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Legal Memorandum: Unconscionable Provisions in Arbitration Agreement

Issue: Will the courts sever the unconscionable provisions from an arbitration agreement if the party seeking enforcement has acted in bad faith?

Area of Law: Alternative Dispute Resolution, Litigation & Procedure
Keywords: Arbitration agreement; Severance of unconscionable provisions; Good faith and fair dealing
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: Restatement (Second) Contracts § 184, § 208
Date: 05/01/2006

The language of the Contracts Restatement is clear.  Severance under § 184 is unavailable to a party who has acted improperly in obtaining the agreement:

(1) If less than all of an agreement is unenforceable under the rule stated in § 178 [regarding unenforceability on public policy grounds], a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange.

(2)  A court may treat only part of a term as unenforceable under the rule stated in Subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing.

Restatement (Second) Contracts § 184.  Accordingly, even if the unenforceable terms are deemed not essential to the agreement, the court will not enforce the remainder if the party seeking enforcement has engaged in serious misconduct, or acted with a lack of good faith or fair dealing.  Id.  Good faith and fair dealing are necessary when a party seeks to dissect an agreement to carve out unenforceable terms and enforce the remainder.  In this regard, abuse of a dominant bargaining power is plainly relevant:

For example, a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so […]

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