Chapter 2 "Asymmetrical Arbitration Clauses"

KluwerArbitration
Document information Chapter 2: “Asymmetrical Arbitration Clauses” – The

United States
Publication Alan Scott Rau
Jurisdictional Choices in (*)
Times of Trouble
The United States
Jurisdiction 1 The Nature of the Problem

United States of America 1 The subject here is the “asymmetrical” arbitration clause. I use the term “asymmetrical”
rather than “unilateral” although the latter is undoubtedly more common; the choice of
terminology reflects the fact that with respect to these contractual provisions, it is not
Bibliographic always — and not necessarily — the case that the drafting party will get to choose
adjudication in whatever forum he prefers: The critical point is that his choices are
reference different from (and usually broader than) the choices imposed on his contractual
Alan Scott Rau, 'Chapter 2: counterpart.
“Asymmetrical Arbitration
Clauses” – The United 2 We could certainly spend a good deal of time here trying to define the dimensions of
States', in Bachir Georges the problem — to delineate the subject matter — but taxonomy is not an enterprise that
Affaki and Horacio Alberto is particularly congenial to my frame of mind. Infinite variations are possible, and legal
Grigera Naón (eds), conclusions will often follow from slight textual differences arising from idiosyncratic
Jurisdictional Choices in drafting. But the following I think are the most common forms of the asymmetrical clause.
Times of Trouble, Dossiers (For purposes of simplicity and comparison, in the examples below I refer to the drafting
of the ICC Institute of World party — the party with the bargaining power to grab for himself the widest choice of
Business Law, Volume 12 forum — as “A,” and the “adhering” party — the party with the most restricted options —
(© Kluwer Law as “B.”). So suppose that:
International; International a The contract imposes an obligation on B to submit any claims to arbitration (or
Chamber of Commerce perhaps, only claims “by him.”). The rest is silence. Presumably when a claim is
(ICC) 2015) pp. 21 - 54 asserted, A himself is bound to go ahead and arbitrate it. (Otherwise the point of B's
“obligation” is unclear — surely initiation of an arbitration is not intended to
function as just an “offer” by B?). (1) But it appears that A has retained no right —
and has certainly incurred no obligation — to trigger arbitration in order to resolve
his own claims). (2)
b The contract grants to A the “sole option” to require B to submit to arbitration of any
dispute between the parties (3) . Here by contrast A is presumably able to initiate
arbitration with respect to his own claims and thus can invoke the arbitral process
both as respondent and as claimant — although it is hard to find here any
commitment on his part to proceed against his will with an arbitration first initiated
by B. (4)
c In what has been termed a “unilateral arbitration” clause, the contract begins by
choosing an exclusive judicial forum for any claims brought by either party — but
then goes on expressly to grant to A alone “the option of bringing any dispute
hereunder to arbitration.” (5)
P 22
d Perhaps the paradigm case is the converse — a “unilateral litigation” clause (6) — a
clause in which both parties agree to arbitrate any disputes between them, but in
which A alone is now expressly given the option to initiate litigation as well, with
respect to:
▪ any claim that he chooses to bring, (7) or, typically (and which in practice will
amount to much the same thing),
▪ certain categories of cases that are expressly “carved out” from the overall
arbitration clause. (8)
e Then there are the cases which do appear to impose a mutual obligation to
arbitrate, so that A has not expressly reserved for himself at all any choice of
alternative fora — but where he has by contract retained the right to change any
terms of the agreement, including the arbitration clause itself, in his own discretion
— to “revise, supplement or rescind” it, to “alter, amend, modify or revoke” it, to
“cancel, supersede or eliminate” it, to “modify or delete” it [It's a very rich language
indeed.].
This does begin to look like a commitment to nothing. (9) But of course, any term in
an at-will agreement — say, the wages to be paid in an employment contract, or the
deposit relationship between a bank and its customer — may be changed
prospectively, at least with appropriate notice. Where possible such a clause should
be read with that understanding, so that an employer would no more be able to
avoid the obligation to arbitrate in place at the time a claim has accrued — or at
the time a dispute has arisen — or at the time that an arbitration was initiated —
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than he could avoid the payment of wages at the rate in effect when labor was
performed. (10)
f Identifying such categories is helpful in order to do justice to the complexity of the
problem. And we can ring further changes on it. Variations may be found, for
example, in clauses where arbitration does not appear at all — but where A, unlike
B, is given a choice between two judicial fora. (11)
But then, complexities should be multiplied only so far as is necessary — and no
further. Consider, for example, an agreement by which “any dispute … shall be
decided by the English courts to whose jurisdiction the parties agree … provided
that either party may elect to have the dispute referred to the arbitration of a
single arbitrator in London.” (12) Commentators may refer to this as a “bilateral
option to arbitrate” (13) — but really, this is nothing but an ordinary arbitration
clause, isn't it? (with a choice of forum as a backup default).
3 Within each category quirks of drafting may present particular interpretive problems,
but in all cases, whatever the structure of the clause, the bottom line is that only one
party is under a contractual obligation to arbitrate. A — certainly whenever he is the
respondent — may if he chooses relegate B to an arbitral forum that A finds
presumptively less desirable for the assertion of his own claims. B can naturally be
expected to protest that he should not be expected to submit to arbitration to the extent
that A has not himself undertaken the same obligation.
4 Perhaps because the cases almost uniformly arise in this context of a challenge (on a
motion to compel or to stay litigation) to the enforceability of a one-sided arbitration
P 23 clause, courts have rarely had to address the further practical questions that may
arise should the matter proceed further — that is, should it be necessary to adjust dual
and conflicting provisions for dispute resolution fora. The stronger party's claim in
litigation will often be identical with, or intertwined with, the weaker party's arbitration
claim; an employee who has been fired, allegedly for disseminating the employer's trade
secrets, may assert a claim for wrongful termination, while at the same time the
employer may wish to seek affirmative relief in the form of an injunction against further
disclosure of the secret, or in the form of damages for past violations.
To consider how this may play out in a concrete case, let's focus for a moment on what I
referred to as the “paradigm case,” in “d” above:
a Recall that the agreed baseline is a mutual commitment to arbitrate. Perhaps then
the clause should be taken to impose a lis pendens regime under which a choice by
either party will forever “fix” the applicable forum — so that, for example, should B
first initiate an arbitration in order to assert his own claim, arbitration now
becomes obligatory for A as well? (14)
b To view the parties' arrangement in this way might, however, encourage an
unseemly scramble to seize a forum before one's opponent is able to do so. And far
more fundamentally, it does not seem to respond to the commercial reality that in
all likelihood underlies the clause — in which A has likely attempted to draft to the
limits of his bargaining advantage. (15)
So perhaps the tenor of the asymmetrical clause is instead that A gets to retain the
right to his preferred forum, whether as claimant or as respondent, even after an
arbitral forum has been seized. Should B initiate arbitration, A might of course
acquiesce — or he might instead, even at this stage, “trump” the arbitration by
insisting that everything be litigated — either in a suit of his own or by enjoining B's
pending arbitration. (16) Based on his assertion that he had after all “never agreed
to submit to the arbitration of such claims,” this would of course give him a
continuing “veto” over the arbitration. (For the limit of arbitral jurisdiction is of
course party consent.). (17) A probable corollary here of course is that any
counterclaims by B be permitted in litigation initiated by A. (18)
c Perhaps, though, we may find that in practice such an elegant and streamlined
solution turns out not to be a live option. Bringing all related disputes into a single
forum would be excluded in the event that:
▪ the unilateral right to litigate retained by A is narrow and confined to matters
(such as a request for injunctive relief in order to protect his intellectual
property rights) that would in any event lie outside the scope of what the
arbitrators would be empowered to decide; (19) or
▪ the applicable law does not envisage that a court in any event would have
jurisdiction to enjoin an arbitral proceeding; or
▪ the peculiar drafting of the agreement seems to suggest that B's right to
invoke the arbitral forum remains intact with respect to his own claims,
despite any option given to A; (20) or
▪ for tactical reasons of his own, A is perfectly content to stay his hand, and see
P 24 B relegated to the burdensome necessity of having to assert any of B's own
claims in arbitration while at the same time having to defend litigation
instituted by A. (21)
In all such cases the specter of parallel proceedings will be difficult to avoid — at least in
the absence of a willingness on the part of a court, or the arbitral tribunal itself, to stay
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its own proceedings to await developments in other fora. (22) (Neither possible collateral
estoppel effects nor the prospect of “bifurcated proceedings and perhaps redundant
efforts to litigate the same factual questions twice” should suffice to justify a court's
refusal to compel a contractually-mandated arbitral proceeding.) (23) In addition to the
obvious burdens and inefficiencies this creates, it is obvious that the problem of
preclusion — that is, the need to defer to what has been decided in the proceeding first
concluded — will eventually have to be faced.
5 The enforceability of these asymmetrical arbitration clauses has been, as we know,
much discussed in recent years, and is the subject of abundant litigation in any number
of jurisdictions. There have been challenges, many of them successful, in the United
States as well. The precise dimensions of the problem, however, are rather difficult to
grasp. Despite the overarching preemptive force of the federal statute, the enforceability
of any “contract” that touches arbitration lies in much-contested territory — with a
common assumption being that it is the law of each individual state, rather than federal
law, that is to govern the issue. (24) Since that inquiry takes us to the private law of more
than 50 states and territories, it does not seem particularly feasible to do a head count.
And even if it were, that would be in any event an extraordinarily naïve way to go about
doing law work. As the late Leon Green wrote, memorably, a decision of a court is no more
“the law” “than the light from last night's lamp is electricity.” (25) That the common law is
necessarily in flux, its answers subject to continual scrutiny to see whether they remain
workable, is particularly true in the US. An amateur — often, astonishingly, an elected —
judiciary will often display foolishness — there will be failures of imagination, failures of
execution, failures of understanding — but this is a process of trial and error, and I share,
wistfully, the belief that “further dialogue with the profession — responsiveness to the
goading and prodding, the suasion and censure, of the academy and the bar — are likely
to ensure they get it right eventually.” (26) So this is instead my own “take” on the subject;
it is perhaps easier to see why asymmetrical clauses should be routinely enforceable by
looking at the US cases that have got things so completely wrong.
2 Asymmetrical Clauses and “Consideration”

6 Occasionally one will come across a court that purports to take the notion of
“separability” very seriously indeed. The judge has heard somewhere — and, without
really grasping the foundation of the matter, is under the vague impression — that the
validity of a “separable” arbitration clause does not necessarily depend on the validity of
the underlying agreement — so that he is expected to determine the clause's
enforceability in isolation from the contract in which it is embedded. (27) Well, then, does
it not necessarily follow that the agreement to arbitrate — in and of itself — must satisfy
all the requisites of contract formation? (28)
7 One such requirement, known alone to the common law, is that of “consideration”.
P 25 Without entering tediously into the details, one can say that the term is a shorthand
intended to express the notion that in our law of obligations only “bargains” enjoy a
privileged position; the perceived social value of reciprocal exchanges is such that only
transactions in the form of a bargain routinely benefit from a presumption of recognition.
(29) The starting point of orthodox doctrine, then, is that a promisee may only enforce a
promise if he has “paid” the promisor for it — that is, if the promisor has received some
quid pro quo in “exchange” for it. Consideration “is the price for which the promise of the
other is bought.” (30) And so, the “reasoning” proceeds, if only one of the parties [B] is
bound to arbitrate — while the other [A] is free of any such obligation — then is it not
obvious that the (“autonomous”) arbitration clause itself contains no exchange of value?
And does it not therefore follow that B's promise to arbitrate — the only promise made by
either party — is not binding, because it is not supported by consideration? Since any
promise from A is “illusory,” B's own promise must be nudum pactum. (31) This truly is
“separability” with a vengeance. (32)
8 Holdings of this sort seemed for a while to have receded into well-deserved
obsolescence, (33) although there have been disturbing signs in recent years that suggest
they may be enjoying something of a revival. (34) In any event, they are plainly
preposterous (35) —as they represent neither sensible applications of ordinary Contract
law, nor sensible doctrinal responses to the problem of Prima Paint.
a For one thing, even if the arbitration clause is truly treated in all respects as “self-
contained” or “autonomous” — split off, for analytical purposes, from the main
agreement — the hornbook requirement of “consideration” should still be quite
easily satisfied: This is most obvious where the contract is read so as not merely to
impose on B the obligation to arbitrate, but to grant him the right to do so: (36) Here
“consideration” for his promise to arbitrate might, on time-honored grounds, be
found in A's commitment to submit to and to be bound by the results of the process.
(37) If there is any obligation of “consideration” or “mutuality,” it requires nothing
more than “that both [A] and [B] bound themselves to the outcome of any dispute
they agreed to arbitrate, not that they agreed to arbitrate every dispute, or that the
disputes they did agree to arbitrate (or not arbitrate) were of equal concern to
each.” (38)
b But there is something far more fundamental here, applicable across the board in
all the relevant categories, and suggested by the classic question: just what is the
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point of the “separability” doctrine, anyway? What function is it designed to serve?
