law-unconscionability | challenging validity and enforceability of contracts | contractual waiver and waiver by
litigation conduct | arbitration | forum selection clauses |
UNCONSCIONABLE CONTRACT OR CONDUCT
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)
A consumer may bring a DTPA cause of action for either a violation of section 17.46(b) of the DTPA (the so-
called “laundry list”) relied on by the consumer to the consumer’s detriment or for an unconscionable action or
course of action if the violation or action “constitute[s] a producing cause of economic damages or damages for
mental anguish.” TEX. BUS. & COM. CODE ANN. § 17.50(a)(1), (3) (West 2011). The “laundry list” prohibits
various types of misrepresentations. See id. § 17.46(b). The DTPA also defines an unconscionable action or
course of actions as “an act or practice which, to a consumer’s detriment, takes advantage of the lack of
knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Id. § 17.45(5).
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)
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