The Supreme Court of Tennessee has held that a contract that requires one party to arbitrate all of its legal claims but which allows the other party to litigate some of its claims in court is not inherently unconscionable under Tennessee law. The Court’s opinion in Richard Berent v. CMH Homes, Inc. specifically held that a one-sided arbitration clause in an adhesive consumer contract was enforceable where the party that was not required to arbitrate all of its disputes was permitted to seek judicial review only for limited purposes.
Berent endeavored to “clarify” the Tennessee Supreme Court’s prior opinion in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004), which had also addressed whether “non-mutuality of remedies” rendered one-sided arbitration clauses unenforceable under Tennessee law. Taylor appeared to establish a rule that for purposes of Tennessee law, one-sided arbitration clauses which grant one party the option of litigating its claims while binding the other party to arbitrate its claims are unconscionable per se.[1] Specifically, Taylor held that an arbitration clause in a consumer contract of adhesion was “unconscionable and therefore void because it reserve[d] the right to a judicial forum for [the seller] while requiring [the buyer] to submit all claims to arbitration.” Taylor, 142 S.W.3d at 287.
While noting that the “the Court’s opinion in Taylor is not a model of clarity,” Berent rejected the notion that Taylor had held that one-sided arbitration clauses are categorically unconscionable under Tennessee law. Instead, the Berent Court opined that “Taylor applied the doctrine of unconscionability in a nuanced manner, weighing the degree of one-sidedness in the arbitration provision as an important factor, but not the only factor, and viewing the arbitration provision in the context of the overall contract and the surrounding circumstances.”
Thus, following Berent, one-sided arbitration clauses are not unenforceable per se under Tennessee law, and non-mutuality of remedies is only one factor among many to be considered in determining whether an arbitration clause is unconscionable. Based on the language of the Court’s opinion in Berent, additional factors that determine whether one-sided arbitration clauses are unconscionable (and thus unenforceable) under Tennessee law include:
- Whether the arbitration clause was included as part of a contract of adhesion—defined as a “standardized contract form that was offered on essentially a ‘take it or leave it’ basis without affording [the accepting party] a realistic opportunity to bargain.” Taylor, 142 S.W.3d at 286 (quoting Black’s Law Dictionary 40 (6th ed. 1990));
- Whether the arbitration provision was “completely one-sided,” or whether it permits one party to seek judicial review only for limited purposes (emphasis in original); and
- Whether there is “a reasonable business justification for the carve-out” that allows only one party to the contract to access the court system.
Taken together, and viewed in light of all the facts and circumstances of a particular case, the question then becomes “whether the terms of the contract are beyond the reasonable expectations of an ordinary person,” or alternatively, whether the contract “is one in which the provisions are so one-sided, in view of all the facts and circumstances, that the contracting party is denied any opportunity for meaningful choice.” Taylor, 142 S.W.3d at 285-86.
Although the Tennessee Supreme Court described non-mutuality of remedies in a binding arbitration clause as an “important” factor, it is worth noting that whether such a clause was included as part of a contract of adhesion was described as a “significant” factor as well, but the Berent Court upheld a one-sided, adhesive arbitration clause nonetheless. Thus, it stands to reason that the additional factors identified by the Berent Court – whether an exception to arbitration is carved out for limited purposes only, and whether there is a reasonable business justification for the carve-out – will play a more important role in determining whether one-sided arbitration provisions are enforceable going forward.
Read the Tennessee Supreme Court’s opinion in Richard Berent v. CMH Homes, Inc. here.
Questions about this article? Email Daniel Horwitz at [email protected].
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[1] Expressing disagreement with that conclusion at the time, former Tennessee Supreme Court Justice Janice Holder penned a dissenting opinion in which she argued that “the mere fact that there are different forums available to the parties in this case does not make the arbitration provision unconscionable.” Taylor, 142 S.W.3d at 287 (Holder, J., dissenting). The Court’s opinion in Berent effectively adopts this view.