And the answer is this: beneath the metaphor of a “separate” arbitration clause, the
doctrine of Prima Paint does serious work — although none of it has any purchase
here whatever. (39)
Courts resort to the slogan of “separability” simply in order to treat an issue like
“fraud,” or “consideration,” as just one more discrete controversy between the parties
— that is, in precisely the same way as other issues going more conventionally to
“the merits.” This way of seeing things inevitably leads them to summon up the
familiar background rule — dictated by federal common law — to the effect that
such issues are routinely presumed to fall within the scope of the conventional
P 26 broad arbitration clause. The very consent to arbitration, then, allows them to
infer a willingness to arbitrate any challenges made to the main agreement —
sensibly imputing to the parties a preference for what has neatly been termed “the
practical advantages of one-stop adjudication,” (40) a presumption reinforced by a
concern to avoid collateral litigation intended to delay or to derail the arbitral
process. The rule of “separability” is thus nothing but another default rule, a rough
and rebuttable presumption, a tentative conclusion, with respect to the likely
boundaries of contractual consent and to the parties' likely allocation of decision-
making responsibility; as the Supreme Court has reminded us in Howsam, when such
questions are in play it only makes sense “for the law to assume an expectation that
aligns (1) decisionmaker with (2) comparative expertise.” (41)
c Viewed in this light, there is absolutely nothing in the policies underlying the
doctrine of “separability” that would, even remotely, require us to look for mutual
promises to arbitrate — nothing that prevents us from “borrowing” the consideration
that sustains the overall agreement for use in upholding the arbitration clause as
well. This, too, is ordinary contract law. After all, it is never thought that for each
clause in an agreement, the obligations of one party must be exactly co-extensive
with the obligations of the other; an agreement by landlord and tenant to a one-
year fixed rental may include a grant to the lessee alone of a unilateral option to
renew at the same rate for a subsequent year — and obviously, the lessee's promise
to pay rent for a year is sufficient to support all the lessor's promises. (42) The
canonical doctrine of “separability” hardly requires that arbitration clauses should
be treated any less favorably. So if an employment agreement contains an
asymmetrical arbitration clause, it is at least true that the employer [A] is
extending the prospect of initial employment even to an at-will employee who
consents to it; if a loan agreement contains an asymmetrical arbitration clause, it is
at least true that the lender [A] is extending credit to the borrower who consents to
it; in either case the arbitration clause is merely adjunct to a complex web of
reciprocal benefits and obligations. (43)
3 Asymmetrical Clauses and “Unconscionability”

9 It requires no great insight, though, to notice that what is going on in these cases is
something other than a mere naïve failure to get the point of Prima Paint. Invoking
“separability” is far more likely to be a “smokescreen” — a more or less disingenuous
surrogate for dealing with perceived unfairness in the arbitration clause itself. Indeed
most recent cases have tended to ignore the problem of “consideration” entirely — and
to engage instead in a direct inquiry into the legitimacy of clauses by which only the
“weaker” party in an adhesion contract is bound to submit his claims to arbitration.
10 The notion of “unconscionability” remains available to common-law courts as a
catchall tool to police excesses and abuses of contractual power. It has been said, with
considerable understatement, that it is “an amorphous concept that evades precise
definition”. The notion has something to do with “the absence of meaningful choice on the
part of one of the parties, together with contract terms that are unreasonably favorable
to the other” (44) — a formulation that is useful perhaps in laying down a foundation for
P 27 the function of judicial control — and which certainly stakes out an attitude — but
which cannot be intended to be operational, given the fact that it begs just about every
conceivable question worth asking. (45) So, in the cases we are concerned with, it is
frequently said that where “the weaker bargaining party has no choice but to settle all
claims arising out of the contract through final and binding arbitration, whereas the more
powerful bargaining party and drafter has the unilateral right” to settle a dispute “in a
court of law,” this may be “so one-sided as to be substantively unconscionable.” (46) The
consequence of a finding of “unconscionability” here is that the arbitration clause is void.
(47)
11 Challenges on the ground of “unconscionability” have tended to be limited to cases
where the underlying contract is one of “adhesion” — and recourse to such challenges has
naturally exploded in recent years, going hand in hand with the relentless tendency on
the part of corporate users to impose arbitration clauses on what has endearingly been
called “the little guy” (48) — consumers, employees, and, somewhat more controversially,
franchisees of national corporations. (49)
The “consideration” cases (discussed in Part 2 above) purported to sweep more broadly.
Relying on the structure of a supposedly “separable” arbitration clause, that challenge
might in theory have been applicable to any contract at all — and thus could have some
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purchase beyond the “adhesion” context that is the proper domain of the doctrine of
“unconscionability.” (Of course in practice, most of those cases did tend in any event to
arise out of contracts to which weaker parties were obliged to submit). To speak of
“unconscionability” is thus to invoke a principle that can be deployed only in a narrower
and more limited group of cases, and is to abandon any attempt, however misguided, to
shelter behind the teaching of arbitration landmarks like Prima Paint. But at least the
cases invoking “unconscionability” have the merit of candor in acknowledging the true
engine that is driving the machine; and however restricted the universe in which they
operate, they rely on a legal standard which — being fuzzier, highly fact-intensive, and
not dependent on doctrinal misunderstanding — tends to generate results that are
essentially unreviewable.
a “Unconscionability” and “Carve Outs”
12 A few things are necessary to note in order to put the challenge of unconscionability” in
proper perspective:
13 In many cases any perceived “one-sidedness” will inevitably be trivial — since the
drafting party is unlikely in any event to have claims to assert, in any forum, against the
adhering party. It is hard, for example, to see why an employer's “retention of litigation
rights” against a file clerk should trouble us unduly — given our difficulty in envisaging
just what such a suit could possibly look like in the first place. (50) After all, had the
employer too been nominally obligated to arbitrate any claim it might have, the
situation would seem much the same. (51)
14 In what I earlier called the paradigm “unilateral litigation” cases, it appears that A has
in every case simply avoided any obligation to arbitrate at all — preserving for himself
the right to litigate any claim he wishes, at his sole option. This has the obvious virtue of
allowing A to insure that claims against him may be centralized in one predictable forum,
judicial or arbitral — while at the same time allowing him to retain the flexibility to
P 28 proceed elsewhere if the particular nature of the dispute, at the time one arises,
suggests that it is important to do so.
15 But perhaps more commonly, we are likely to find clauses drafted in a somewhat
different fashion — clauses that do impose on A a residual obligation to arbitrate, but
which are then tailored to “carve out” certain claims — that is, which specify individual
exceptions allowing him to assert in court only a limited number of particular causes of
action. (52)
The nature of the most prevalent contractual “carve outs” could readily have been
predicted. (53) These appear to be the clauses that would grant A the right to seek in
court,
a “injunctive and/or other equitable relief”; (54)
b protection against B's use of his “proprietary names and [trade]marks” or to
“prohibit any act … which might impair the goodwill associated with the proprietary
names and marks”; (55)
c foreclosure of a security interest; (56)
d recovery of possession or eviction; or
e collection of a debt. (57)
16 Some of these “carve outs” are presented in contracts as straightforward facially equal
exclusions from the arbitration clause — with the apparent effect that neither party would
have the right to demand arbitration of the excluded claims. (58) On the face of it, “carve
outs” of this sort might be seen as nothing more than banal illustrations of a familiar
phenomenon, where a drafting party carefully crafts the contours of the arbitration
agreement, calibrating it so that, for example, it will cover disputes arising out of the sale
of apples — but under no circumstances disputes arising out of the sale of oranges. (59)
By contrast, of course, many “carve outs” have a different structure — and stick with the
notion of giving A alone, with respect to these sorts of claims, a simple option to invoke
either forum as it appears best to him at the time. (60) But in either case, of course —
however the agreement is drafted — the overwhelming reality is that the claims “carved
out” from the obligation to arbitrate are in fact likely to be the only claims that A as a
practical matter will wish to assert. As one court wrote in a case involving a consumer's
purchase of a car, “Indeed, it is hard to imagine what other claims [the seller] would have
against [the buyer] other than one to recover the vehicle or collect a debt.” (61) The point
is that whether the deal contains an explicit “carve out” or not, in practical operation A
retains access to a judicial forum for the claims that matter to him — while B does not —
and while a clever draftsman may aim for the pretense of symmetry by barring both
parties from asserting such claims in arbitration, A is barred from doing so in much the
same way that a rich man is barred from sleeping under a bridge.
17 Parties in the position of A regularly invoke what are often referred to as possible
“justifications” for their “carving out” certain specific claims from the general obligation
to arbitrate. (62) A more neutral term would simply involve asking for an “account” or an
“explanation”. One account would be this: that the most common “carve outs” identify
and respond to particular circumstances — due perhaps to the legal and cultural
structure in which arbitration is embedded — in which arbitral adjudication has proved
P 29
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P 29 less than optimal in meeting a particular business need. For example (to track the list
of the most common “carve outs” in ¶ 15 above):
a The limits — or at best the uncertainties — that surround arbitral awards of
injunctive or preliminary relief are well-known, particularly in the delicate period
before the tribunal has been constituted; (63)
b For many corporations intellectual property, such as a trademark, may be “the
lifeblood of the business”; given the inability to correct first-level mistakes, the
company might deem excessive “the risk that an arbitrator might wrongly
determine the mark to be generic or invalid”; (64)
c A streamlined and cost-effective judicial mechanism for recovering secured
collateral, or for the routine collection of smaller debts, is a commonplace feature
of most legal systems — an advantage for creditors with whom it is assumed
arbitration cannot compete. (65)
18 Those courts that have proved particularly resistant to the gravitational force of
arbitration will often find such accounts unpersuasive and inadequate. In contracts of
adhesion the courts of California have taken the lead in insisting that a drafting party
demonstrate
▪ some “legitimate commercial need” for an asymmetrical clause — a need that must
be “factually established.” (66)
And this is a requirement that somehow, curiously, is taken to mean something
different from — something more than —
▪ the mere “desire to maximize its advantage based on the perceived superiority of
the judicial forum.” (67)
At first glance this supposed dichotomy seems puzzling indeed — given that in the world
of commerce, “need” and “desire” are hard to disentangle. But the two propositions are
perhaps reconciled if we realize that the former requirement merely represents the
crafting of a particularly high burden of proof to be placed on A — expecting him to justify
these clauses by demonstrating the existence of “business realities” that would actually
“compel” an asymmetrical obligation to arbitrate. (68)
19 By contrast — and in further testimony to the infinite diversity of fact patterns
presented us — there is one further form of “carve out” that has gone relatively unnoticed.
This variation, perhaps because it rarely arises in the context of an adhesion contract,
has never been thought to require any particular “justification” whatever. It appears as a
response to the nagging challenge frequently posed to arbitral adjudication by multi-
party disputes. Suppose that the Owner of a project has entered into separate contracts
with a General Contractor (responsible for the construction) and with an Architect (who
acts as the Owner's representative in designing and overseeing the project). But suppose
that only the agreement with the Contractor contains an arbitration clause. If defects
appear in the building — with the Contractor and the Architect pointing the finger of
blame at each other — the Owner, as the “party in the middle”, is faced with the prospect
of duplicate proceedings and expense, not to mention the real possibility of inconsistent
results in two fora. But in such cases there is no simple way to insure that all the claims
will be heard at the same time in a single proceeding. (By contrast one powerful appeal
of litigation lies in the ability of a court with jurisdiction over all the interested parties to
P 30 bring them all into a single action.) (69) A savvy party in the Owner's position might
want, then, to negotiate for an “escape clause” — freeing him (and him alone) from any
obligation to submit to arbitration with the Contractor if, “in order to fully protect [his]
interests, [he] desires in good faith to bring in or make a party … the Architect or any
other third party who has not agreed to participate in and be bound by the same
arbitration proceeding.” (70) This situation is never discussed in terms of “mutuality” or
“unconscionability,” although such a unilateral option brings obvious “advantages” to the
Owner.
a “Unconscionability” and Litigation Romanticism
20 In any event the underlying problem goes much deeper than what has appeared so far
— for it is unclear to me why we would want to require any showing at all of a
“justification” for an asymmetrical arbitration clause, let alone as compelling a showing
as so many of the cases seem to require. What is most striking about much of the US
jurisprudence, then, is rather what it seems to suggest about our changing discourse of
“unconscionability.”
It is a surprising proposition — and it should be an unacceptable one — that it is now
illicit for one contracting party, at least in the absence of some stringent necessity, to
draft a provision allowing it to “maximize its [own] advantage” without a corresponding
“benefit” to the other. (71) Just what is the foundation for this test of the legitimacy of
arbitration, that makes it rest in turn on the drafter's own willingness, when asserting his
own claims, to submit himself to it? Is the notion one of estoppel? “If the arbitration
system established by the employer is indeed fair, then the employer as well as the
employee should be willing to submit claims to arbitration.” (72) Or the Golden Rule? Or
its less distinguished siblings, envy and ressentiment?
21 But this will not do. By definition parties enter into contracts when the overall
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perceived utility of the transaction for them exceeds any costs (including foregone
alternatives). Any particular contractual provision that confers benefits (or imposes
burdens) unequally will presumably be “paid for” by adjusting the terms of the deal, if it
is sufficient value to one party to justify a transfer payment to the other. (73) So in a
situation of “mutual advantage” — which of course is what exchange is all about — it is
hardly self-evident that the lack of symmetry with respect to one individual issue
amounts in itself to such “unfairness” as to warrant judicial relief. (74) And even this is to
pass over the fact, as Professor Drahozal has pointed out, that treating such clauses as
“unconscionable” may be particularly shortsighted in any event as putative measures of
“consumer protection” — since the drafting party may naturally react by subjecting his
own claims, too, to binding arbitration. (75)
22 I could doubtless rest there, but there remains one further, overarching observation. It
is hard to understand why an arbitration clause may not in any event properly be drafted
to reflect with some accuracy the power imbalances, the allocation of risks, and the
relative “advantages,” already reflected in the substantive terms of the parties' underlying
agreement. That is, it is hard to understand why the parties' dispute resolution system
need be “justified” at all, in isolation and abstraction from questions of relative
economic strength. (76) In offering to courts this tool to police contractual
“unconscionability” — in allowing them to proceed directly to address the true concern
P 31 and to bypass such traditional techniques as “adverse construction of language or
manipulation of the rules of offer and acceptance” — the drafters of the Uniform
Commercial Code took the pains to remind us that the “principle” involved “is one of the
prevention of oppression and unfair surprise and not the disturbance of allocation of
risks because of superior bargaining power” (77) — that is, the goal is not to redress
imbalance in a bargain, but to identify and repress abuses of the way in which bargains
are hammered out. This is a fortiori the case with respect to the issues we're dealing with
here — where an arbitration clause may bind one party only, but where the structure of
the clause — by hypothesis — in no way implicates the very integrity of the adjudicative
process itself.
