Legal Memorandum: Substantive Unconscionability

Issue: What will cause a Dispute Resolution Agreement to be held substantively unconscionable?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Dispute Resolution Agreement; Substantively Unconscionable
Jurisdiction: Virgin Islands
Cited Cases: 400 F.3d 370; 116 P.3d 479; 670 N.W.2d 129; 405 U.S. 174; 565 F.2d 255
Cited Statutes: Restatement (Second) of Contracts § 208; 24 U.S.C. § 451b
Date: 05/01/2007

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). 

The fact that an arbitration provision may also impose on the other party to the dispute an equal or even greater amount of expenses does not necessarily alter this conclusion.  This is true when the other party is the drafter, an employer with “substantially stronger bargaining position and more resources [than] the employee needing to obtain legal assistance.”  Parilla, 368 F.3d at 278-79.

On September 1, 2006, the Virgin Islands […]

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