Opinion by Chief Justice MORRISS.
In the contract dispute arising out of Munn & Associates, Ltd.'s agreement to provide consulting services to Shamrock Foods Company, Munn sued Shamrock and alleged not more than $60,000.00 in damages. The trial court overruled Shamrock's responsive motion to require arbitration as provided by the consulting contract, finding that Munn would likely be charged excessive arbitration fees and that, therefore, the arbitration provision was unconscionable. No party denies the existence of the arbitration agreement or that it covers the dispute at hand. The ultimate issue is whether the agreement is unconscionable because the cost of such arbitration is prohibitive. We reverse because — although (1) Munn properly raised the unconscionability claim — (2) Munn relied on inadmissible evidence to support its unconscionablity claim and, (3) even considering all its evidence, Munn failed to prove unconscionability.
In 2004, Shamrock and Munn entered into a consulting agreement under which Munn would provide certain consulting services to Shamrock. The agreement provides for arbitration:
In addition to providing that the expenses of arbitration will be borne by the losing party, the agreement further provides that "the prevailing party will be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which that party is entitled," in the circumstance that "any action at law or in equity is necessary to enforce or interpret the terms" of the agreement.
Munn did not use its original petition to allege that the agreement's arbitration provision was unconscionable or otherwise unenforceable. Instead, Munn raised the issue in its response to Shamrock's motion to compel arbitration.
In its order denying Shamrock's motion to stay and compel arbitration, the trial court found that "the Plaintiff is in all probability likely to be charged excessive arbitration fees in light of the dispute at issue and the likely costs to be incurred through the Texas judicial system, and therefore, the Arbitration Clause in the contract is unconscionable." No findings of fact or conclusions of law were requested or filed.
Shamrock argues that Munn waived the issue of unconscionability by failing to plead same as a defense to the arbitration provision. Although Arizona law may govern the issue of whether the arbitration provision is substantively unconscionable, Texas procedural rules — including pleading rules — control. Moonlight Invs., Ltd. v. John, 192 S.W.3d 890, 894 (Tex.App.-Eastland 2006, pet. denied).
Generally, an affirmative defense is waived if it is not pled. "In pleading to a preceding pleading, a party shall set forth affirmatively ... any other matter constituting an avoidance or affirmative defense." TEX.R. CIV. P. 94. Shamrock relies on Corbindale, L.P. v. Kotts Capital Holdings Ltd. P'ship, 316 S.W.3d 191 (Tex. App.-Houston [14th Dist.] 2010, no pet.), in support of its waiver argument. In that case, Kotts brought a declaratory judgment action against Carbindale. Id. at 194. In response, Carbindale filed a general denial answer subject to a motion to stay litigation and compel arbitration. Id. In opposition to the motion to compel arbitration, Kotts argued that the arbitration agreements were not properly authenticated and, therefore, were insufficient evidence of a valid agreement to arbitrate. The motion to compel arbitration was denied. Id.
On appeal, Kotts argued for the first time that the arbitration agreements were invalid because they were unconscionable. The court recognized that "an allegation
This case can be distinguished from Corbindale. In that case, the issue of unconscionability was raised for the first time on appeal. Here, while Shamrock did not assert its right to arbitration in its answer, it filed a motion to compel arbitration. Munn filed a separate response to that motion, wherein it maintained that Shamrock refused to discuss "the manner in which such arbitration process will be conducted, in order to reduce unnecessary costs and delay in the arbitration process." As a result of this refusal, Munn asserted that the "arbitration process ... will result in prohibitive costs" thus rendering "the arbitration provision ineffective because of substantive unconscionability."
The arbitration provision here is properly invoked "on the written request of one party served on the other...." Shamrock properly invoked the arbitration provision on filing of its motion to stay and compel arbitration. Munn properly responded, alleging substantive unconscionabilty, which issue was tried before the court. Shamrock claims, in essence, that Munn was required to offensively assert the alleged unconscionability of the arbitration provision, before its invocation.