22 I can hardly leave this subject without noting how naïve it would be to pretend to
discuss this problem as an ordinary matter of doctrinal analysis, in abstraction from
political and ideological reality. The incorporation of arbitration clauses in contracts of
adhesion is obviously one of the most fraught topics in the current US landscape, and the
symbiotic relationship between the law of arbitration and the contract doctrine of
“unconscionability” one of the most intriguing. State courts and legislatures have
increasingly found their hands tied by a rigid and imperialist federal policy that bars any
interference with or discrimination against arbitration clauses; (78) given that the
“contract law” that is “saved” by section 2 of the FAA is in theory state law, (79) state
courts are increasingly receptive to challenges based on “unconscionability” — which, as
a purportedly “neutral” doctrine, has become the doctrinal weapon of choice. (80)
23 Where conventional “contract doctrine” calls upon courts to engage in an amorphous,
muddy, fact-intensive application of broad, unexceptional standards, it will be
particularly hard to monitor state cases to ensure compliance with federal law: This
makes it natural for state courts — frequently for political reasons more responsive to the
claims of local businesses and consumers — to be tempted to exploit this doctrine in the
ongoing tug of war with federal policy. (81) As a familiar doctrinal construct whose virtue
lies precisely in its vagueness, “unconscionability” provides abundant opportunity for
covert manipulation and strategic behavior on the part of a state court
▪ inclined not to enforce an arbitration agreement,
▪ sophisticated enough to know that one is expected to “mouth the appropriate
pieties,” (82)
▪ and ingenious enough to conjure up some ill-defined mixture of consumer
inexperience, surprise, gross disparity in bargaining power and “harsh or oppressive
terms” lacking any “commercial justification.” (83)
25 What may explain the shaky legal status of “one-sided” arbitration clauses in many US
jurisdictions is, I think, little more than the classic recurring fallacy of the false
comparison. It is familiar to see the messy realities of arbitration held up alongside an
idealized litigation alternative — in which justice is unfailingly available, costless, swift,
rational, predictable and accurate — and inevitably to be found wanting. (84) (Professor
Jerome Cohen once remarked, in a very different context, that the worst kind of
Comparative Law thinking is that which compares “our theory” with “their reality” — and,
inevitably, finds the latter deficient). It is presumably this “litigation romanticism” that is
responsible for so much of the overwrought rhetoric that occasionally surfaces in the
P 32 advance sheets and law reviews. (85) But, as Judge Easterbrook has remarked, this is
precisely “the sort of litany that the Federal Arbitration Act is supposed to silence.” (86)
26 There are of course many putative defects in arbitration clauses that might invite
successful challenges on the ground of “unconscionability” — these are well-known and
may range from excessive costs incurred in the process, to bias on the part of the
decisionmaker, to burdens arising from the location of the proceedings. But all of these
serve to provide a precise account of unfairness — all of these suggest ways in which the
assertion of a weaker party's claims may be discouraged, or the result skewed — all, that
7
is, provide a rationale for the conclusion that the clause operates in an oppressive fashion.
(87) Such an account would seem to have little purchase in the cases we are discussing
here — at least in the absence of some reason to suspect the neutrality of the arbitral forum
to which B alone is relegated. (88) Remember that B would, after all, be relegated to
precisely the same forum if the obligation to arbitrate were stated to be “mutual”. In
these circumstances it would seem hard to plausibly claim that B, solely by virtue of the
fact that he alone is subject to the duty to arbitrate, is thereby somehow “placed … at the
mercy” of A. (89) It follows that “the only way” the paradigmatic asymmetrical clause “can
be deemed unfair or unconscionable is by assuming the inferiority of arbitration to
litigation.” (90)
27 In theory a clause drafted to bind B alone might, I suppose, create incentives for A to
structure the arbitral process so as to affect the process or outcome in his favor — but of
course A would have an even greater incentive to do so should the stakes be higher —
that is, should his own claims equally be subject to being sent to arbitration. (91) Nor
does there seem to be any reason for a prophylactic rule of invalidity as a surrogate for
the ability of courts to directly address and police abuses of the arbitral process when
they can be uncovered.
28 Finally, I should mention here the Supreme Court's recent endorsement of the notion
— disturbing to many, (92) although not to me (93) — that the very question of the
“unconscionability” of the arbitration clause itself can, by contract be entrusted to and
decided by an arbitral tribunal. This is a vast topic well behind my remit here, but which
may have “legs”. Its importance is obvious: under the guise of “respecting private
autonomy,” the prospect of a federal rule that permits and encourages reallocation of
decison-making power to arbitrators is an elegant means of removing it from state courts
entirely: Here “federalization” of the question of the allocation of authority between
courts and arbitrators is accomplished simply through
▪ the parties' use of a generic arbitration clause or reference to common institutional
rules, which is then
▪ construed through the lenses of the federal common-law “presumption of
arbitrability,” and then, finally
▪ granted privileged status by federal policy embodied in §2 of the FAA.
Of course, precisely the same thing is true of any of the other pieces of allocation
doctrine — for example, the rule of “separability” enshrined in Prima Paint itself. All in all,
this constitutes a promising indication that we are moving in the right direction. (94)
P 32
References
*) Alan Scott Rau: Mark G. & Judy G. Yudof Chair in Law, The University of Texas at Austin
School of Law. This is a longer version of a presentation prepared for the Spring
Conference of the ICC Institute of World Business, “Jurisdictional Choices in Times of
Trouble,” held in Paris on May 23, 2014
8
1) Cf. O'Neil v. Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997) (“as a condition of
employment and continued employment, I agree to submit any complaints to the
published process and agree to abide by and accept the final decision of the
arbitration panel as ultimate resolution of my complaints for any and all events that
arise out of employment or termination of employment”). The court noted here that
“the contract to arbitrate was proffered by the employer” and that “such a proffer
clearly implies that both the employer and the employee would be bound by the
arbitration process”; “if an employer asks an employee to submit to binding
arbitration, it cannot then turn around and slip out of the arbitration process itself.”
This was not, it underlined, a case where the agreement “specifically allows the
employer to ignore the results of arbitration.” See also Kinney v. United Healthcare
Services, Inc., 83 Cal. Rptr.2d 348 (Cal. App. 1999) (“Arbitration is the final, exclusive
and required forum for the resolution of all employment r elated disputes which are
based on a legal claim” — defined as a “claim under any federal, state or local
statute, regulation of common law doctrine regarding or relating to employment
discrimination, terms and conditions of employment, or termination of employment
“; the court noted that “although [the employer] appears to be obligated under the
policy to submit to arbitration where an employee has initiated arbitration
proceedings based on an employment-related claim, it is under no obligation to
pursue any employment-related claims it might assert against an employee in
arbitration”).
Some drafting variants make somewhat more explicit As obligation to submit to
arbitration of any claim initiated by B. E.g., Alexander v. Professional Exchange
Service Corp., 2011 WL 1490906 (Cal. App.) (“You and [the employer] agree that any
employment related claim made by you, including unlawful harassment,
discrimination, wrongful termination or wrongful conduct allegedly occurring prior to,
in the course of, or after your employment .. will be submitted to final and binding
arbitration and not to any other forum”; “the agreement does not require that [the
employer] arbitrate ‘any employment related claim’ it may have against [the
employee]; it only requires arbitration of [the employee's] claims and specified
types of claims that are more likely to belong to the employee than the employer”).
See also Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003). Here the
agreement provided that “any and all employment-related legal disputes,
controversies or claims of an Associate arising out of relating to an Associate's
[employment], shall be settled exclusively by final and binding arbitration.” As a
consequence, the court held,
• the employer “does not agree to submit to arbitration claims it might
hypothetically bring against employees,” although
• the wording clearly indicates that at least both parties were bound to arbitrate
any claims that the employee might assert.
2) See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 694
(Cal. 2000) (“I agree as a condition of my employment, that in the event my
employment is terminated, and I contend that such termination was wrongful .. I and
Employer agree to submit any such matter to binding arbitration”;“[a] though it did
not expressly authorize litigation of the employer's claims against the employee ..
such was the clear implication of the agreement. Obviously, the ack of mutuality can
be manifested as much by what the agreement does not provide as by what it
does.”).
For examples of contracts in this category, see, e.g., Domin v. River Oaks Imports, Inc.,
2011 WL 5039865 (N.D. Ill. 2011) (“I understand and voluntarily agree that any disputes
regarding the terms of this pay plan or my employment or termination from
employment .. will be resolved exclusively in accordance with binding arbitration”;
held, agreement is unenforceable; “where an arbitration agreement is worded
entirely in terms of an employee's obligation to submit her claims to arbitration .. it
cannot be read to also require the employer to submit its claims to arbitration”). Of
similar import are Noohi v. Toll Bros., Inc., 708 F.3d 599 (4th Cir. 2013) (“Buyer .. hereby
agrees that any and all disputes with Seller .. shall be resolved by binding
arbitration”; “we agree with the district court that the provision binds only Plaintifs
to arbitration, and thus lacks mutuality of consideration”); Johnson v. Circuit City
Stores, 148 F.3d 373 (4th Cir. 1998) (“any and all employment-related legal disputes,
controversies or claims of an Associate arising out of, or relating to, an Associate's
application or candidacy for employment, employment, or cessation of
employment”; this “apparently requires the arbitration only of [the employee's]
claims against [the employer] and does not appear to require the arbitration of any
claims [the employer] might have against the [employee.]”); Smith v. Professional
Security Bureau, 225 F.Supp.2d 395, 397 (S.D.N.Y. 2002) (“in the event that Employee
seeks relief in any agency or court of competent jurisdiction for any dispute covered by
this Agreement… the Company may, at any time within 90 days of the service of
Employee's complaint upon the Company, at its sole option, require all or part of the
dispute to be arbitrated”)].
9
3) See, e.g., Blumenthal-Kahn Elec. Ltd. v. American Home Assur. Co., 236 F. Supp.2d 575,
577 (E.D.Va. 2002) (“any dispute between San Jose and Subcontractor, shall, at San
Jose's sole option, be decided by arbitration”); Willis Flooring v. Howard S. Lease
Construction, 656 P.2d 1184 (Alaska 1983) (“Contractor, at its sole option, shall have
the right to require Subcontractor to arbitrate any and all claims, disputes, and other
matters in question between Contractor and the Subcontractor arising out of or
related to the Subcontract or the breach thereof”); Boatright v. Aegis Defense
Services, LLC, 938 F. Supp.2d 602 (E.D. va. 2013) (“If [B] seeks relief from A in court
relating to a Dispute, [A].. may at its option within sixty (60) days of service of [B's]
complaint, require all or part of the dispute to be arbitrated”).
Cf. Ballast Nedan Groep, N.V. v. Computer Sciences Corp., 822 F.2d 55 (4th Cir. 1987).
Here the clause provided that “all claims, disputes and other matters in question”
between the parties “shall at the sole discretion of [A] be decided either under
applicable Saudi Arabia law and procedure or by arbitration in accordance with” ICC
rules. A moved to stay a suit fled in the U.S. by B “pending resolution of a claim” that
A had fled in Saudi Arabia, but the court found that the contractual provision was
“not unambiguously a choice-of forum clause,” as it could “just as plausibly (and
perhaps more plausibly) be interpreted” as merely a choice-of-law provision. (But
what, then, could “sole discretion” be intended to mean?)
4) On this point, see the contract in Sablonsky v. Gordon Company, 535 N.E.2d 643, 645
(N.Y. 1989) (“any dispute .. shall at the Company's election, which election may be
made at any time prior to the commencement of a judicial proceeding by the Company,
or in the event instituted by the Employee at any time prior to the last day to answer
and/or respond to a summons and/or complaint made by the Employee, be submitted
to arbitration”). For another clause drafted to have the same effect see United States
v. Consigli Construction Co., Inc., 873 F.Supp.2d 409 (D. Me. 2012) (“any and all claims
or disputes arising out of or relating to this Agreement .. shall be decided, at the sole
discretion of [A], either by submission to (1) arbitration .. or (2) judicial decision by
the Superior Court in the State of Maine”; held, A's motion to stay litigation and
compel arbitration granted).
A's drafting in Stevens/Leinweber/Sullens, Inc v. Holm Development and Managemtn,
Inc., 795 P.2d 1308 (Ariz. App. 1990), went much further than this — farther than I have
seen elsewhere: For A reserved the right not only to choose a forum, but the right to
change its mind — to “reserve and retain the option throughout any proceedings which
may be instituted, for further election at any time, prior to a final judgment in the
ongoing proceeding.” The court struck down the clause “on the basis of the separability
doctrine,” concluding that consideration cannot be “borrowed” from the principal
contract and thus that the arbitration clause was “void for lack of consideration.” As I
suggest below, this exemplifies a fundamental misunderstanding with respect to the
law of arbitration; see ¶¶ 6-8 infra. But despite recognizing that fact, we can still
conclude that A had overreached impermissibly. The next step perhaps would have
been to allow A to ignore any adverse award and force B to litigate anew. It was
Cocteau I think who wrote that “le tact dans l'audace c'est de savoir jusqu'où on peut
aller trop loin” — a lesson the draftsman would have done well to heed.
5) See NB Three Shipping ltd. v. Harebell Shipping ltd., [2004] EWHC 2001 (Q.B. Comm.
2004) (“the courts of England shall have jurisdiction to settle any disputes which may
arise out of or in connection with this Charterparty but the Owner shall have the
option of bringing any dispute hereunder to arbitration”); Deutsche Bank AG v.
Tongkah Harbour Public Co. Ltd., [2011] EWHC 2251 (Q.B. Comm.) (“courts of England
shall have jurisdiction to settle any disputes .. which may arise in connection with
any Finance Document,” but “notwithstanding” this, “any dispute arising out of or in
connection with the Finance Documents, including any question regarding its
existence, validity or termination, may at the option of the relevant Finance Party ..
be referred to and finally resolved by arbitration”); see also Simon Nesbitt & Henry
Quinlan, The Status and Operation of Unilateral or Optional Arbitration Clauses, 22
Arb. Int'l 133, 134 (2006) (“notwithstanding” an agreement by which the parties submit
to the jurisdiction of a particular court, “party A may, at its sole option, refer any
Dispute to arbitration”).
