Legal Memorandum: Denial of Arbitration

Issue: Should a court deny arbitration to a party when the arbitration provisions in the relevant contract are unconscionable?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Denial of arbitration; Unconscionable; Procedural unconscionability
Jurisdiction: Federal, Virgin Islands
Cited Cases: 514 U.S. 938; 102 Cal. Rptr. 2d 1; 54 P.3d 1; 169 F.3d 501; 151 F.3d 132
Cited Statutes: None
Date: 11/01/2007

To rule on a motion to stay, the court must first decide whether the moving party has established that a particular matter is referable to arbitration.  To make this determination, the court must conduct a two-question inquiry into the “gateway issues”:  “(1) Did the parties seeking or resisting arbitration enter into a valid arbitration agreement? (2) Does the dispute between those parties fall within the language of the arbitration agreement?”  John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 137 (3d Cir. 1998).  Unless the evidence compels an answer to both questions in the affirmative, the matter is not referable to arbitration and the motion cannot be granted.  See Ostroff v. Alterra Healthcare Corp., 433 F. Supp. 2d 538, 542 (E.D. Pa.), reconsideration denied, July 25, 2006 (the court may not direct parties to arbitration if the agreement is invalid). 

When deciding these gateway questions, “ordinary state-law principles that govern the formation of contracts” should apply.  First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).  “[A]rbitration agreements . . . are subject to all defenses to enforcement that apply to contracts generally.”  Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003).  Of particular relevance here, “[a]n agreement to arbitrate may be unenforceable based on a generally applicable contractual defense, such as unconscionability.”  Alexander v. Anthony Int’l, L.P. 341 F.3d 256, 264 (3d Cir. 2003) (emphasis added).

Although there is a strong federal policy favoring […]

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