Shamrock complains of two exhibits admitted over its hearsay objections at the hearing on its motion to compel arbitration. The first exhibit
On appeal, Munn contends the financial statement was not hearsay, claiming the prior arbitration was a quasi-judicial proceeding to which Shamrock was a party. Munn further contends that both Munn and Shamrock designated the AAA as agent for purposes of serving as the designated arbiter in the previous proceeding. It thus maintains that the financial history issued by the AAA was created within the scope of the AAA's employment by the parties during the existence of the agency relationship. Accordingly, Munn contends that, in accordance with Rule 801(e)(2)(D) of the Texas Rules of Evidence, the statement is not hearsay. This rule provides that a statement is not hearsay if it is offered against a party and is "a statement by the party's agent or servant concerning a matter within the scope of the agency or employment, made during the existence of the relationship." TEX.R. EVID. 801(e)(2)(D).
Even assuming this analysis is correct, there is no evidence in the record supporting the predicate findings Munn contends are true. Outside of argument by counsel, there is no evidence that (1) Shamrock was a party to a prior arbitration with Munn, (2) the AAA was Shamrock's designated agent in such proceeding, (3) the financial history was created within the scope of AAA's employment by the parties, and (4) the document was created during the existence of an agency relationship between AAA and Shamrock. The hearsay status of the financial history offered and accepted into evidence as Plaintiff's Exhibit 4 is not remedied under the agency exception of the hearsay rule.
Alternatively, Munn argues that the financial history falls within the hearsay exception set forth in Rule 803(1) of the Texas Rules of Evidence, which provides that "a statement describing or explaining an event or condition made while the declarant was perceiving the event or condition, or immediately thereafter" is not excluded by the hearsay rule. TEX.R. EVID. 803(1). We disagree.
No testimony was offered, either live or by affidavit, that could have proved the "financial history" was not hearsay, was a business record, or otherwise satisfied an exception to the hearsay rule. The document captioned "financial history" constitutes an out-of-court statement offered for the truth of the matter asserted therein — that the charges listed were billed to Munn as arbitration costs in a previous matter. This document was therefore hearsay. TEX.R. EVID. 801(d). Absent application of one of the Rule 803 exceptions, hearsay is inadmissible. TEX.R. EVID. 802. The "financial history" should have been excluded from evidence in light of Shamrock's hearsay objection.
Shamrock contends that, because there is no evidence of the elements of substantive unconscionability, the trial court erred in denying its motion to compel arbitration.
When determining whether an arbitration agreement is valid, "state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." Perry v. Thomas, 482 U.S. 483 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987); see also Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (states may regulate arbitration clauses "under general contract law principles and they may invalidate an arbitration clause `upon such grounds as exist at law or in equity for the revocation of any contract'") (quoting 9 U.S.C. § 2).
Unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable. Id. at 686-87. Moreover, unconscionability is a generally applicable contract defense under Arizona law. Harrington v. Pulte Home Corp., 211 Ariz. 241, 119 P.3d 1044, 1048-49 (Ct. App.2005). Thus, our task is to determine whether the arbitration agreement is unconscionable under Arizona law. Here, the claim is one of substantive unconscionability. The Arizona Supreme Court has held that a claim of unconscionability can be established with a showing of substantive unconscionability
"Substantive unconscionability concerns the actual terms of the contract and examines the relative fairness of the obligations assumed." Maxwell, 907 P.2d at 58. "Indicative of substantive unconscionaiblity are contract terms so one-sided as to oppress or unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain, and significant cost-price disparity." Id.
In reliance on Green Tree Financial, Harrington recognized that "arbitration agreements are enforceable in the absence of individualized evidence to establish that the costs of arbitration are prohibitive." Harrington, 119 P.3d at 1055. Further, the party seeking to invalidate the agreement has the burden of showing the likelihood that arbitration "would be prohibitively expensive." Id. (citing Randolph, 531 U.S. at 92, 121 S.Ct. 513). Once that burden has been met, the party seeking arbitration must come forward with contrary evidence. Randolph, 531 U.S. at 92, 121 S.Ct. 513. However, a mere showing of a risk that the party opposing arbitration "will be saddled with prohibitive costs is too speculative to justify the invalidation of an arbitration agreement." Id. at 91, 121 S.Ct. 513. In determining whether fees imposed pursuant to an arbitration agreement deny a potential litigant the opportunity to vindicate his or her rights, Arizona law requires the case-specific evaluation adopted in Randolph. Harrington, 119 P.3d at 1055.