6) Nesbitt and Quinlan call this a “less common variant” on the preceding “unilateral
arbitration clause,” but that is certainly not an assessment that is borne out by the
available American jurisprudence. Nesbitt & Quinlan, supran. 5 at 134.
7) See, e.g., Law Debenture Trust Plc. v. Elektrim Finance BV, [2005] EWHC 1412 (Ch.) (“any
dispute arising out or in connection with these presents .. may be submitted by any
party to arbitration for final settlement,” and “neither [ESA] nor [EFBV] shall be
permitted to bring proceedings in any other court or tribunal,” but “notwithstanding”
this, “the Trustee and each of the Bondholders shall have the exclusive right, at their
option, to apply to the courts of England who shall have non-exclusive jurisdiction to
settle any disputes which may arise out of or in connection with these presents”).
8) See ¶¶ 15-17 infra.
10
9) See, e.g., Phox v. Atriums Management Co., Inc., 230 F.Supp.2d 1279 (D. Kan. 2002)
(held, the arbitration clause “does not constitute a separate binding agreement
because defendant's promise to arbitrate is illusory”); Stanich v. Hissong Group, Inc.,
2010 WL 373 2129 (S.D. Ohio) (same; sanctions imposed on A's counsel for “needlessly
multiply[ing] the proceedings”); Caire v. Conifer Value Based Care, LLC, 2013 WL
5973151 (D. Md.) (same).
10) Cf. Williams v. TCF Nat'l Bank, 2013 WL 708123 (N.D. Ill.) (contract “did not purport to
render modifications retroactively applicable to already-pending disputes,” as it
provided that ”no change” to the arbitration clause would apply “after [A] received
your notice” of a claim); Lizalde v. Vista Quality Markets, 746 F.3d 222, 226 (5th Cir.
2014)(the fact that “termination of the Arbitration Agreement is restricted to
prospective claims” means that the agreement was not rendered “illusory”). But
compare Peleg v. Neiman Marcus Group, Inc., 140 Cal. Rptr. 3d 38 (Cal. App. 2012)
(clause provided that “any amendment, modification or revocation will have no
effect on any Claim that was fled for arbitration prior to the efective date of such
amendment, modification, or revocation,” but the court held that the agreement
“fails” because “it does not go far enough”; rather than exempting “only fled claims,”
it should also exempt claims that have accrued or are known to the employer”); Caire,
supran. 9, 2013 WL 5973151 at *10 (after the employee had initiated arbitration
proceedings, A “sought to exercise this discretion by choosing to reject the AAA as the
arbitration administrator and only proceed on terms it dictated”; held, “arbitration
agreement is void because [A] made no promise to arbitrate at all”);
11) This pattern appears only rarely in US cases, and presents few of the supposed
doctrinal hurdles that encourage challenges to arbitration clauses — which I will
discuss later under the rubrics of the “separability” and “unconscionability” of such
clauses. As long, then, as the forum to which B is relegated is neutral and otherwise
acceptable, such provisions have proven quite unproblematical. See, e.g., Valens U.S.
SPVI, LLC v. Hopkins Capital Partners, Inc., 907 N.Y.S.2d 104 (Sup. Ct. 2010):
I do not find unjust or reasonable an arms'-length agreement between
sophisticated parties, permitting one party to sue in a jurisdiction of its
choosing while restricting the other party's right to sue to just one forum.
When negotiating an agreement, parties ordinarily engage in give-and-
take, trying to obtain favorable provisions and making concessions to the
other side. On the papers before me, I have no reason to second-guess the
reasonableness of their agreement.
Cf. Richard Fentiman, Unilateral Jurisdiction Agreements in Europe, 72 Cambridge L.J.
24 (2013) (English law; “despite their asymmetric, optional character it is difficult to
conceive how… their validity could be impugned, or what policy might justify doing
so, given that they… affect only well-advised commercial parties”).
12) Westfal-Larsen & Co. A/S v. Ikerigi Compania Naviera SA, [1983] 1 All E.R. 382 (Q.B.D.
1982) (Comm.).
13) Nesbitt & Quinlan, supran. 5 at 134.
11
14) See, e.g., Deyan Draguiev, Unilateral Jurisdiction Clauses: The Case for Invalidity,
Severability or Enforceability, 31 J. of Int'l Arb. 19, 23-24 (2014) (“the dispute
resolution mechanism having jurisdiction in concreto is the one that is first seized by
either of the parties”; “the options ‘crystallize’ at this point and the sole, mandatory,
exclusive place for settlement of the dispute is reduced to the one where the claim
has been brought”). Professors Ancel and Cuniberti argue that as drafted, this was
precisely the effect of the asymmetrical clause involved in the celebrated Banque
case; see Pascal Ancel & Giles Cuniberti, Observations, Journal des Tribunaux-
Luxembourg (Feb. 28, 2013)(“the clause was in reality as binding on the bank as on the
client;” if the client in accordance with the clause had seized the Luxembourg courts,
“the bank would certainly not have been able to deny their jurisdiction by claiming
that the dispute should be brought before some other court”).
Alternatively the applicable forum might in theory be “fixed” by action taken by A
himself, in the sense that seizing one jurisdiction would disable him from exercising
any contractual option: If, for example, A is the first to bring suit in court — at least if
his claim would also have been deemed within the scope of the arbitration clause —
it will inevitably be argued that this activity, “inconsistent” with any intention to
invoke the arbitration clause, constitutes a “waiver” of any right to relegate B to the
arbitral forum; cf. Alan Scott Rau, the UNCITRAL Law in State and Federal Court: The
Case of “Waiver,” 6 Amer. Rev. of Int'l Arb. 223, 227-28 (1995). But see, rejecting this
argument, Green Tree Servicing LLC v. Simmons, 108 So.3d 476 (Miss. App. 2013) (A's
action for repossession does not waive its right to relegate B's suit for “wrongful
repossession and destruction of property” to arbitration; after all A's action ‘was
specifically permitted by the arbitration clause” and B had “agreed to this course of
action in the contract”).Cf. also Deutsche Bank AG, supran. 5 at ¶ 29(claims asserted in
arbitration and in litigation, both initiated by A, are “interconnected” and “arise out
of the same breach of the same contractual arrangements”; “I fully agree that [A]
bargained for the right of access to this court, and should not be deprived of it,” but
“having referred [the matter] to arbitration, the statutory stay applies as regards the
court proceedings”).
15) Cf. Draguiev, supran. 14 at 25, 34 (it would “confer an enormous advantage on one
party to bypass the moment of ‘crystallization’ and still make .. a discretionary
election”; therefore the “imbalance [should be] effectively ‘cured’ at the stage where
the real settlement of the dispute has to take place.”). Draguiev argues that “there is
a thin line between advantage in general, or prior to commencement of action, and
having advantage after an action is brought,” id. at 24 fn. 12; in terms of the
commercial sense of the clause — in terms of what A was attempting to accomplish —
the line is not, I think, “thin” but evanescent.
16) See Law Debenture Trust, supran. 7 at ¶¶ 11, 38, 44 (A is “contractually entitled to
litigate the present dispute (and to stop [B] pursuing a parallel arbitration dealing
with the same matters)”; “the current disputes are not ones which it has been agreed
shall be referred to arbitration because the parties have agreed that [A] is entitled to
litigate it”; the clause “gives an additional advantage to one party, but so do many
contractual provisions”); Nesbitt & Quinlan, supran. 5 at 142.
17) Compare the “unilateral arbitration” case adumbrated in “c” in the text: Here A
would by contrast ask that any pending litigation be stayed in favor of arbitration — an
easier task under any modern arbitration statute; see NB Three Shipping Ltd., supra n.
v (after B brought suit, A's solicitors wrote that “given our client's option we are
surprised that you did not consult with our client before you commenced court
proceedings”; held, the asymmetrical clause “is designed to give ‘better rights” to A
than to B, and so gives A “a right to stop or stay a court action brought against them,
at their option. This gives the clause some practical effect,” and B “can obtain no
advantage from ‘jumping the starting gun’”). On the somewhat more controversial
possibility of injunctions against arbitration, see Alan Scott Rau, Understanding (and
Misunderstanding) “Primary Jurisdiction,” 21 Amer. Rev. Int'l Arb. 47, 114-175 (2010).
18) The full text of the clause in Law Debenture Trust, supran. 7, provided that the
agreement “to refer all disputes arising out of or in connection with these presents ..
to arbitration .. is exclusive such that neither [ESA] nor [EFBV] shall be permitted to
bring proceedings in any other court or tribunal other than by way of counterclaim in
respect of proceedings brought by the Trustees .. in respect of any of the above
documents in such other court or tribunal in accordance with this Clause.”
19) See the discussion at ¶ 15 infra.
12
20) Cf. Mauritius Commercial Bank ltd. v. Hestia Holdings Ltd., [2013] EWHC 1328 (Q.B.
Comm.). Here a clause in a loan agreement provided that the “courts of England have
exclusive jurisdiction” except that “the Lender [A] shall not be prevented from taking
proceedings related to a Dispute in any other courts in any jurisdiction.” The
borrower [B] defaulted and A brought suit in England; the court rejected the
proposition that the clause was “too one-sided to be compatible with fundamental
principles regarding equal access to justice” under English law. In dicta, the court
noted that a textual interpretation [“..not prevented from taking proceedings.. “]
suggested that at the very least A has indeed “agreed to be subjected to the
exclusive jurisdiction of the English courts, subject to its rights to bring claims (which
may overlap) abroad.” Id. ¶ 40. [And even if, “improbably,” “the true intention of the
parties expressed in the clause is that [A] should be entitled to insist on suing or
being sued anywhere in the world”” [as held in NB Three Shipping Ltd., supran. 5, and
Law Debenture Trust, supran. 7], still, nevertheless, “that is the contractual bargain to
which the court should give effect”].”
21) See, e.g., Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155 (Wis. 2006). This
involved a consumer loan secured by an automobile as collateral; the lender sued to
recover possession of the car, and the borrower filed a counterclaim both for himself
and for a putative class, alleging that the lender had improperly concealed
transaction costs and had imposed finance charges without proper disclosures. The
agreement contained a mutual agreement to arbitrate except that the lender
retained “the right to enforce the borrower's payment obligations in the event of
default, by judicial or other process, including self-help repossession.” Now the
lender [A] conceded that the borrower [B] had “the right to put forth his affirmative
defenses” to the repossession action — including the defense that the loan agreement
was unconscionable, — but vigorously argued nonetheless that any counterclaims
“maintain[ing] a substantive cause of action based on the same theory of
unconscionability” had to be brought in arbitration. The court found the arbitration
agreement itself “unconscionable” and therefore refused to compel arbitration of B's
counterclaims. To the same effect is Noohi, supran. 2 at 611 ([B] hereby waives the
right to a proceeding in a court of law .. for any claims or counterclaims brought
pursuant to this agreement”; the implication of this provision was apparently that
“even though [A] may bring a claim in court, [B] may not assert any counterclaim in
that forum” but would be relegated to asserting it in arbitration).
But cf. Delta Funding Corp. v. Harris, 912 A.2d 104, 115-16 (N.J. 2006). In this sub-prime
lending case, the arbitration agreement excluded “any action to effect a judicial or
non-judicial foreclosure or to establish a deficiency judgment.” The mortgage lender
subsequently assigned the loan to Wells Fargo; Wells Fargo instituted a mortgage
foreclosure action, and the borrower responded with an answer as well as a third-
party complaint against the lender, alleging violations of the Truth in Lending Act.
The agreement apparently created the following structure: Although the borrower “is
able to raise potential defenses against Wells Fargo .. in the foreclosure proceeding, as
a result of the arbitration agreement she is forced to bring her third-party
counterclaims against [the lender] in arbitration. [The borrower's] defenses to the
foreclosure action track her affirmative claims against [the lender]; thus, she is
forced to litigate those substantively similar claims in two different forums. That
result is burdensome; however, it is not unconscionable.” Similarly, see Conseco
Finance Servicing Corp. v. Wilder, 47 S.W.3d 335 (Ky. App. 2001). Under this agreement
for the financing of the purchase of a mobile home, the parties agreed that “all
disputes” would be subject to binding arbitration except that A retained “an option
to use judicial (fling a lawsuit) or non-judicial relief to enforce [its] security
agreement”; there was a further express provision that doing so would not constitute
a waiver of A's right to compel arbitration of any “dispute or remedy” “including .. a
counterclaim in a suit brought by [A].” The clause was upheld here as well. And for a
further example suggested by English law, see Woolf v. Collis Removal Service, [1948] 1
K.B. 11 (C.A. 1947) (customer suit against mover; “if the customer [B] makes any claims
upon or counterclaim to any claim made by [the carrier A], the same shall in case of
diference be referred to the decision of two arbitrators”; nevertheless the clause
“leaves the carrier free, as the customer is not, to pursue claims on his part against
the customer by action at law”).
Quaere whether an allocation of fora on the basis of what on the one hand constitutes
a “defense,” and what by contrast constitutes a “counterclaim” — particularly one
arising out of the same “transaction or occurrence” — is a line that one would wish to
defend, or a line that can possibly prove workable or stable. Cf. Iwen v. U.S..West
Direct, 977 P.2d 989 (Mont. 1999) (in an action by an advertiser for a “negligently
published yellow page advertisement,” the agreement provided for arbitration of
any claim “other than an action by [the publisher] for the collection of the amounts
due under this Agreement”; the court noted that “as a practical matter” the “primary
reason” the publisher would seek any remedy against the advertiser would lie in his
refusal to pay his advertising bill, and “likewise, according to the terms of the
contract, the only remedy for the advertiser” was to seek “a pro rata reduction or
refund of the cost of the advertisement” — and so in consequence “the sole remedy
for either party [was] the cost of the advertisement”).
