft with care
Ohio businesses have substantial leeway in drafting consumer contracts, even to the point of including obvious one-sided terms. These provisions, however, must be carefully sculpted to avoid the appearance of abusing a superior bargaining position against a consumer incapable of negotiating for any other options. Businesses should work with their attorneys to ensure that their consumer contracts get the maximum possible protection for the company — yet avoid any potential interference with Ohio consumer protection or contract law.
Louis J. Licata is a managing partner. His practice focuses on employment law, litigation and business transactions. He can be reached at [email protected] or by phone at (216) 573-6000.
Michael Beardsley is an associate attorney. He can be reached at [email protected] or by phone at (216) 573-6000.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.