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Happy New Year! No, You Don't Have to Pay Your Adversary's (And Possibly Other's) Attorney's Fees for Bad Construction

The holidays are over, and we hope that no one got a lump of coal in their stocking.  But that is almost what happened to our client, who purchased an older residence in one of Nashville's hottest, trendy neighborhoods.  To turn that house into a home, she planned some substantial renovations. 

It didn't go well.  In short order, it became apparent that the renovations were actually making things worse.  The dispute quickly escalated into litigation.  Our client was then shocked to discover a provision the contractor slipped into each of his renovation contracts:

"You agree to pay all court, legal and both sets of attorney fees associated if any legal action is taken by either you, Hastings Management or any other party."

You read that right.  Even if our client prevailed, she would still  have to pay all of Mr. Hastings' attorney's fees.  It was actually worse than that.  Because the provision also required payment of fees associated with "any other party", she might have to pay fees for someone she didn't even know.

Regrettably, the contractor justified this odd position in court filings, stating that customers "commonly question the quality of work performed and complain about the pace of work, defects in the work performed, conduct of sub-contractors, whether the work meets codes, whether the work is complete, whether the materials used are sub-standard amongst many other issues experienced in the construction process."

You also read that right.  Fortunately, a local Chancellor ruled this provision was unconscionable and violated Tennessee public policy.  The Court stated, in pertinent part, as follows:

This dispute centers on two residential construction contracts between Mindy Donovan ("Ms. Donovan"), who is a consumer, and Joshua Hastings ("Mr. Hastings"), who is an experienced contractor in the Nashville area.  (See Compl.; Counter-Compl.)

To that end, each contract contained the following fee provision:

You agree to pay all court, legal and both sets of attorney fees associated if any legal action is taken by either you, Hastings Management or any other party.

(Mot. for Sum. J. at Exhs. A and B; see Stmt. of Undisputed Material Facts ¶¶ 1, 3; Response to Stmt. of Undisputed Material Facts ¶¶ 1, 3.) (emphasis added)

The Court has carefully considered the foregoing language in its analysis of whether the provision is enforceable, while recognizing that Tennessee law has long-permitted contracting parties to “specifically and expressly create a right to recover attorney fees by incorporating the phrase ‘including reasonable attorney fees’ or some other similar, yet equally specific, contractual language.”  Cracker Barrel Old Country Store, Inc. v. Epperson, 284 S.W.3d 303, 310 (Tenn. 2009) (citing House, 245 S.W.3d at 377; Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336, 338 (Tenn. 1985); Pinney v. Tarpley, 686 S.W.2d 574, 581 (Tenn. Ct. App. 1984)). 

On the other hand, Tennessee law is equally well-settled that “the law’s strong policy favoring the enforcement of contracts as written must occasionally give way.”  Sikora v. Vanderploeg, 212 S.W.3d 277, 286 (Tenn. Ct. App. 2006).  The Court finds that one such occasion relevant to the instant Motion is where a contract’s terms are unconscionable and/or violate Tennessee’s public policy.  Taylor v. Butler, 142 S.W.3d 277, 285 (Tenn. 2004); In re Baby, 447 S.W.3d 807, 823 (Tenn. 2014). 

“The question of whether a contract or provision thereof is unconscionable is a question of law” and therefore appropriate for this Court to consider on a dispositive motion.  Taylor, 142 S.W.3d at 284-85 (citing Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable & Cold Storage Co., 709 F.2d 427, 435 n. 12 (6th Cir. 1983)).  “The determination that a contract or term is or is not unconscionable is made in the light of its setting, purpose and effect. Relevant factors include weaknesses in the contracting process like those involved in more specific rules as to contractual capacity, fraud, and other invalidating causes.”  Id. at 285 (citing Restatement (Second) of Contract § 208, cmt. a (1981)).

In particular, a provision in a contract is unconscionable where “‘inequality of the  bargain is so manifest as to shock the judgment of a person of common sense, and where the terms are so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.’”  Id. (quoting Haun v. King, 690 S.W.2d 869, 872 (Tenn. Ct. App. 1984)).  Further, “[a]n unconscionable contract is one in which the provisions are so one-sided, in view of all the facts and circumstances, that the contracting party is denied any opportunity for meaningful choice.”  Id.  Similarly, in order to determine whether a contract “is inconsistent with public policy, courts may consider the purpose of the contract, whether any violation is inherent in the contract itself, as opposed to merely a collateral consequence, and, finally, whether the enforcement of the contract will have a detrimental effect on the public.” In re Baby, 447 S.W.3d at 823 (citing Baugh v. Novak, 340 S.W.3d 372, 382 (Tenn. 2011)).

To that end, “‘the public policy of Tennessee is to be found in its constitution, statutes, judicial decisions and applicable rules of common law.’”  Blackwell v. Sky High Sports Nashville Operations, LLC, 523 S.W.3d 624, 646 (Tenn. Ct. App. 2017) (quoting In re Baby, 447 S.W.3d at 823; Baugh v. Novak, 340 S.W.3d 372, 382 (Tenn. 2011)).  Further, Tennessee courts also often look to decisions of courts in other jurisdictions when evaluating public policy concerns.  See Alsip v. Johnson City Med. Ctr., 197 S.W.3d 722, 723 (Tenn. 2006); Davenport v. Chrysler Credit Corp., 818 S.W.2d 23, 28 (Tenn. Ct. App. 1991) (“While we should not blindly follow precedents from other jurisdictions, we should seriously consider them and should adopt them when they are harmonious with this State’s public policy.”)

