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Legal Memorandum: Contract Requiring Enforcement of Arbitration

Issue: In order for a contract requiring arbitration to be enforced, must the waiver of a right to trial be knowingly obtained?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Contract requiring arbitration; Waiver of a right to trial; Substantive unconscionability
Jurisdiction: Federal, Virgin Islands
Cited Cases: 400 F.3d 370; 670 N.W.2d 129; 405 U.S. 174; 930 F.2d 1390; 565 F.2d 255
Cited Statutes: Restatement (Second) of Contracts § 208, cmt. d (1981); 24 V.I.C. § 451b; 5 V.I.C. § 815.
Date: 11/01/2007

The element of substantive unconscionability “refers to terms that unreasonably favor one party to which the disfavored party does not truly assent.”  Alexander v. Anthony Int’l, L.P. 341 F.3d 256, 265 (3d Cir. 2003).  That is, the terms are so lopsided in favor of one party that they show “that the weaker party had no meaningful choice, no real alternative” but to “appear to assent to the unfair terms.”  Id. (citing Restatement (Second) of Contracts § 208, cmt. d (1981)).  Thus, substantive unconscionability is established by showing “that the contractual terms are unreasonably favorable to the drafter.”  Id.  Among the types of terms that have been held to meet this standard are arbitration provisions that impose prohibitively high costs on one of the parties, such that they effectively deny that party a forum to vindicate his or her rights.  See Parilla v. IAP Worldwide Servs., VI, Inc. 368 F.3d 269, 278-79 (3d Cir. 2004); Blair v. Scott Specialty Gases, 283 F.3d 595, 610 (3d Cir. 2002); Reed v. Turner St. Croix Maint., Inc., 46 V.I. 544 (D.V.I. 2005).  See also Ostroff, 433 F. Supp. 2d at 545 (discovery restrictions made agreement substantively unconscionable); Gittens v. Indus. Maint. Corp., No. Civ. 453/2002 (V.I. Super. Ct. Nov. 30, 2005) (arbitration agreement’s 30-day notice provision as well as its provision preventing the recovery of attorney’s fees were unconscionable and unenforceable).  The fact that the arbitration provision may also impose on the other party to the dispute an equal or even greater amount of […]

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