Rejecting Claim of Unconscionability to Avoid Arbitration

Rejecting Claim of Unconscionability to Avoid Arbitration

District Court Reaffirms New York as a Center for International Commerce and Standardized Contracting

By Louis M. Solomon

 

Where would an international practitioner or law firm or even a purely domestic corporate lawyer or go for a recent, succinct, lucid articulation of New York law on the subject of the circumstances under which a party can invoke the ground of unconscionability to avoid a dispute resolution provision in a contract calling for arbitration? To Arizona, of course.

Tierra Right of Way Services, Ltd. v. Abengoa Solar Inc., et al., No. CV-11-00323-PHX-GMS (D. Ariz. June 2011) [enhanced version available to lexis.com subscribers], litigated a dispute over the alleged failure by Agengoa to provide critical information to Tierra so that Tierra could provide right-of-way acquisition services supporting Abengoa's construction of a solar electrical generation plant. The contract contained a broad arbitration clause - all claims "arising out of, relating to, or in connection with" the contract. The procedural posture was Abengoa's motion to dismiss or stay in favor of arbitration. The District Court granted the motion to stay, enforced the arbitration clause as written, and rejected the attempt to modify the clause based on alleged unconscionability under New York law.

The decision elucidates New York law in the following ways that might be useful to international practice:

First, the District Court recognized under 9 U.S.C. § 2 that arbitration agreements 'shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract". The issue of unconscionability is governed by state law, so the Court looked to governing state law. The parties to the contract elected New York law.

Second, the District Court observed the Supreme Court's recent decision in AT&T Mobility LLC v. Conception [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], which we discussed in the context of the FAA preempting state law prohibitions on arbitration clause preclusion of class-wide arbitrations, noted that the savings clause of 9 U.S.C. § 2 "permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue". New York law did not single out arbitration contracts for any special treatment concerning the law of unconscionability.

Third, the Court ruled that, under New York law - absent extreme cases - both "procedural unconscionability" and "substantive unconscionability" had to be proven. New York focuses on whether the parties to the contract had a "meaningful choice" in agreeing to the provision under attack.  Here, the Court found, the parties were not so unfairly matched, nor the result of their negotiations so uneven, to support an inference of lack of meaningful choice.

Fourth, Tierra asserted that the very application of New York law was a ground for finding unconscionability. It is true, said the District Court that "New York has little to do with the activities of the parties under the Agreement". No matter, said the Court, given New York's "reputation as a center for international commerce". The Court cited an analysis in Eisenberg and Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies, 20 Cardozo L. Rev. 1475 (2009), that "almost half of all commercial contracts in the survey chose New York law".  Concluded the District Court:

there is a reasonable basis for the parties to designate New York law as applicable. Abengoa cites numerous authorities suggesting that many contracting parties select New York law due to that state's reputation as an international commercial center or to standardize contracting when the parties do business nationwide.

Fifth, and interestingly, the arbitration clause at issue contained a flat prohibition on discovery, including document production.  Even that, the Court found, was not enough on which to base a finding of unconscionability.  The Court twice noted that the provision was bilateral and applied to each litigant equally. The Court also said, an "agreement between two corporate parties to decrease expected litigation costs is not unconscionable".

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