The Court finds that the Tennessee Supreme Court’s decision in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004), to be particularly instructive upon the issue before the Court.  In Taylor, the Tennessee Supreme Court held that an arbitration provision in an auto-sale agreement between a consumer and a used car dealer was unconscionable because it was oppressively one-sided and required the consumer to arbitrate any and all claims against the dealer, while reserving to the dealer a judicial forum “for practically all claims that it could have against [the consumer].”  Taylor, 142 S.W.3d at 286. 

In its analysis, the Taylor Court recognized that Tennessee had not addressed the enforceability of a unilateral arbitration provision in a consumer contract, but reviewed instructive decisions from other jurisdictions.  Id. at 285-86.  For example, the Taylor Court looked to the Supreme Court of West Virginia’s decision in Arnold v. United Cos. Lending Corp., 511 S.W.2d 854 (W. Va. 1998) for instruction, which held that a similar unilateral arbitration provision was unconscionable because: (1) “‘the relative positions of the parties, a national corporate lender on one side and elderly, unsophisticated consumers on the other, were grossly unequal’”; (2) “there was ‘no evidence that the loan broker made any other loan option available to the [consumers]’”; and, (3) the “‘terms of the agreement [were] ‘unreasonably favorable’ to [the lender].’”  Id. at 285 (quoting Arnold, 511 S.W.2d at 862).

In addition, the A Taylor Court relied on the Montana Supreme Court’s decision in Iwen v. U.S. West Direct, 977 P.2d 989 (Mont. 1999), where a similar provision was unconscionable:

“[T]his case presents a clear example of an arbitration provision that lacks mutuality of obligation, is one-sided, and contains terms that are unreasonably favorable to the drafter. Because U.S. Direct presented this agreement on a take-it-or-leave-it basis, it is also a contract in which there was not meaningful choice on the part of the weaker bargaining party regarding acceptance of the provisions.... [D]isparities in the rights of the contracting parties must not be so one-sided and unreasonably favorable to the drafter, as they are in this case, that the agreement becomes unconscionable and oppressive.”

Id. at 286 (quoting Iwen, 977 P.2d at 996) (also citing Williams v. Aetna Fin. Co., 700 N.E.2d 859 (Ohio 1998) (refusing to enforce an arbitration clause in a consumer loan contract which preserved for the finance company the judicial remedy of foreclosure on the debtor's mortgage but restricted the debtor's remedies solely to arbitration); Lytle v. CitiFinancial Servs., Inc., 810 A.2d 643 (Pa. Super. Ct. 2002) (finding unenforceable an arbitration agreement that reserved access to the courts for CitiFinancial, absent “business realities” that would compel such a clause); Showmethemoney Check Cashers, Inc. v. Williams, 27 S.W.3d 361 (Ark. 2000) (finding that the arbitration agreement lacked mutuality because it provided for a judicial forum for one party while restricting the other party to arbitration)).

The Taylor Court held that the unilateral arbitration provision was unconscionable based on its similarities to the provisions in cases from other jurisdictions, and because it was a contract of adhesion offered “on essentially a ‘take it or leave it’ basis” that was unreasonably oppressive against an unsophisticated consumer and served to limit the obligations and liability of the stronger party.  Id. at 286-87.

Based upon all of the foregoing, the Chancery Court finds that the same rationales apply to the fee provision at issue in this case.  The Court also finds that the provision shocks the perception of fairness and acts unfairly against consumers, like Ms. Donovan.  The Court further finds that the fee provision works as a deterrent not only to frivolous or bad faith litigation, as contended by Mr. Hastings, but to all litigation and to individual consumers, such as Ms. Donovan.   

The Court has also analyzed and carefully considered the Tennessee Court of Appeals decision in Dominion Enterprises v. Dataium, LLC, 2013 WL 6858266 (Tenn. Ct. App. Dec. 27, 2013).  The Court finds Dominion Enterprises to be distinguishable primarily because it involves two businesses, not a business and a consumer.  Further, that opinion did not contain the precise language of the provision at issue, and it therefore has little precedential value.  In any event, the issues in Dominion Enterprises appear to be less applicable to the facts of this case than do the rationales involving unilateral arbitration agreements in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004) . . .

                1.            Based upon all of the Court’s Findings of Fact, with particular emphasis on the specific language of the fee provision in this case and the Tennessee Supreme Court’s decision in Taylor, the Court hereby concludes this provision is unconscionable and violates Tennessee’s public policy;

                2.            Although the parties’ contracts attached to Ms. Donovan’s Motion as Exhibit A and Exhibit B do not contain a formal severability provision, the Court hereby concludes, as did the Tennessee Supreme Court in Taylor, that these provision are severable from the remaining portions of the contracts;

                3.            Accordingly, the following language is hereby severed from the parties’ contracts in its entirety:

You agree to pay all court, legal and both sets of attorney fees associated if any legal action is taken by either you, Hastings Management or any other party.

It is incredibly rare for any court to find a contractual provision to be unconscionable.  This ruling lets our client (and us) enjoy the new year a little longer.