law-unconscionability | challenging validity and enforceability of contracts | contractual waiver and
waiver by litigation conduct | arbitration | forum selection clauses |
"Unconscionability" has no precise legal definition, and it is to be determined on a case-by-case basis.
Arthur's Garage, Inc. v. Racal-Chubb Sec. Sys., Inc., 997 S.W.2d 803, 815 (Tex. App.-Dallas 1999, no
pet.); Besteman v. Pitcock, 272 S.W.3d 777, 788 (Tex. App.-Texarkana 2008, no pet.). In general,
"unconscionability" describes a contract that is unfair because of its overall one-sidedness or the
gross one-sidedness of its terms. Arthur's Garage, 997 S.W.2d at 815.
Whether a contract is contrary to public policy or unconscionable at the time it is
formed is a question of law. Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006).
Because a trial court has no discretion to determine what the law is or apply the law incorrectly, its
clear failure to properly analyze or apply the law of unconscionability constitutes an abuse of
discretion. See Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992).
In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (“The test for substantive
unconscionability is whether, given the parties’ general commercial background and the commercial
needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable
under the circumstances existing when the parties made the contract.” (internal quotation marks
omitted)).
Second, Gulf asserts the agreement here is unconscionable because it allows the prevailing party to
recover attorney’s fees. It is true that absent a contractual agreement like this, Texas law allows
attorney’s fees only for a prevailing plaintiff. See Tex. Civ. Prac. & Rem. Code § 38.001–.002. But
allowing both parties to recover fees hardly makes an agreement “one-sided”; such agreements,
common in commercial contexts, surely make them less so.
SOURCE: In Re Fleetwood Homes of Texas, LP, 257 S.W.3d 692 (Tex. 2008) (orig. proc.)(arbitration
clause enforced, no waiver)
SEVERANCE OF ILLEGAL PROVISIONS, REMAINDER VALID AND ENFORCEABLE
In re Poly-America, LP, No. 04-1049,262 S.W.3d 337 (Tex. Aug. 29, 2008)(O'Neill)
(arbitration in employment context, FAA, retaliatory discharge, employment law, limitation of remedies,
unconscionability argument challenge sustained, offending provision stricken, but remainder given
effect)
We hold invalid, as substantively unconscionable and void, provisions of the parties’ contract that
prohibit the award of punitive damages or reinstatement and thus inhibit effective vindication of Luna’s
retaliatory-discharge claim in an arbitral forum. We further hold that the trial court did not abuse its
discretion in allowing the arbitrator to determine whether the fee-splitting agreement and discovery
limitations — as applied in the course of arbitration — are unconscionable. Because we find the
invalid remedies-limitation provisions severable from the agreement to arbitrate, which we conclude is
otherwise enforceable, the trial court did not abuse its discretion in compelling arbitration.
Accordingly, we conditionally grant the writ of mandamus.
Poly-America argues that, even if elements of its arbitration agreement with Luna are
unconscionable, arbitration is nevertheless required because the unconscionable provisions
are severable from the general agreement to arbitrate.[4] Luna contends the unconscionable
provisions are integral to the entire contract and are therefore not severable. The court of
appeals agreed with Luna, stating that the fee-splitting and remedies-limitation provisions
“together deprive Luna of his opportunity to vindicate his claim in the arbitral forum” and
concluding that “those provisions are integral to the purpose of the agreement and cannot be
severed.” 175 S.W.3d at 328. The court of appeals came to this conclusion, it appears, by
identifying the fee-splitting and remedies-limitation provisions as weighing in favor of
unconscionability “as a whole,” but the court did not identify any particular provision that, by
itself, would defeat the agreement’s purpose. See id. at 322, 324. We have determined,
however, that the remedies-limitation provisions are individually unconscionable and void,
and see no reason why they cannot be easily excised from the contract without defeating its
underlying purpose.
An illegal or unconscionable provision of a contract may generally be severed so long as it does not
constitute the essential purpose of the agreement. See Williams v. Williams, 569 S.W.2d 867, 871
(Tex. 1978); see also Hoover Slovacek, 206 S.W.3d at 565 (citing Restatement (Second) of
Contracts § 208 (1981)). Whether or not the invalidity of a particular provision affects the rest of the
contract depends upon whether the remaining provisions are independent or mutually dependent
promises, which courts determine by looking to the language of the contract itself. See John R. Ray &
Sons, Inc. v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (citing
Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex. 1982)).
The relevant inquiry is whether or not parties would have entered into the agreement absent the
unenforceable provisions. See Patrizi v. McAninch, 269 S.W.2d 343, 348 (Tex. 1954); see also City of
Beaumont v. Int’l Ass’n of Firefighters, Local Union No. 399, 241 S.W.3d 208, 215 (Tex. App.—
Beaumont 2007, no pet.) (citing Rogers v. Wolfson, 763 S.W.2d 922, 925 (Tex. App.—Dallas 1989,
writ denied)); Stroman, 923 S.W.2d at 86 (citing Frankiewicz v. Nat’l Comp. Assocs., 633 S.W.2d 505,
507–0 8 (Tex. 1982)). We have previously allowed severance of illegal contract provisions
where the invalid provisions were “only a part of the many reciprocal promises in the agreement” and
“did not constitute the main or essential purpose of the agreement.” Williams, 569 S.W.2d at 871.
Whether a contract is contrary to public policy or unconscionable at the time it is formed is a question
of law. Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006). Because a trial court has
no discretion to determine what the law is or apply the law incorrectly, its clear failure to properly
analyze or apply the law of unconscionability constitutes an abuse of discretion. See Walker v.
Packer, 827 S.W.2d 833, 840 (Tex. 1992).
