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