Legal Memorandum: Unconscionable Arbitration Agreement

Issue: Under federal law, when will an agreement to arbitrate be unenforceable on grounds that it is unconscionable?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Arbitration agreement; Procedural unconscionability; Substantive unconscionability
Jurisdiction: Federal
Cited Cases: 54 P.3d 1; 907 P.2d 51
Cited Statutes: Restatement (Second) of Contracts § 208, cmt. d (1981)
Date: 09/01/2011

“An 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).  The Alexander court instructed that an arbitration agreement may not be enforced when the provision at issue is both procedurally and substantively unconscionable.  Id. at 265, 270.

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.  See also Ostroff v. Alterra Healthcare Corp., 433 F. Supp. 2d 538, 544 (E.D. Pa. 2006) (residency contract presented to woman as she was moving her mother into assisted living facility, which she had to sign or her mother would have no place to live, was procedurally unconscionable); Kloss v. Edward D. Jones & Co., 54 P.3d 1 (Mont. 2002) (given that the contract was a contract of adhesion, it could not be presumed that the plaintiff waived her right to a jury trial, and a waiver was not within the plaintiff’s reasonable expectations, such that the arbitration agreement was unenforceable). 

Put differently, a contract is procedurally unconscionable if it was obtained by oppression.  “‘The oppression component of the test for procedural unconscionability “arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a […]

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