Unconscionable contracts, however — whether relating to arbitration or not — are unenforceable
under Texas law. A contract is unenforceable if, “given the parties’ general commercial background
and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is
unconscionable under the circumstances existing when the parties made the contract.” FirstMerit
Bank, 52 S.W.3d at 757; see also In re Halliburton Co., 80 S.W.3d 566, 571 (Tex. 2002) (“[S]
ubstantive unconscionability . . . refers to the fairness of the arbitration provision itself.”).
Unconscionability is to be determined in light of a variety of factors, which aim to prevent oppression
and unfair surprise; in general, a contract will be found unconscionable if it is grossly one-sided. See
Dan B. Dobbs, 2 Law of Remedies 703, 706 (2d ed. 1993); see also Restatement (Second) of
Contracts § 208, cmt. a (1979) (“The determination that a contract or term is or is not unconscionable
is made in the light of its setting, purpose, and effect. Relevant factors include weaknesses in the
contracting process like those involved in more specific rules as to contractual capacity, fraud, and
other invalidating causes; the policy also overlaps with rules which render particular bargains or terms
unenforceable on grounds of public policy.”). Although not subject to precise doctrinal definition, see
Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 498 (Tex. 1991) (Gonzalez, J., concurring),
unconscionability — as delineated by the above principles — has been recognized and applied by
this Court for well over a century. See, e.g., Flanagan v. Pearson, 61 Tex. 302, 307 (1884); Fowler v.
Stoneum, 11 Tex. 478, 493 (1854); Hemming v. Zimmerschitte, 4 Tex. 159, 166 (1849); Luckett v.
Townsend, 3 Tex. 119, 131 (1848).
Arbitration and Statutory Rights
An arbitration agreement covering statutory claims is valid so long as the arbitration agreement does
not waive the substantive rights and remedies the statute affords and the arbitration procedures are
fair, such that the employee may “effectively vindicate his statutory rights.” In re Halliburton, 80 S.W.
3d at 572. Federal courts, analyzing the enforceability of arbitration provisions relating to federal
statutory claims, have noted that such contracts are not enforceable when a party is forced to “forgo
the substantive rights afforded by the statute,” as opposed to merely “submit[ting] to resolution in an
arbitral, rather than a judicial, forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.
S. 614, 628 (1985). In the context of federal claims, either an expression of federal intent to exclude
certain categories of claims from arbitration, see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.
20, 26 (1991), or the excessive waiver of statutory rights, see Mitsubishi, 473 U.S. at 628, may render
a particular dispute un-arbitrable. State courts, bound by the FAA under the supremacy clause, have
more limited power, as the FAA preempts state laws that specifically disfavor arbitration. Perry, 482 U.
S. at 492 n.9; see Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 271 (Tex. 1992) (holding that the FAA
preempts state statutes to the extent they are inconsistent with the FAA’s purpose to require courts to
compel arbitration when the parties have so provided in their contracts).
In re Poly-America, LP, 262 S.W.3d 337 (Tex. 2008) (arbitration in employment context, FAA,
retaliatory discharge, employment law, limitation of remedies, unconscionability argument challenge
sustained, offending provision stricken, but remainder of arbitration agreement given effect)
However, where a particular waiver of substantive remedies or other provision of a contract is
unconscionable — independent of the agreement to arbitrate — it will be unenforceable even though
included in an agreement to arbitrate. See Gilmer, 500 U.S. at 33 (“[A]rbitration agreements are
enforceable, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’”)
(quoting 9 U.S.C. § 2). To determine the permissibility of restrictions on a particular worker’s access to
statutory rights, we analyze the provisions of the actual statute at issue; thus, to analyze the
enforceability of the various restrictions and waivers in the employment contract at issue in this case,
we turn to the retaliatory-discharge provisions of the Texas Workers’ Compensation Act, Tex. Lab.
Code §§ 451.001–.003.
An illegal or unconscionable provision of a contract may generally be severed so long as it does not
constitute the essential purpose of the agreement. See Williams v. Williams, 569 S.W.2d 867, 871
(Tex. 1978); see also Hoover Slovacek, 206 S.W.3d at 565 (citing Restatement (Second) of Contracts
§ 208 (1981)). Whether or not the invalidity of a particular provision affects the rest of the contract
depends upon whether the remaining provisions are independent or mutually dependent promises,
which courts determine by looking to the language of the contract itself. See John R. Ray & Sons, Inc.
v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (citing Hanks v.
GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex. 1982)). The relevant inquiry is whether or not
parties would have entered into the agreement absent the unenforceable provisions. See Patrizi v.
McAninch, 269 S.W.2d 343, 348 (Tex. 1954); see also City of Beaumont v. Int’l Ass’n of Firefighters,
Local Union No. 399, 241 S.W.3d 208, 215 (Tex. App.—Beaumont 2007, no pet.) (citing Rogers v.
Wolfson, 763 S.W.2d 922, 925 (Tex. App.—Dallas 1989, writ denied)); Stroman, 923 S.W.2d at 86
(citing Frankiewicz v. Nat’l Comp. Assocs., 633 S.W.2d 505, 507–0 8 (Tex. 1982)). We have
previously allowed severance of illegal contract provisions where the invalid provisions were “only a
part of the many reciprocal promises in the agreement” and “did not constitute the main or essential
purpose of the agreement.” Williams, 569 S.W.2d at 871.
In re Poly-America, LP, 262 S.W.3d 337 (Tex. 2008) (arbitration in employment context, FAA,
retaliatory discharge, employment law, limitation of remedies, unconscionability argument challenge
sustained, offending provision stricken, but remainder of arbitration agreement given effect)