13
22) See, e.g., Hikers Industries, Inc. v. William Stuart Industries (Far East) Ltd., 640
F.Supp. 175 (S.D.N.Y.1986). Here the exclusive licensee of a trademark brought suit
against both his licensor and a retailer to whom the licensor had sold goods
allegedly in violation of the license. The licensee had an arbitration agreement only
with the licensor; however, the court held that “sound judicial administration”
suggested that, in its discretion, the lawsuit should be stayed as to the retailer also:
Since the licensee's claims against the retailer were “derivative” of his claims against
the licensor, the arbitrator's decision would be “helpful” and would “provide the
court with insight into the issues of law and fact.”
But cf. Chartis Seguros Mexico, S.A. v. HLI Rail & Rigging, LLC, 967 F.Supp.2d 756, 766-
67 (S.D.N.Y. 2013) (“the heavy presumption” that “the arbitration and the lawsuit will
each proceed in its normal course” “counsels against exercise of the Court's
discretion to stay the federal court claims”; “to the extent there is some overlap
between the outcomes in federal court and arbitration, [the insurer] as defendant to
[the] third party-party complaint, can keep the court apprised of developments and
delays in the arbitration. Simply put, scheduling issues can be maneuvered”).
23) See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983)
(Owner had related claims against the Contractor (with whom it had an arbitration
agreement) for delay, and the Architect (with whom it did not) for indemnity; “the
relevant federal law requires piecemeal resolution when necessary to give effect to
an arbitration agreement”; if the dispute between [Owner and Contractor] is
arbitrable under the Act, then the [Owner's] two disputes will be resolved separately
— one in arbitration, and the other (if at all) in state-court litigation”); Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985) (arbitration of state-law claims must be
compelled even in circumstances where a federal court will in any event assert
jurisdiction over a federal-law claim (assumed to be non-arbitrable), even though-
the arbitrable and non-arbitrable claims arise out of the same transaction, and are
“intertwined factually and legally”; “the preeminent concern of Congress in passing
the Act was to enforce private agreements into which parties had entered, and that
concern requires that we rigorously enforce agreements to arbitrate, even if the
result is ‘piecemeal’ litigation”).
14
24) Section 2 of the FAA, now binding on the states, requires that agreements to arbitrate
“shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law
or in equity for the revocation of any contract.” [“Revocation” may not be modern
Contracts terminology but probably stands in here for “rescission” or “successful
challenge to the enforceability.”] The body of “contract law” has traditionally been
state law, as there is no “general federal common law of contracts,” and the Supreme
Court is often quoted to the effect that the “contract” “grounds” “saved” in §2 are
necessarily matters of state law; See generally Perry v. Thomas, 482 U.S. 483, 492 n.9
(1987) (§2 “provides the touchstone for choosing between state-law principles and the
principles of federal common law envisioned by the passage of the statute”; “state
law .. is applicable if that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally”).
But the Court's casual references to this effect have been treated far too uncritically.
See, e.g., Neal Troum, Drawing a Line after AT&T Mobility: How Far Does the FAA Reach
into State Contract Regulation?, 29(7) Alternatives to the High Cost of Litigation, at pp.
129, 134 (July/Aug. 2011) (the FAA “contemplates — indeed, requires — courts to look
at and interpret state contract law”); Stephen L. Hayford, Federal Preemption and
Vacatur: The Bookend Issues under the Revised Uniform Arbitration Act, 2001 J. Disp.
Resol. 67, 74 (“contract formation” issues are “matters to be decided solely under
state contract law principles. There is no role for the FAA,” unless state law has
“singled out” arbitration agreements for different treatment).
Few people, alas, have ever paused to wonder whether Supreme Court jurisprudence
envisages a state law that is indeed to be applied ex proprio vigore — with some
regulatory force of its own — or instead one that is adopted, in Holmes' typically
quotable phrase, merely as a “benevolent gratuity,” Southern Pacific Co. v. Jensen,
244 U.S. 205, 220 (1917)(Holmes, J., dissenting). The latter is the correct view: Federal
courts after all commonly choose to “incorporate” — or “borrow” — or “absorb” —
rules of state law, and it would be natural to do so if only as a matter of convenience,
avoiding the burden of having to specially fashion a newly minted federal common
law of private agreement. Von Mehren and Trautman referred to this rather more
ponderously as “optional supplementation by reference,” Arthur Von Mehren &
Donald T. Trautman, The Law of Multistate Problems: Cases and Materials on Conflict
of Laws 1049 (1965). But federal substantive law it remains; the “savings clause” of §2
merely qualifying and giving full meaning to a federal right. See also Southland Corp.
v. Keating, 465 U.S. 1, 19-20 (1984) (Stevens, J., concurring in part and dissenting in
part) (§2 “does not define what grounds for revocation may be permissible, and
hence it would appear that the judiciary must fashion the limitations as a matter of
federal common law”; however, federal policy “does not necessarily require the
inexorable application of a uniform federal rule of decision”).
And once the decision to apply state law is made, Justice Scalia suggested that it
may remain “of only theoretical interest” whether the basis for that application is in
fact the state's “own sovereign power” saved from federal “preemption,” or instead
“federal adoption” of the state rule. O'Melveny & Myers v. FDIC, 512 U.S. 79, 85 (1994).
25) Leon Green, The Duty Problem in Negligence Cases, 28 Colum. L. Rev. 1014, 1015 (1928).
26) See Alan Scott Rau, Federal Common Law and Arbitral Power, 8 Nevada L.J. 169, 200-
203 (2007); see also Melvin Aron Eisenberg, The Nature of the Common law 12-13 (1988)
(courts are “obliged to be responsive to what the profession has to say,” which entails
that they “attend to the professional discourse and stand ready either to modify
their views when that discourse is convincing to or to give good reason showing why it
is not convincing”); Jefrey J. Rachlinski, Bottom-Up Versus Top-Down Lawmaking, 73 U.
Chi. L. Rev. 933, 953 (2006)) (“Even if many courts adopt a misguided approach to an
issue, so long as lawyers, professors, and subsequent courts have the means of
identifying the sensible decisions of their predecessors, the misguided rulings will
lose influence.”).
27) As we know, every modern regime of arbitration takes “separability” as the
foundation stone of the entire structure; the “separability” of the arbitration clause
became a consecrated part of American arbitration law in 1967 with Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).
28) “In addition to the contract really alleged to have been formed (the container
contract), the separability doctrine pretends that the party also alleges a fictional
contract consisting of just the arbitration clause, but no other terms.” Stephen L.
Ware, Arbitration and Unconscionability after Doctor's Associates, Inc. v. Casarotto, 31
Wake Forest L. Rev. 1001, 1010 (1996); see In re Knepp, 229 B.R. 821 (N.D. Ala. 1999)
(quoting Ware; “[u]nder this doctrine, an arbitration clause must fulfill all the
requirements of a contract including mutuality of assent and cannot rely on the
container contract for these elements”).
29) See Restatement, Second, Contracts, §71 & cmt. a. (“consideration” “is often used
merely to express the legal conclusion that a promise is enforceable”; “to constitute
consideration, a performance or a return promise must be bargained for,” that is,
“sought by the promisor in exchange for his promise and .. given by the promise in
exchange for that promise.”
15
30) See Dunlop Pneumatic Tyre Co. Ld. v. Selfridge & Co. Ltd., [1915] A.C. 847 (H.L.) (“An act
or forbearance of one party, or the promise thereof, is the price for which the
promise of the other is bought, and the promise thus given for value is enforceable.”).
31) E.g., Stevens/Leinweber/Sullens, Inc., supran. 4 (held, under the state arbitration
statute that “embod[ies] the concept of separability endorsed by the United States
Supreme Court” in Prima Paint, that where there is “no mutual obligation to submit
contractual disputes to an arbitrator” the arbitration provision “is void for lack of
consideration”; defendant's contention “that the arbitration provision should be
considered in isolation from the principal contract only when it is necessary to
preserve the parties' agreement to arbitrate is without merit”); The Money Place v.
Barnes, 78 S.W.3d 714 (Ark. 2002) (“follow[ing] the lead of the United States Supreme
Court [in Prima Paint, we] decline to address the issue of whether there is sufficient
consideration for the contract as a whole”; “mutuality within the arbitration
agreement itself is required”; “the agreement to arbitrate is not supported by
sufficient consideration, because [B] is the only party that has promised to forego her
rights to seek redress in the court system” and A “has the option of pursuing
arbitration or bringing suit in court”); Cheek v. United Healthcare of the Mid-Atlantic,
Inc., 835 A.2d 656 (Md. App. 2003) (“we have followed the lead of the Supreme Court in
Prima Paint by considering an arbitration clause of a larger contract to be severable
therefrom; in consequence “mutual promises to arbitrate [must be present to create]
an independent enforceable contract”).
An even more flawed decision — if possible — is Vassilkovska v. Woodfield Nissan,
Inc., 830 N.E.2d 619 (Ill. App. 2005). Here the paperwork for the sale of a used car
included an arbitration agreement, but the court found the seller's promise to
arbitrate to be “an empty one” and “wholly illusory” — because any claim the seller
could possibly have against the buyer was excluded from the clause. The court held
that this “retention of the right to litigate all possible causes of action” against the
buyer invalidated any consideration for the buyer's promise to arbitrate; the court
endorsed the proposition that since the arbitration agreement was “separate and
distinct from the purchase contract entered into by the parties.” It thus “require[d]
its own consideration.” Now why was it “separate and distinct”? The court did not rely
on — or even cite — Prima Paint; apparently what was decisive was that the purchase
contract and arbitration agreement were physically “separate documents.” That,
however, is a perfectly irrelevant factoid.
32) Another term that is frequently found in the cases involves a putative requirement of
“mutuality of obligation”: But this notion of “mutuality” — “that both parties must be
bound or neither is bound” — is either just a clumsy statement of the consideration
requirement, or it is nothing: If an alleged “consideration” takes the form of mutual
promises, then of course the plaintiff's own promise has to be “real” and not
“illusory”; that's a truism; if consideration is alleged to take some other form — e.g., a
sum of money paid in exchange for an option — then “mutuality” becomes simply
irrelevant. See Restatement, Second, Contracts §79 (“if the requirement of
consideration is met, there is no additional requirement of .. ‘mutuality of
obligation’”).
Nevertheless, see Tyson Foods, Inc. v. Archer, 147 S.W.3d 681 (Ark. 2004) (clause
provided that “any dispute or controversy .. shall be submitted to arbitration” but
allowed A, upon B's default, to “also pursue any other remedies at law or equity”;
held, arbitration agreement is unenforceable ; “the terms of the agreement must fix a
real liability upon both parties”; “mutuality of contract means that an obligation
must rest on each party to do .. something in consideration of the act or promise of
the other; thus, neither party is bound unless both are bound”); Cash In A Flash Check
Advance of Arkansas v. Spencer, 74 S.W.2d 600 (Ark. 2002) (“[t]here is no mutuality of
obligation where one party uses an arbitration agreement to shield itself from
litigation, while reserving to itself the ability to pursue relief through the court
system”); Hagedorn v. Veritas Software Corp., 250 F.Supp.2d 857 (S.D.Ohio 2002)
(agreement “provides [the employer] with discretion to seek legal relief to enforce
the agreement while forcing Plaintif to submit any and all employment disputes to
arbitration. As such there is a lack of mutuality of obligation and the contract is
illusory”).
33) See Christopher R. Drahozal, Nonmutual Agreements to Arbitrate, 27 J. Corp. L. 537,
542-547 (2002) (“prior to 1990, a number of courts” refused to enforce nonmutual
arbitration clauses on the basis of the “doctrine of mutuality of obligation,” although
“today, virtually all courts hold” that this does not preclude the enforcement of such
clauses).
16
34) For some cases decided just last year, see, e.g., Raglani v. Ripken Professional
Baseball, 939 F.Supp.2d 517 (D. Md. 2013) (agreement is “entirely one-directional,”
containing “no language suggesting that [the employer] has any responsibility .. . to
enter into binding arbitration for any dispute it might initiate against an employee,”
but applying “only to ‘problems’ that an employee may have with management, not
vice-versa,”; “in light of the Supreme Court's decision in Prima Paint, courts are not
permitted, when assessing the enforceability of an arbitration agreement, to go
beyond the confines of the arbitration agreement itself and into an analysis of the
validity of the larger contract”); Noohi, supran. 2 (citing Prima Paint, “an arbitration
provision is treated as a severable contract that must be supported by adequate
consideration”; “the arbitration provision was unenforceable as a matter of law
because it was not supported by mutual consideration, notwithstanding the fact that
the contract as a whole was supported by adequate consideration”) Caire, supran. 9
(“the parties' obligations need not be identical for an arbitration agreement to be
valid, but there must be some mutual promise”; in the absence of a “mutual promise
to arbitrate” the agreement is “unenforceable for lack of consideration”).
35) To say, with some understatement, that there is no basis for this legal argument is
alternatively to say, in the wonderful Yiddish phrase, that it “didn't climb up and it
didn't fy.” (nisht geshtoygn un nisht gefloygn).
It is not as if, even after all these years, the notion of “separability” is particularly
well-understood. One comes across simple earnest misunderstandings — a matter
perhaps of nothing more than honest incompetence, triggering bemusement and
passed over with compassion. [See, e.g., Alan Rau, “Everything You Really Need to
Know About ‘Separability’ in Seventeen Straightforward Propositions, 14 Amer. Rev. of
Int'l Arb. 1, 14-17 (2003)(“bizarre and inexplicable misreadings”)]. And then, one
comes across what can only be deemed bluff dogmatic refusals even to inquire into
the simplest architecture of our law. [See, e.g., Rau, supra n. xxvi at 211 (“baffling” that
current commentary “does not even glance in the direction of this established
jurisprudence, familiar for almost half a century”).] So, for example, it is really not
acceptable to write (as some have done) that US courts show willingness to entrust
arbitrators with the power to pass on the unconscionability of the arbitration
agreement itself — -while adducing, in support, cases that grant them the power to
pass on the unconscionability of the overall container agreement. [Even the most
superficial acquaintance with Prima Paint would teach that these are completely
different things.]. Nor is it acceptable to blithely conflate the completely alien
concepts of “a forum” and the lex arbitri. [ To agree on a French lex arbitri in a
transaction calling for the application of US (or Freedonian) substantive law is after
all about as banal a phenomenon as one can imagine.]. An unwonted combination of
diffidence and congeniality counsels me against actual citation here. But arbitration
is not for dabblers. And curiosity, coupled with humility, remains a virtue even in
academic life.
