Legal Memorandum: Arbitration Agreement Unconscionable Provision

Issue: Will the courts in the Virgin Islands sever the unconscionable parts from an arbitration agreement?

Area of Law: Alternative Dispute Resolution, Employee Law, Litigation & Procedure
Keywords: Arbitration agreement; Unconscionable provisions; Severance
Jurisdiction: Federal, Virgin Islands
Cited Cases: 873 So. 2d 168; 173 F.3d 933; 200 F. Supp. 2d 475; 6 P.3d 669; 242 F. Supp. 2d 862; 175 S.W.3d 315; 43 F.3d 1244
Cited Statutes: Restatement (Second) of Contracts § 208 cmt. a,f, 184 (1); 1 V.I.C. § 4
Date: 05/01/2006

The Third Circuit Court of Appeals has made clear that the issue of whether an agreement should be set aside on grounds of gross overreaching and unconscionability is to be resolved with reference to the intent of the parties at the time the contract was signed, “as determined from the language of the contract and the surrounding circumstances.”  Parilla v. IAP Worldwide Services VI, Inc., 368 F.3d 269, 288 (3d Cir. 2004); see also Restatement (Second) of Contracts § 208 cmt. a (“The determination that a contract term is or is not unconscionable is made in the light of its setting, purpose and effect.”); id., § 208 cmt. f (determination of unconscionability is made by the court in light of all the material facts; parties must be afforded “opportunity to present evidence as to commercial setting, purpose and effect to aid the court in making its determination”).

In emphasizing that the decision whether to sever an offending provision or provisions is for the court to make, the Parilla court stated that determining whether to sever is not a matter of merely counting how many unconscionable provisions there are.  Instead, the determination involves an assessment of the nature of the unconscionable provisions in context.  368 F.3d at 289.  See In re Luna, 175 S.W.3d 315, 327 (Tex. App. 2004) (“It is not the number of provisions weighing toward an overall finding of substantive unconscionability that matters as much as the cumulative one-sidedness of the burden that those provisions […]

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