Bustos Law Firm

Arbitration Agreement Unconscionable? “See You in Court”

In Arbitration, Dispute Resolution, Federal Law, Litigation on March 16, 2011 at 1:12 PM

Have you made a significant purchase lately? Or perhaps agreed to “terms and conditions” to access web services? Maybe you’ve recently signed an employment agreement. If so, there is a good chance you have waived your right to an in-court trial with respect to any disputes that may arise out of your transaction.

It’s called an arbitration clause. Arbitration clauses find their way into all sorts of settings: consumer purchases, work contracts, high-dollar corporate transactions, you name it. They are agreements to resolve disputes before a private arbitrator rather than a judge or jury. By signing them, a person may be agreeing to vindicate rights arising out of the transaction in front of arbitrators sympathetic to the interests of the other party—and maybe even in a forum many hundreds of miles away! It is not surprising that folks often sign arbitration clauses without any knowledge of their meaning or effect.  Because of the Federal Arbitration Act (FAA), once signed, arbitration clauses are not easily avoided.

FAA

Congress passed the FAA with the specific intent of keeping courts and state governments from voiding arbitration clauses. Section 2 of the FAA states that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In other words, arbitration agreements must be treated the same as any other contract under state law.

Texas courts may void arbitration agreements for unconscionability because the doctrine of unconscionability applies to all contracts.

Applying Unconscionability to Arbitration

The general standard for unconscionability is a bit nebulous (not to mention extraordinarily difficult to establish). Fortunately, courts have further explicated this doctrine as it applies to arbitration clauses.

If a claimant’s substantive rights cannot be successfully vindicated in the arbitral forum, there is a healthy possibility a Texas court will find the arbitration clause unconscionable. See In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883, 893 (Tex. 2010). A key issue related to a claimant’s “substantive rights” is whether the arbitration proceeding will be an “adequate and accessible substitute to litigation.” Id. at 894.

The Texas Supreme Court has identified a number of factors for determining whether  an arbitration proceeding is “an adequate and accessible substitute.” These include the actual cost of arbitration compared to the total amount of damages the plaintiff is seeking and the claimant’s ability to pay the arbitration fees and costs. Id. at 895. In addition, the Texas Supreme Court has stated that the most important factor is a comparison of the costs of the arbitral and the traditional litigation forums. Id. at 894-95. An important inquiry related thereto is whether such cost differential will “deter individuals from bringing valid claims.” See Id. at 893.  

If a claimant can present substantive evidence in support of these factors, evidence that goes beyond “merely speculat[ing] about the risk of possible cost,” Id. at 895, the chances of blowing up the arbitration agreement and enforcing the claim in a court of law rather than an arbitral forum greatly improve.

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