36) See text accompanying n. 1 and n. 1supra (category “a.”)
37) See, e.g., Circuit City Stores, Inc. v. Najd, 294 F.3d 1104, 1108 (9th Cir. 2002) (the
employee argued that the arbitration agreement “is not supported by adequate
consideration because [the employer] is not required to submit any of its claims
against employees to arbitration”; however, the employer's “promise to be bound by
the arbitration process itself serves as adequate consideration”); Johnson v. Circuit
City Stores, Inc., 148 F.3d 373, 377-78 (4th Cir. 1998) (“[a]n agreement to be bound by
the arbitration process does not necessarily mean an agreement to submit the
employer's claims to arbitration; rather, it more likely means that the employer
agreed, with respect to any claims the employer has agreed should be submitted to
arbitration, to be bound by the rules of the arbitration procedure and to be bound by
its results”) (emphasis in original); Boatright, supran. 3 at 609 (“the arbitration
provision in the Employment Agreements subjects both parties to the same rules
during arbitration .. and binds both parties equally to the arbitrator's decision
afterwards”).
38) Raasch v. NCR Corp., 254 F. Supp.2d 847 (S.D. Ohio 2003).
39) See generally Rau, supran. 35 at 32-35.
40) See Harbour Assurance Co. (U.K.) Ltd. v. Kansa General Int'l Ins. Co. Ltd., [1993] Q.B. 701
(C.A.) (“or in other words, the inconvenience of having one issue resolved by the Court
and then, contingently on the outcome of that decision, further issues decided by the
arbitrator”; “I would be very slow to attribute to reasonable parties an intention that
there should in any foreseeable eventuality be two sets of proceedings”) (Hofmann
L.J.).
41) Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002).
17
42) See 2 Arthur Corbin, Corbin on Contracts §5.12 (rev. ed.1995) (“One Consideration
Exchanged for Several Promises”; “[w]here an option is part of a larger contract, the
consideration for the contract is also consideration for the option”); Harris v. Green
Tree Financial Corp., 183 F.3d 173, 180 (3d Cir. 1999) (reviewing authority).
Professor Drahozal and the Macneil treatise disapprove of the cases discussed here
on a somewhat different ground — that while Prima Paint proper reaches a “pro-
arbitration result,” cases such as those discussed in notes 31-32supra represent
“adverse discriminatory treatment” of arbitration and are thus preempted by federal
law. Drahozal, supran. 33 at 546 & note 68 (2002); 2 Ian R. Macneil et al., Federal
Arbitration Law (1994) at §§17.4.2; see also Doctor's Associates, Inc. v. Distajo, 66 F.3d
438, 453 (2d Cir. 1995) (“[a] doctrine that required separate consideration for
arbitration clauses might risk running afoul of” the “strong federal policy favoring
arbitration”). I have no particular problem with this analysis, although it seems
simpler and more straightforward merely to repeat one of the pillars of common-law
reasoning — that the proper reach of Prima Paint, precisely like that of any other
case, extends just as far as its rationale extends, and no further.
43) See, e.g., Raasch, supran. 38 (employer “offered valid consideration [for arbitration
agreement] when it permitted [the employee] to remain in its employ (or, stated
differently, did not discharge him”); Boatright, supran. 3 at 609 (“the Employment
Agreements as a whole are supported by adequate consideration, including Plaintifs'
promises to perform work in exchange for Defendant's promise to pay them for that
work”); Conseco Finance Servicing Corp., supran. 21 (“purchase of mobile home; “the
principal consideration sought by [B] — financing and the mobile home — is
sufficient to support [his] ancillary agreement to arbitrate disputes and to except
certain claims by [A] from the arbitration clause”); cf. Willis Flooring, supran. 2
(subcontractor [B] was awarded a contract to install a floor for A; “as one clause in a
larger contract, the option clause is binding to the same extent that the contract as a
whole is binding”; “this was a unitary integrated contract, not a series of independent
agreements”); Torrance v. Aames Funding Corp., 242 F.Supp.2d 862, 872 (D. Ore. 2002)
(“mutuality of obligation exists because defendant agreed to loan money to plaintifs
in exchange for plaintifs” agreement to pay back the loan”; “the requirement of
consideration is met even if one party is more obligated than the other”).
44) Wisconsin Auto Title Loans, Inc., supran. 21, 714 N.W.2d at 164-65.
45) Other traditional-but-still-popular formulations--although probably more restrictive
than current jurisprudence would justify — will describe an “unconscionable”
contract as “one which no man in his senses, not under delusion, would make, on the
one hand, and which no fair and honest man would accept on the other.” E.g.,
Conseco Finance Servicing Corp., supra n. xxi at 342. Or one “when the transaction
affronts the sense of decency without which business is mere predation and the
administration of justice an exercise in bookkeeping,” Gimbel Bros. Inc. v. Swift, 307
N.Y.S.2d 952, 954 (N.Y.C. Civ. Ct. 1970).
46) E.g., Iwen v. U.S. West Direct, 977 P.2d 989, 995 (Mont. 1999); Kinney v. United
Healthcare Services, Inc., 83Cal. Rptr.2d 348, 354 (Cal. App. 1999). The “leading case”
is undoubtedly Armendariz, supran. 2 (“an arbitration agreement imposed in an
adhesive context lacks basic fairness and mutuality if it requires one contracting
party, but not the other, to arbitrate all claims arising out of the same transaction or
occurrence or series of transactions or occurrences”).
47) If the contract contains a background default provision with respect to litigation — as
in the “unilateral arbitration” clauses referred to as category “c,” above — the
designated choice of a judicial forum, being mutual, would presumably survive. But
cf. Fentiman, supran. 8 at 27 (as a result of the Banque Rothschild case, “neither party
could rely on the agreement to found jurisdiction even in the primary court
identified in the clause”).
The one thing that we can be reliably certain about, though, is that if a lack of
“symmetry” is deemed sufficient to render an arbitration clause illegitimate, a court
should not be permitted to create it, by proceeding in the opposite direction — that
is, by rewriting the agreement so as to impose arbitration on A too, against his will. But
see, making this argument, Hans Smit, The Unilateral Arbitration Clause: A
Comparative Analysis, 20 Amer. Rev. of Int'l Arb. 391 (2009) (“the unconscionable
element can be removed by eliminating its discriminatory element [leaving] a clause
giving both parties the right to demand arbitration”).
48) Jean R. Sternlight, Counterpoint: Fixing the Mandatory Arbitration Problem: We Need
the Arbitration Fairness Act of 2009, 16 No. 1 Disp. Resol. Mag. 5 (2009) (“with envelope
stufers, computerized click-through agreements, or just small print, companies can
eliminate ‘little guys” opportunity to litigate, even if the ‘little guys’ did not
knowingly or intelligently agree, and even if they never signed the provision”); see
also Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court's
Preference for Binding Arbitration, 74 Wash. U. L.Q. 637 (1996).
18
49) A recent study by the Consumer Financial Protection Bureau of the use of pre-dispute
arbitration provisions in contracts for consumer financial services (essentially
consumer checking accounts and credit cards), concluded that
• larger banks tend to include arbitration clauses in their checking contracts,
while mid-sized and smaller banks and credit unions do not — so that around
8% of banks — but covering 44% of insured deposits — include such clauses in
their contracts;
• similarly, larger bank issuers of credit cards are more likely to include
arbitration clauses than smaller bank issuers — so that around 17% of credit
card contracts — but covering over 50% of credit card loans outstanding — are
subject to such clauses.
CFPB, Arbitration Study Preliminary Results (Dec. 12, 2013).
On the availability of the “unconscionability” challenge to franchisees, see Ticknor v.
Choice Hotels Int'l, Inc., 265 F.3d 931, 939 (9th Cir. 2001) (franchise agreement “was a
standardized, form agreement that [the franchisee] was forced to accept or reject
without negotiation” and, because of the “one-sided” nature of the obligation to
arbitrate, the arbitration provision was “unenforceable as unconscionable under
Montana law”; the dissent protested that this was in fact a “commercial contract
between sophisticated business organizations,” and that the franchisee was an
”experienced and sophisticated motel franchise operator.”); Bolter v. Superior Court,
87 Cal.App.4th 900 (2001) (contract between a “large wealthy international franchiser”
and franchisee with “limited financial means, owning small ‘one-man operated’ Dry-
Chem franchises”). Cases are collected in 1 E. Allan Farnsworth, Farnsworth on
Contracts 588-91 (3d ed. 2004). See id. at 590 (“courts have generally been chary
about using the doctrine of unconscionability to protect merchants and similar
professionals, declining to apply the doctrine in favor of sophisticate d
corporations”).
50) Cf. McCoy v. Superior Court, 104 Cal. Rptr.2d 504 (Cal. App. 2001). In Armendariz,
supran. 2, the court accepted that that the employees were “lower level supervisory
employees, without the sort of access to proprietary information or control over
corporate finances that might lead to an employer suit against them” — which would
explain why the drafting party “did not [even] foresee the possibility of any dispute
arising from employment that was not initiated by the employee.” however, it held
nevertheless that this “provides no reason for categorically exempting employee
claims, however rare, from mandatory arbitration.” 6 P.3d at 694.
51) The highly abstract nature of this “onesidedness” has led some U.S. jurisdictions
down some murky paths indeed. In one Ninth Circuit case, the court found
“unconscionable” a clause that did not require an employer to submit to arbitration
any “claims it might hypothetically bring against employees.” The court conceded
that the possibility of any such claim against an employee was indeed extremely
“remote” — but for some reason, this seemed to make things worse, not better: “[T]he
lucre of the arbitration agreement flows one way: the employee relinquishes rights
while the employer generally reaps the benefits of arbitrating its employment
disputes,” Ingle, supran. 1, 328 F.3d at 1173-1174. But in the same jurisdiction, clauses
that are drafted as entirely mutual and even-handed — that are drafted so as to apply
to both parties — are sometimes criticized on the ground that — as a practical matter
— only the drafter is likely to have a claim! Ting v. AT&T, 319 F.3d 1126, 1150 & n. 14
(9th Cir.2003) (the argument that the clause is facially mutual “ignores the obvious
practica implications of the arbitration provision” because credit card companies”
typically do not sue their customers”; “that the company may do so is not
dispositive”). Sometimes you just can't win.
Another striking — although so obvious as perhaps to seem tendentious — example of
the point made in the text, is suggested by Pittalis v. Sherefettin, [1986] 2 All E.R. 227
(C.A.) Here a rent review clause provided that the lessor was to give his assessment of
the “open market rental value” to the lessee, and that the lessee, if he disagreed, had
the right to submit the matter to arbitration. The lessee alone had the right to refer
the determination of the market rent to arbitration. This might perhaps seem
asymmetrical and unilateral — but that of course is of absolutely no significance on
the facts of the case, given that the lessor was protected by having the rental value
proposed by him automatically applicable unless successfully challenged. See Carol
Mulcahy, Unilateral Arbitration Agreements: A Contradiction in Terms?, [2004]
Arbitration 172, 175 (Aug. 2004) (“no commercial need for there to be a bilateral right
to arbitration since a dispute within the scope of the arbitration clause only arose if
the party with the right to arbitrate chose not to accept a particular position put
forward by the other party”).
52) See, e.g., Donald Lee Rome, “Preserving Rights — and ADR — by Knowing When to Use a
“Carve Out,'” Alternatives to the High Cost Litigation Jan. 1998, at 7 Stephen Ware,
Paying the Price of Progress: Judicial Regulation of Consumer Arbitration Agreements,
2001 J. Disp. Resol. 89, 97-98.
19
53) A tabulation of “common exceptions to arbitration,” compiled from a sample of
franchise agreements on file with state regulatory agencies, appears in Christopher R.
Drahozal, “Unfair” Arbitration Clauses, 2001 U. ILL. L. REV. 695, 762-64. (the “most
common exception was for trademark disputes, with 68% of all arbitration clauses
permitting the franchisor to go to court to protect its trademark”; in 44% of the cases
in the sample there was an exception for equitable relief sought by the franchisor).
54) E.g., Hagedorn, supran. 32 (“in the event of any violation of this Agreement .. [A] “shall
have the right to an immediate injunction”); Navistar Int'l Corp. v. Fernandez, 2011 Ill.
App. 2nd 100268-U at ¶ 69 (mutual agreement to arbitrate “except” that Employer
has the right to “injunctive relief from any court of competent jurisdiction to restrain
the violation” of Employee's agreement
• not to divulge or appropriate “any secret or confidential propriety information”;
• not to engage in a “competitive “ “line of business” for 12 months following
termination, or
• not to recruit or solicit any of As employees or customers;
held, any “disagreements over the interpretation” of the agreement “will be
arbitrated unless they fit into” this “carve out of the general arbitration clause”).
Cf. Mercuro v. The Superior Court of Los Angeles County, 116 Cal. Rptr. 2d 671 (Cal. App.
2002) (arbitration clause specifically excluded “claims for injunctive and/or other
equitable relief for intellectual property violations, unfair competition and/or the
use and/or unauthorized disclosure of trade secrets or confidential information”);
Lara v. Onsite Health, Inc., 896 F.Supp.2d 831 (N.D. Cal. 2012) (“Nothing in this
Agreement shall prevent either you or the Company from obtaining injunctive relief
in court to prevent irreparable harm pending the conclusion of any such
arbitration”).