In Harrington, each of the five plaintiffs submitted an affidavit to attempt to meet the burden to demonstrate that arbitration would be prohibitively expensive. These affidavits showed that plaintiffs were retired or self-employed and either lived on a "modest fixed income" or a "low fixed income." Further, each affiant indicated that a cost of "even a thousand dollars" for arbitration would prohibit them from pursuing their claims.
A more recent case applying Arizona law to this issue found that an arbitration clause in an employment agreement was enforceable. Coup, 823 F.Supp.2d at 935. In support of the claim that the arbitration agreement was substantively unconscionable, Coup argued, among other things, that the agreement failed to address how arbitration fees would be allocated between the parties, and thus "the arbitration fees and costs awarded against the plaintiffs could be prohibitive to plaintiffs who are indigent." Id. at 954. The court observed that Harrington rejected the argument that that arbitration clause was substantively
Munn's claim of substantive unconscionability rests on the notion that the fees it would likely incur if this matter were sent to arbitration would be prohibitive. Munn relies on the financial history (Plaintiff's Exhibit 4) in support of its contention. Munn argues that the financial history, which it claims reflects costs of the previous arbitration between the same parties in the amount of approximately $22,000.00, is evidence of what arbitration costs would total in this case. Because Munn's original petition alleges damages not to exceed $60,000.00, it contends that the cost of pursuing its claims in arbitration is excessive. Munn contends that a comparison of litigation costs to arbitration fees in this context is unnecessary because "both procedures will likely incur the same amount of attorney's fees." This statement is unsupported by any evidence.
The only evidence presented to the trial court relevant to arbitration costs was the "financial history," which, as previously discussed, was improperly admitted over Shamrock's hearsay objection. When this evidence is removed from the equation, there is no evidence probative of the anticipated cost of AAA arbitration in Longview, Texas.
Even assuming the financial history was properly admitted, Munn still fails to meet its burden to show the likelihood that arbitration would be prohibitively expensive. Lacking is the type of individualized evidence required in Harrington. The sole piece of evidence is the cost of a previous, albeit unconcluded, arbitration. There is no evidence here of the type required by Harrington — specific facts regarding the financial situation of the party opposing arbitration. There was no evidence presented in the trial court showing Munn's financial situation or how, given that financial situation, arbitration would result in a prohibitive hardship.
The primary purpose of arbitration is to provide an inexpensive and speedy final disposition of disputes as an alternative to litigation. Canon Sch. Dist. No. 50 v. W.E.S. Const. Co., 180 Ariz. 148, 882 P.2d 1274,1278 (1994). However, arbitration agreements are enforceable in the absence of individualized evidence to establish that the costs of arbitration are prohibitive. Harrington, 119 P.3d at 1055. Because Munn failed to provide such individualized evidence, the motion to stay and compel arbitration was improperly denied.
We reverse the judgment of the trial court and remand for further proceedings consistent with this opinion.
Additionally, Shamrock relies on Parks, 302 S.W.3d at 924. Parks was a summary judgment case in which Parks alleged, for the first time on appeal, that a contractual indemnity provision was unconscionable and void. In holding this affirmative defense was waived, the court found that, because "appellants failed to assert in the trial court that section 2.4 of the indemnity agreement was unconscionable, we may not now consider their argument for purposes of reversing the summary judgment." Id. Here, Munn asserted the issue of unconscionability in the trial court.
9 U.S.C.A. § 2. In keeping with the federal statute, Arizona law provides:
A.R.S. § 12-1501 (2012) (West).
