Legal Memorandum: Substantive Unconscionability

Issue: What is substantive unconscionability in the context of an arbitration agreement?

Area of Law: Alternative Dispute Resolution
Keywords: Substantive unconscionability; Arbitration agreement
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: Restatement (Second) of Contracts § 208; Restatement (Second) of Contracts § 79
Date: 03/01/2007

Alexander v. Anthony International, LP, 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 elements 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)).

In Alexander, the court summarized the standard necessary to show both elements of unconscionability.  “In the end, unconscionability requires a two-fold determination: that the contractual terms are unreasonably favorable to the drafter and that there is no meaningful choice on the part of the other party regarding acceptance of the provisions.” Id.

Thus, substantive unconscionability is established by showing “that the contractual terms are unreasonably […]

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