55) E.g., Seymour v. Gloria Jean's Coffee Bean Franchising Corp., 732 F.Supp. 988 (D. Minn.
1990).
56) E.g., Pridgen v. Green Tree Financial Serving Corp., 88 F.Supp.2d 655 (S.D. Miss. 2000)
(“notwithstanding” a mutual agreement to arbitrate, consumer finance company
“retains an option to use judicial or non-judicial relief to enforce a security
agreement relating to the Manufactured home secured in a transaction underlying
this arbitration agreement, to enforce the monetary obligation secured by the
Manufactured home or to foreclose on the Manufactured Home”).
57) E.g., Ticknor, supran. 49 (“except for our claims against you for indemnification,
actions for collection of moneys owed us under this Agreement, or actions seeking to
enjoin you from using the marks in violation of this Agreement”); Wisconsin Auto Title
Loans, Inc., supran. 21 (“save and except the Lender's right to enforce the Borrower's
payment obligations in the event of default, by judicial or other process”);Taylor v.
Butler, 142 S.W.3d 277 (Tenn. 2004) (“Dealer, however, may pursue recovery of the
vehicle under the Tennessee Uniform Commercial Code and Collection of Debt due
by state court action”); Arnold v. United Companies Lending Corp., 511 S.E.2d 854 (W.
Va. 1998) (agreement to arbitrate “shall not apply with respect to either (i) the
Lender's right .. to submit and to pursue in a court of law any actions related to the
collection of the debt; [or] (ii) foreclosure proceedings .., proceedings pursuant to
which Lender seeks a deficiency judgment, or any comparable procedures allowed
under applicable law pursuant to which a lien holder may acquire title to the
Property which is security for this loan and any related personal property .. upon a
default by the Borrower under the mortgage loan documents”); Guzman v. AIMCO
River Club, LLC, AAA Case No. 18-526-Y-000120-13 (Dec. 4, 2013) (“excluded claims”
that are “intended not to be arbitrable” include claims for “eviction, to recover
possession, and to collect past due rent or other amounts due under the lease”);
58) See, e.g., Torrance, supran. 43. Here the clause provided that “neither Borrower nor
Lender can require the other to arbitrate foreclosure proceedings [nor] any Claim
where Lender seeks damages or other relief because of Borrower's default.” There is
of course a sharp distinction here between the treatment of A's claims and the
treatment of B's claims — but it is not strictly an “option” clause given that — with
respect the assertion of his own claims — A is restricted to the judicial forum. See
also Salley v. Option One Mortgage Corp., 925 A.2d 115 (Pa. 2007) (“any judicial
foreclosure proceeding against any real or personal property that serves as collateral
for the loan” or “provisional or ancillary remedies with respect to the loan or any
collateral for the loan such as injunctive relief, sequestration, attachment, replevin
or garnishment,” “are not disputes subject to this Agreement”).
20
59) Another illustration of the principle — but a curious case — is Carter v. SSC Odin
Operating Co., LLC, 927 N.E.2d 1207 (Ill. 2010). Here the legal representative of a
nursing home resident filed a suit for wrongful death against the home; a “Health
Care Arbitration Agreement” with the resident excluded from arbitration “any dispute
where the amount in controversy is less than $200,000.” The court merely held that
the “antiwaiver” policy found in state nursing-home legislation was preempted by
FAA, and did not go on to address any other questions going to the validity of the
agreement. The facial equality of the clause hides the apparent explanation for this
drafting choice, which presumably proceeds on the assumption that such sizable
claims would be overwhelmingly likely to be asserted by the resident rather than by
the home.
Here's a nice analogy: A contractual provision in an uninsured motorist policy may
grant to “either party” the right to reject an arbitration award for an amount in excess
of the statutory minimum coverage (which may be as little as $25,000). The fact that
this too may appear facially neutral should not blind us to the structural imbalance
between the parties. Although the concern is sometimes left unarticulated, an award
in excess of the statutory minimum is far more likely to offend the insurer than the
insured; it is principally the former, then, who benefits from the right to reject such
awards. With regard to the insured who has no equivalent right to reject a smaller
award, the clause may appear in operation to be “oppressive” and “unconscionable.”
So holding is Schmidt v. Midwest v. Family Mutual Ins. Co., 426 N.W.2d 870
(Minn.1988)) (held, insurer had no right to a new trial; the trial de novo provision was
unenforceable). See also Saika v. Gold, 56 Cal. Rptr.2nd 922 (Cal. App. 1996) (in
contract between doctor and patient, either party had the right to disregard the
arbitral award and demand a trial de novo where the award exceeded $25,000; held,
“the cases where the trial de novo clause could possibly benefit the patient are going
to be rare indeed,” “making arbitration virtually illusory as far as one side is
concerned”); Sanchez v. Valencia Holding Co., LLC, 135 Cal. Rptr.3d 19 (Cal. App. 2012)
(“either party may request a new arbitration .. before a three arbitrator panel” if the
award exceeds $100,000 or if it includes injunctive relief; held, the clause, “though
seemingly neutral, has the effect of benefiting the party with superior bargaining
power, here, the car dealer”; “there is no justification for the $100,000 threshold,
other than to relieve the car dealer of liability it deems excessive,” and “a truly
bilateral clause would allow a buyer to appeal an award below $100,000”).
60) E.g., Senior Services of Palm Beach LLC v. ABCSP Inc., 2012 WL 2054971 (S.D. Fla.) (“If we
shall desire to seek specific performance or other extraordinary relief including, but
not limited to, injunctive relief under this Agreement .. any such action shall not be
subject to arbitration and we shall have the right to bring such action”); Panoramic
Stock Images, Ltd. v. John Wiley & Sons, Inc., 963 F.Supp.2d 842 (N.D. Ill. 2013)
(“notwithstanding” the mutual agreement to arbitrate, [A] shall have the right to
commence and prosecute any legal or equitable action or proceedings before any
court of competent jurisdiction to obtain injunctive or other relief against Licensee in
the event that in the onion of [A] such action is necessary or desirable”); The Money
Place, supran. 31 (payday loans; “all disputes,” including “all claims asserted by us
against you” and “all claims asserted by you,” “shall be resolved by binding
arbitration”; however, “if [your] check is returned to us from your financial institution
due to insufficient funds, closed account, or a stop payment order, we have the right
to all civil remedies allowed by law to collect the Check,” including “court costs and
reasonable attorney fees”).
61) Taylor, supran. 57 at 286; see also Ware, supran. 53 at 97 (“carve-outs” for collection
actions and for actions to repossess or foreclose on collateral “encompass nearly all
the claims lenders assert against consumer-borrowers”); Mercuro, supran. 55 (“the
agreement compelled arbitration of the claims employees were most likely to bring
against the company, while exempting from arbitration the claims the company was
most likely to bring against its employees”); Lara, supran. 54 at 843-44 (since it is “far
more likely” that “employers will invoke the court's equitable jurisdiction, in order to
stop employee competition or to protect intellectual property,” than the reverse, the
clause although facially equal is “substantively unconscionable”).
62) See Drahozal, supran. 33 at 551; Armendariz, supran. 2 at 691-92 (requiring a
“legitimate commercial need” or a “reasonable justification for this “lack of
mutuality”).
21
63) See Jonathan Solish, Turning Your Arbitration Instrument into a Stradivarius, 11:4
Franchise L.J. 135 (Spring 1992) (“where immediate ex parte relief is called for, most
parties prefer the formal rules of the court system to extemporizing conference calls
with three arbitrators and opposing counsel”); cf. Tyson Foods, Inc., supran. 32, 147
S.W.3d at 689 (contractual language “allows [A] to step in to protect its property when
the animals are in peril,” something “which would be outside the realm of an
arbitrator's power”) (Hannah, J., dissenting). See generally Alan Scott Rau, Provisional
Relief in Arbitration: How Things Stand in the United States, 22(1) Journal of
International Arbitration 1 (2005).
Cf. Hagedorn, supran. 32. Here A sought to stay litigation against it in favor of
arbitration, but B successfully argued that the arbitration clause “fails to provide for
mutuality of obligation” and was thus unenforceable. The arbitration clause gave A
“the right to an immediate injunction” “in the event of any violation of this
Agreement,” and A argued “that it needs immediate access to injunctive relief from
the courts in order to protect its intellectual property rights” — but this, it claimed,
was not inconsistent with the ultimate arbitration of B's claims on the merits, and A
conceded that it would “ultimately” be bound to submit to the arbitral process. The
court dismissed this as being “offered post hoc in an attempt to salvage an
agreement that lacks mutuality.” No, I don't understand that either.
64) Eileen Davis, “ADR Well-Suited to Handle Franchise Cases,” 10:9 Alternatives to the
High Cost of Litigation (Sept. 1991), at 131.
65) See Conseco Finance Servicing Corp., supran. 21 at 343 (“the claims the agreement
permits [A] to litigate — basically claims asserting its security interest — may be
litigated expeditiously. Such claims have come to be heavily regulated by statute,
allowing for streamlined procedures and efective protections for both sides”); Ware,
supran. 52 at 97-98 (since collection actions “nearly always involve small amounts of
money” and “often result in default judgments,” collections practice is in fact “an
assembly line in which large numbers of small claims are processed at a low cost per
claim”).
Cf. Delta Funding Corp., supran. 21 at 115 (“the foreclosure of mortgages is a uniquely
judicial process”); Lackey v. Green Tree Financial Corp., 498 S.E.2d 898, 905 (S.C. App.
1998) (“judicial remedies for the recovery of property, such as the replevin action,
and the foreclosure action, provide specific procedures for protection of collateral
and the parties during the pendency of the proceedings”; “this clause does bear a
reasonable relationship to the business risks”).
The “carve out” in Ticknor, supran. 49, was somewhat different, excluding from
arbitration “claims against [B] for indemnification,” as well as “actions for collection
of money owed [by B],” and actions seeking to enjoin B from using A's trademarks. The
dissenting judge pointed out such an exclusion “makes sense” because
indemnification claims “invariably arise out of third-party claims which are often
already in litigation,” and in consequence the “convenient remedy” is to bring a
third-party claim for indemnification in the same proceeding. 265 F.3d at 943 fn. 6
(Tashima, J., dissenting).
66) Comb v. Paypal, Inc., 218 F.Supp.2d 1165, 1174 (N.D. Cal. 2002).
67) Armendariz, supran. 2, 6 P.3d at 694.
68) Taylor, supran. 57, 142 S.W.3d at 286 (italics in original).
69) In a lawsuit against the Contractor, Owner would have been able to join a claim “in
the alternative” against the Architect; alternatively the Contractor as defendant
would have been able to “implead” the Architect as a third party defendant. See
generally the discussion in Alan Scott Rau et al., Processes of Dispute Resolution: The
Role of Lawyers 895-906 (4th 2006).
70) See Garden Grove Community Church v. Pittsburgh-Des Moines Steel Co., 191 Cal. Rptr.
15 (1983). (if the Owner's dispute with the Architect cannot be addressed in
consolidated proceedings, an order staying arbitration would be “proper because
the [Owner] has not contracted to arbitrate separately with [the Contractor] under
such circumstances and it would be manifestly unjust to force [him] to do so”;
however, in this case the Owner had entered into arbitration agreements with both
defendants, and state law permitted the court to consolidate the two proceedings).
22
71) Flores v. Transamerica Homefirst, Inc., 113 Cal. Rptr.2d 376 (Cal. App. 2002); See also
Plaskett v. Bechtel Int'l, Inc., 243 F.Supp.2d 334, 341-342 (D. V.I. 2003) (the arbitration
clause as interpreted by the court bound both parties to arbitrate their respective
claims; however, the further requirement that the employee notify the employer of
any claims within 30 days was held “unconscionable” because it “unreasonably
favors” the employer and the employee “obtains absolutely no benefit from this
provision”).
Cf. Independence County v. City of Clarksville, 386 S.W.3d 395 (Ark. 2012). Here too
there was a mutual agreement to arbitrate, but the agreement went on to provide
that “under no circumstances shall an arbitration panel be vested with authority or
jurisdiction to determine or add monetary damages (by way of setoff, counterclaim,
directly or otherwise) or any other legal relief against the [defendant] or its officers,
agents, or employees.” The court found that “the arbitration agreement suffers from
[a] lack of mutuality and is unenforceable”: “Mutuality requires that the terms of the
agreement impose real liability upon both parties”; however, “this limitation of
jurisdiction precludes the arbitration panel from enforcing defendant's primary
obligation under the [contract], which is to purchase the electrical power supplied by
[plaintif]. Thus, on its face, the provision treats the parties differently, and this
disparate treatment results in a lack of mutuality.”
Now clauses like the one in Independence County should probably be read as
entrusting the validity and meaning of this remedial limitation to an arbitrator
rather than to a court; see Rau, supran. 35, 14 Am. Rev. Int'l Arb. at 64-65 (a limitation
on remedies does not implicate “arbitrability,” but instead should be “treated as one
more claim or dispute within the scope of the arbitration clause”; “I cannot bring
myself to believe that contracting parties are likely to perceive any distinction in
meaning whatever” between a clause phrased in terms of the arbitrator's “power or
authority” and one phrased in terms of “no award” or “no liability”). See also
Restatement, Third, The U.S. Law of International Commercial Arbitration §4-14 cmt.
c (Tentative Draft No. 2, April 3, 2012) (if the arbitral tribunal has purported to
“exercise a power that the arbitration agreement expressly denies to the tribunal,”
the Restatement will nevertheless “presume” — “as a default interpretation of such
[a] contractual provision” — “that such a provision is a contractual limitation on
remedies but not a specific restriction on the tribunal's authority”; “courts reject
attempts by parties to characterize a merits issue as a scope issue in an attempt to
obtain court review”). So if the overall agreement is somehow defective because one
party's promises were “illusory” — or if the clause should be read instead as
preserving the plaintiff's right at least to an equitable remedy — this is, all in all, a
call for the arbitrator to make. But whoever the proper decisionmaker is to be, the
notion that the parties' remedial rights must be congruent with each other is strange
learning indeed.
