Opinion ID: 1058557
Heading Depth: 3
Heading Rank: 2

Heading: Is the Arbitration Provision in the Contract Unconscionable?

Text: In her brief on appeal, Taylor focuses on the following provision contained in the arbitration agreement of the Buyers Order: Dealer, however may pursue recovery of the vehicle under the Tennessee Uniform Commercial Code and Collection of Debt due by state court action. Taylor asserts that this provision renders the contract unconscionable because City Auto has retained for itself legal remedies beyond arbitration while restricting Taylor to those remedies available under the Federal Arbitration Act. The question of whether a contract or provision thereof is unconscionable is a question of law. See Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable & Cold Storage Co., 709 F.2d 427, 435 n. 12 (6th Cir.1983). If a contract or term thereof is unconscionable at the time the contract is made, a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term. See Restatement (Second) of Contracts § 208 (1981). 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. . . . Restatement (Second) of Contract § 208, cmt. a (1981). Enforcement of a contract is generally refused on grounds of unconscionability where the inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and where the terms are so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other. Haun v. King, 690 S.W.2d 869, 872 (Tenn.Ct.App.1984) (quoting In re Friedman, 64 A.D.2d 70, 407 N.Y.S.2d 999 (1978)); see also Aquascene, Inc. v. Noritsu Am. Corp., 831 F.Supp. 602 (M.D.Tenn. 1993). An unconscionable contract is one in which the provisions are so one-sided, in view of all the facts and circumstances, that the contracting party is denied any opportunity for meaningful choice. Id. While Tennessee has yet to address the issue of whether an arbitration provision in a consumer contract which reserves a right to access to the courts only for the merchant and not the consumer is voidable on the basis of unconscionability, a number of other jurisdictions have addressed such one-sided arbitration provisions. For example, the Supreme Court of West Virginia held that: [W]here an arbitration agreement entered into as part of a consumer loan transaction contains a substantial waiver of the borrower's rights, including access to the courts, while preserving the lender's right to a judicial forum, the agreement is unconscionable and, therefore, void and unenforceable as a matter of law. Arnold v. United Cos. Lending Corp., 204 W.Va. 229, 511 S.E.2d 854, 862 (1998). The Court in Arnold stated that [a] determination of unconscionability must focus on the relative positions of the parties, the adequacy of the bargaining position, the meaningful alternatives available to the plaintiff, and `the existence of unfair terms in the contract.' Id. at 861 (quoting Art's Flower Shop, Inc. v. Chesapeake & Potomac Tel. Co., 186 W.Va. 613, 413 S.E.2d 670 (1991)). Applying this test, the Court noted that the relative positions of the parties, a national corporate lender on one side and elderly, unsophisticated consumers on the other, were `grossly unequal.' Id. (footnote omitted). Additionally, there was no evidence that the loan broker made any other loan option available to the Arnolds. Finally, the Court found that the terms of the agreement are `unreasonably favorable' to United Lending. Based on these reasons, the Court found the arbitration agreement to be unconscionable. Similarly, the Montana Supreme Court voided as unconscionable an arbitration provision contained in a contract for advertisement in a telephone directory that reserved the right to a judicial forum for the Publisher for collection of amounts due while limiting the consumer to arbitration of all claims. Iwen v. U.S. West Direct, 293 Mont. 512, 977 P.2d 989 (1999). The Montana Court held: [T]his case presents a clear example of an arbitration provision that lacks mutuality of obligation, is one-sided, and contains terms that are unreasonably favorable to the drafter. Because U.S. Direct presented this agreement on a take-it-or-leave-it basis, it is also a contract in which there was not meaningful choice on the part of the weaker bargaining party regarding acceptance of the provisions.... [D]isparities in the rights of the contracting parties must not be so one-sided and unreasonably favorable to the drafter, as they are in this case, that the agreement becomes unconscionable and oppressive. Id. at 996; see also Williams v. Aetna Fin. Co., 83 Ohio St.3d 464, 700 N.E.2d 859 (1998), cert. denied, 526 U.S. 1051, 119 S.Ct. 1357, 143 L.Ed.2d 518 (1999) (refusing to enforce an arbitration clause in a consumer loan contract which preserved for the finance company the judicial remedy of foreclosure on the debtor's mortgage but restricted the debtor's remedies solely to arbitration); Lytle v. CitiFinancial Servs., Inc., 810 A.2d 643 (Pa.Super.Ct.2002) (finding unenforceable an arbitration agreement that reserved access to the courts for CitiFinancial, absent business realities that would compel such a clause); Showmethemoney Check Cashers, Inc. v. Williams, 342 Ark. 112, 27 S.W.3d 361 (2000) (finding that the arbitration agreement lacked mutuality because it provided for a judicial forum for one party while restricting the other party to arbitration). [4] The arbitration agreement in this case is comparable to those that were found to be unconscionable in the aforementioned cases. City Auto has a judicial forum for practically all claims that it could have against Taylor. Indeed, it is hard to imagine what other claims it would have against her other than one to recover the vehicle or collect a debt. At the same time, Taylor is required to arbitrate any claim that she might have against City Auto. The contract signed between Taylor and City Auto is one of adhesion, in that it is a standardized contract form that was offered on essentially a take it or leave it basis without affording Taylor a realistic opportunity to bargain. See Black's Law Dictionary 40 (6th ed. 1990). We have previously determined that enforceability of contracts of adhesion generally depends upon whether the terms of the contract are beyond the reasonable expectations of an ordinary person, or oppressive or unconscionable. See Buraczynski v. Eyring, 919 S.W.2d 314, 320 (Tenn.1996). Courts will not enforce adhesion contracts which are oppressive to the weaker party or which serve to limit the obligations and liability of the stronger party. Id. Looking at the arbitration agreement in the present case, it is clear that it is unreasonably favorable to City Auto and oppressive to Taylor. For these reasons, we find the arbitration clause in the Buyers Order to be invalid and unenforceable. Generally, a void agreement to arbitrate, incorporated in a general contract, is treated as a separate contract. 4 Am. Jur. Alternative Dispute Resolution § 77 (Supp.2002) If the agreement is not a part of the substance of the general contract, pertains to the remedy only, and is collateral to the contractual matters, it is severable from the main body of the contract. Id. In Tennessee, [a]n agreement can be either an entire contract or a severable contract according to the intention of the parties, and the fact that divisible parts are included within the same document does not preclude them from being considered and enforced as separate contracts. Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d 669, 671 (Tenn.1990). Because the arbitration provision in the Buyers Order only relates to remedy and is collateral to all other contract matters, we find that it is severable from the remaining portions of the contract.