Legal Memorandum: Non-enforcement of an Arbitration Clause

Issue: When will courts decline to enforce an arbitration clause because of unconscionability?

Area of Law: Alternative Dispute Resolution
Keywords: Arbitration Clause; Unconscionability; Decline to enforce
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: Restatement (Second) of Contracts § 208
Date: 03/01/2007

Alexander v. Anthony Int’l, L.P. 341 F.3d 256 (3d Cir. 2003) instructs that an arbitration provision may not be enforced where the provision at issue is both procedurally and substantively unconscionable.  341 F.3d at 265, 270.  Relying, in part, on Restatement (Second) of Contracts § 208 and its official comments, Alexander discusses both these dimensions of unconscionability in detail.  Id. at 264-65.  According to the court, procedural unconscionability “is generally established if the agreement constitutes a contract of adhesion.”  Id. at 265.  A contract of adhesion “is one which is prepared by the party with the excessive bargaining power who presents it to the other party on a take-it-or-leave-it basis.”  Id.   

The second element, substantive unconscionability, “refers to terms that unreasonably favor one party to which the disfavored party does not truly assent.”  Alexander, 341 F.3d at 265.  That is, the terms are so lop-sided 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 […]

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