I fear though that much well-meaning commentary goes even further and appears to
suggest that merely to draft in one's own “self interest” is inherently “troubling.” Cf.
David Horton, Arbitration As Delegation, 86 N.Y.U. L. Rev. 437, 480-81 (2011) (“ the FAA
as interpreted by the Court confers broad discretion upon private parties to feather
their own nests”; delegation to private decision-makers is “troubling” if it allows “the
delegate to further its own self-interest (rather than the common good)”)[sic].
72) Armendariz, supran. 2, 99 Cal. Rptr.2d at 770 (“the doctrine of unconscionability limits
the extent to which a stronger party may, through a contract of adhesion, impose the
arbitration forum on the weaker party without accepting that forum for itself”).
73) See the discussion in Drahozal, supran. 53 at 744-50.
74) Among the commentators nevertheless treating this as self-evident, and therefore
dispensing with any need for rationalization, is Smit, supran. 47 at 405) (the rights
granted by an asymmetrical arbitration clause are “so wholly one-sided and unfair
that the courts should feel no reluctance in finding it unacceptable”).
75) See Drahozal, supranote 33 at 561 (“If the business requires arbitration of all claims —
which is a very plausible response — consumers may actually be worse of than under
the non-mutual arbitration clause. If consumers prefer to litigate rather than
arbitrate the business's claims, they would have preferred the non-mutual clause.”).
76) See Alan Scott Rau, Integrity in Private Judging, 38 S. Tex. L. Rev. 485, 511-12. Cf. id. at
509-511: Here I discuss, with approval, cases in which the appointment of “a single
arbitrator so closely allied with one of the parties as to be presumed partial to him”
has been upheld; e.g., Westinghouse Elec. Corp. v. N.Y.C. Transit Auth., 623 N.E.2d 531
(N.Y. 1993). In such cases, by the way, it can be presumed that in addition to his
eagerness to get the job, the party now challenging the arbitration had originally
built into his bid a premium to compensate himself for the risk of subjecting himself
to a biased arbitrator — and that he is certainly not offering to give it back now as
the price of avoiding the consequences).
77) Uniform Commercial Code §2-302 cmt. 1.
78) See, e.g., Alan Scott Rau, “Does State Arbitration Law Matter at All?,” in Thomas E.
Carbonneau (ed.), American Arbitration Association Handbook on Commercial
Arbitration 415 (2006).
79) See ¶ 5 supra.
23
80) In the universe of arbitration cases “unconscionability” has become the inevitable
doctrinal weapon of choice to stave of an obligation to arbitrate; see Aaron-Andrew
Bruhl, The Unconscionability Game: Strategic Judging and the Evolution of Federal
Arbitration Law, 83 N.Y.U. L. Rev. 1420, 1440-41 (2008) (“where unconscionability
challenges once appeared in less than 1% of all arbitration-related cases, more
recently they have appeared in 15-20% of all cases involving arbitration”). And
conversely, in the entire universe of “uncon-scionability” cases, the overwhelming
majority of challenges these days arise as defenses to arbitration; see Charles L.
Knapp, Blowing the Whistle on Mandatory Arbitration: Unconscionability as a
Signaling Device, 46 San Diego L. Rev. 609, 622 (2009)(the “total number of reported
unconscionability decisions” increased “nearly tenfold” between 1990 and 2008, and
“those involving arbitration clauses accounted for the lion's share of the overall
increase”); Stephen A. Broome, An Unconscionable Application of the
Unconscionability Doctrine: How the California Courts are Circumventing the Federal
Arbitration Act, 3 Hastings Bus. L.J. 39 (2006)((reviewing two decades of California
appellate cases; of 160 cases in which a contractual provision was challenged for
“unconscionability,” 114 (or over 70%) involved challenges to an arbitration
agreement).
81) Professor Bruhl talks in this connection of the “unconscionability game,” in which the
state and federal courts are the players, and which results from the tension between
strongly pro-arbitration federal courts, especially the United States Supreme Court,
and courts that are “more leery of arbitration, mostly some state courts.” Of course
federal law is paramount, but the difficulty “for a reviewing court to tell if a decision
invalidating an agreement on unconscionability grounds” is truly the same
“evenhanded” analysis that “it applies to other contracts” — the minimum standard
for preemption — “creates opportunities for lower courts to misapply, or perhaps
even manipulate, state contract doctrines so as to nullify arbitration agreements
while simultaneously frustrating the ability of reviewing courts to reverse.” Bruhl,
supran. 80 at 1421-22; see also id. at 1443 (“the opportunity for furtive manipulation
and evasion of review”).
82) Id. at 1461.
83) The ability of state courts to “win” in this interactive game might be thought to have
been sharply curtailed by the Court's recent counter-move in Concepcion — where
California courts were denied the power to hold “unconscionable” the increasingly
common provisions in adhesion contracts barring classwide proceedings and
requiring arbitration to proceed on a bilateral basis. AT&T Mobility LLC v.
Concepcion, 131 S. Ct. 1740 (2011). But the principle represented by Concepcion will
remain quite cabined, given that
• the whole context of class relief seems sui generis — “the specter of class relief
in arbitration [being] just about the only feature of the arbitration process that
has been anathema to the business community,” and the “avoidance of class
relief” being in recent Court decisions “the engine driving the machine”; and
that
• the California rule barring waiver of class actions had been drafted broadly and
prophylactically — to the point indeed that it read almost like a legislative
decree; cases applying it have seemed to conflate the “unconscionability”
question with broader social concerns raised by class waivers, thereby avoiding
the usual steep hurdle of having to demonsrate indecent conduct towards a
particular plaintiff.
See Alan Scott Rau, Arbitral Power and the Limits of Contract: The New Trilogy, 22
Amer. Rev. of Int'l Arb. 435, 485, 544-46 (2011).
A more effective counter-move by the Court may instead be represented by the
contemporaneous Rent-A-Center case: Here a general “delegation” clause in the
parties' agreement granted the arbitrator the “exclusive authority to resolve any
dispute relating to the .. enforceability .. of this Agreement including, but not limited
to any claim that all or any part of this Agreement is void or voidable”; this was
construed as a grant of “final” decisionmaking power (final of course simply in the
sense that any arbitral award on the merits is “final”) — to the arbitral tribunal to
determine the very “unconscionability ” of the arbitration clause itself. Rent-A-Center,
West Inc. v. Jackson, 561 U.S. 63 (2010). By party agreement, then — and assuming a
“real,” contractually valid “delegation” — state courts can be denied much of their
traditional policing function. See infra ¶ 27;see the lengthy discussion of Rent-A-
Center in Rau, Arbitral Power and the Limits of Contract, supra, at 488-523.
84) See Kinney, supranote 1 (“the party who is required to submit his or her claims to
arbitration foregoes the right, otherwise guaranteed by the federal and state
Constitutions, to have those claims tried before a jury”; however, “by contrast, the
party requiring the other to waive these rights retains all of the benefits and
protections the right to a judicial forum provides”); Armendariz, supran. 2, 6 P.3d at
692 (“given the disadvantages that may exist for plaintiffs arbitrating disputes, it is
unfairly one-sided for an employer with superior bargaining power to impose
arbitration on the employee as plaintiff but not to accept such imitations when it
seeks to prosecute a claim against the employee”).
24
85) I suspect though that few courts these days would be as ingenuous, or obtuse, to
write, as did the bankruptcy judge in In re Knepp:
Ask any reasonable man on the street, i.e. a consumer, if he thinks it is fair
that he is barred from access to the courts when he has a claim based on a
form contract that contains an arbitration clause and he will respond with
a resounding “No!” .. The reality that the average consumer frequently
loses his/her constitutional rights and right of access to the court when
he/she buys a car, household appliance, insurance policy, receives
medical attention or gets a job rises as a putrid odor which is
overwhelming to the body politic.
In re Knepp, 229 B.R. 821 (N.D. Ala. 1999). (held, “rais[ing] this issue sua sponte,”
arbitration clause is unconscionable; “consumers lack a meaningful choice today,
particularly when they are purchasing a motor vehicle,” and the clause requires the
consumer “to give up access to the courts, forsake his rights and constitutional
protections to participate in arbitration which requires the payment of fees”).
A similar attitude is exemplified by Professor Sternlight, who urges that even
assuming binding arbitration “is preferable to litigation for society as a whole,” “it is
not necessarily fair or just to force a loss on certain individuals” just to achieve such
benefits:
It could be that society as a whole would be better of if a particularly
nasty individual were gagged, locked up, or even thrown of a cliff. Still,
most would argue that the individual's rights of free speech, liberty, and
life make it wrong to harm the individual, even if society as a whole would
gain. Applying this same reasoning, it may be wrong to force a detrimental
system of justice on consumers merely to obtain a gain for society as a
whole.. . Indeed, our Bill of Rights and much of our law support the
proposition that it is wrong to take from one person merely to secure a
greater gain for others.
This tour de force of cost/benefit analysis may be what passes for reasoned argument
in the academy these days. Sternlight, Panacea or Corporate Tool?, supran. 48 at 696
& fn. 333.
86) Metro East Center for Conditioning and Health v. Qwest Communications Int'l, Inc.,
294 F.3d 924, 927 (7th Cir. 2002).
87) See the discussion in Rau et al., supran. 69 at 694-706, 819-832. See also Subsidiary
Company of Franchiser v. Franchisee, Higher Regional Court of Thuringia, XXXVII Yrbk.
Comm. Arb. 220 (13 January 2011) (refusing to enforce a US award because there was a
“considerable disparity” in the arbitration agreement, resulting in a “preferential
treatment” “unilaterally given” to one party — but the “gross disparity” here
consisted in the fact that the agreement provided for a New York venue for the
hearing — which would have caused the defendant, “a small entrepreneur and start-
up operating in Germany,” “a great expenditure of time and money”).
88) See Willis Flooring, supra n. 3 (“Arbitration is not so clearly more or less fair than
litigation that it is unconscionable to give one party the right of forum selection”);
Conseco Finance Servicing Corp., supran. 21 (If arbitration will afford [B] essentially
the same opportunity to present [its claims] as would litigation, there is no reason to
believe that the agreement limiting [him] to arbitration is unfair”; however, “should it
transpire .. that the unspecified details of [A]'s arbitration procedure prevent or
unfairly hinder [B] from meaningfully presenting [its] case, the arbitration clause
consigning [him] to that procedure would appear in a different light”).
89) Cf. Marie-Elodie Ancel et al., “Reflections on one-sided jurisdiction clauses in
international litigation,” presentation at the Spring Conference of the ICC Institute of
World Business, 23 May 2014, at fn. 44.
90) THI of New Mexico v. Patton, 741 F.3d 1162 (10th Cir. 2014) (state courts had ruled that
an agreement permitting a nursing home “to litigate its most likely claims against the
resident — guardianship, collection, and eviction claims — while requiring
arbitration of the resident's most likely claims against the nursing home — personal-
injury claims and the like” — was unconscionable; held, state rule was preempted by
the federal law of arbitration; a “court may not invalidate an arbitration agreement
on the ground that arbitration is an inferior means of dispute resolution”).
I think the point made here is nicely illustrated by the following example — which
operates as a reductio ad absurdum of the argument of “unfairness through lack of
symmetry”: Imagine an arbitration clause in a contract of sale that provides for
arbitration at the Ukrainian Chamber of Commerce — but which permits the Russian
buyer, should he have a claim, to initiate arbitration instead at the Russian Chamber
of Commerce. See Anton Asoskov, “Unilateral Option Clauses: From Russia with
Prejudice,” presentation at the Spring Conference of the ICC Institute of World
Business, 23 May 2014.
25
91) See Drahozal, supran. 33 at 564 (so long as any unfairness in the arbitral process “is
pro-business, rather than pro-respondent, a mutuality requirement will not make the
process more fair, and may actually make it less fair, than under a nonmutual
arbitration clause”).
92) E.g., Horton, supran. 71 at 466 (“dizzying sleight of hand”); David S. Schwartz, Claim-
Suppressing Arbitration: The New Rules, 87 Ind. L.J. 239 (2012), at 246 (“breathtaking”),
263 (“bizarre”).
93) See Rau, supran.83 at 523 fn. 295 (“As Conrad's Marlow was advised, ‘du calme.’”).
94) See Rent-A-Center, West Inc., supran. 83; see also Bruhl, supran. 80 at 1470-82
(“federalization of the allocation question is the ultimate trump card in the
unconscionability game. There is no need to question hard-to-scrutinize state law
rulings if one takes away, as a matter of federal law, the authority to issue them in
the first place”).
On the proper decision-maker for the question of the “unconscionability” of the
arbitration clause following Rent-A-Center, see Senior Services of Palm Beach LLC,
supran. 60 (relying on the AAA rules, the court granted a motion to dismiss the action
“to allow the arbitrator to determine whether the arbitration clause is
unconscionable”). But cf. Peleg, supran. 10, in which the court refused to send the
question of “unconscionability” to the arbitrators because it somehow managed to
find an “ambiguity” in the clause: In addition to a now-common “delegation'
provision by which the parties agreed to arbitrate “any dispute concerning this
Agreement” or “any claim that all or part of this Agreement is void or voidable” —
there was a boiler-plate “severability” provision referring to the possibility that “a
court [might] determine that this Agreement in its entirety shall not be enforced.”
Such a holding is precisely what one might expect from a California state court: So,
draftsman, just go back and try again.
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Chapter 2 "Asymmetrical Arbitration Clauses"

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Chapter 2 "Asymmetrical Arbitration Clauses"

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KluwerArbitration

Document information Chapter 2: “Asymmetrical Arbitration Clauses” – The

Jurisdiction 1 The Nature of the Problem

2 Asymmetrical Clauses and “Consideration”

3 Asymmetrical Clauses and “Unconscionability”

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