In a recent decision by the California Appellate Court, Second District, the Court analyzed the validity of arbitration agreements and severance clauses. Specifically, the Court analyzed when arbitration agreement limiting depositions in discovery and whether or not an unconscionable arbitration agreement can be severed from the contract. The Court determined that the arbitration agreement did not violate the Plaintiff’s right to discovery, and if the agreement had been unconscionable, it could have been severed from the contract.
Arbitration Analysis
Arbitration agreements must be conscionable both procedurally and substantively. Procedural issues focus on if the agreement oppresses one party or causes unfair surprise. Substantive issues determine if the terms of the agreement are too harsh or one-sided. The two items interrelate and balance each other. If a court determines little procedural violations, it must then find significant substantive violations and vice versa.
Procedural unconscionability generally looks to whether one party lacked significant bargaining power when entering into the agreement. The unfair surprise arises when a party cannot make a full informed choice when entering into the agreement. In the above referenced case, the lower court determined that because such arbitration clauses are common in employment contracts and the clause did not require any unusual provisions no real procedural violations arose.
After analyzing procedural unconscionability, the court next must look to determine the substantive nature of the agreement. In the present case, the plaintiff argued that limitation to the number of depositions each side may take created an unfair burden. The appellate court reasoned that arbitration allows for cheaper and faster litigation through limited discovery. So long as the arbitrator has discretion to allow additional discovery and the rules are equally applied, neither party suffers an injustice.
The Appellate Court in the current case did not find the arbitration agreement either procedurally or substantively unconscionable.
Severance Analysis
Contracts often include severance clauses. The clause allows for certain sections of a contract to be deemed invalid without invalidating the entire agreement. Severance is permissible where removing the clause would not substantially change the purpose of the agreement. In the current case, the lower court refused to sever the discovery limitation from the remainder of the arbitration agreement. The Appellate Court disagreed.
Legislative and judicial preference seeks to preserve contracts. Severance, though within the discretion of the court, should be encouraged. Only upon a showing that the entire agreement is unconscionable should the court expunge the entire agreement.