Texas Supreme Court Holds Agreement to Arbitrate is Not Substantively Unconscionable Despite Unenforceable Provisions

The Supreme Court of Texas has held that an arbitration agreement that includes an unenforceable provision is not substantively unconscionable and may be severed from the unenforceable provision.  In Venture Cotton Cooperative, et al. v. Freeman, et al., No. 13-0122 (Tex. 2014), a group of cotton farmers joined a cooperative pool that was used to sell their crop.  Each farmer who joined the Venture Cotton Cooperative signed a membership agreement that included an arbitration provision.  After a dispute arose over the amount of cotton each farmer agreed to supply to Venture, several farmers filed two separate lawsuits against the cooperative in Gaines County, Texas.

Venture responded to the lawsuits by filing a motion to compel arbitration pursuant to the Federal Arbitration Act.  The farmers argued that Venture’s motion should be denied because the agreement to arbitrate included in the cooperative’s membership contract was unconscionable.  According to the farmers, a provision that allowed Venture, but not the farmers, to collect attorneys’ fees following a breach rendered the entire arbitral provision unenforceable.  The district court agreed and refused to compel the dispute to arbitration.  Venture then consolidated the cases and filed an interlocutory appeal with Texas’ 11^th District Court of Appeals.

On appeal, the 11^th District held the arbitration provision included in the parties’ agreement was substantively unconscionable because it afforded one-sided rights to Venture in the event of a breach and it compelled the farmers to give up their statutory rights and remedies.  Venture appealed the court’s decision to the Supreme Court of Texas.

In a 19-page decision, the Texas high court reversed the decision of the lower court.  After stating the FAA preempts conflicting state law, the court explained that “state law remains relevant to declare an arbitration agreement itself unenforceable on ‘such grounds as exist in law or in equity for the revocation of any contract.’” Consequently, “if the circumstances would render any contract unconscionable under Texas law, they are appropriate to invalidate the agreement to arbitrate as well.”

Next, the Texas Supreme Court agreed with the 11^th District that the clause at issue failed to conform to the requirements included in the state’s Deceptive Trade Practices Act.  Because of this, the court held the clause at issue “is contrary to public policy and therefore invalid.”  Despite this, the Supreme Court stated the provision was “insufficient to defeat arbitration under the FAA,” and should have been severed from the rest of the arbitration agreement.

The Texas high court also addressed the 11^th District’s assertion that the entire arbitration clause was unenforceable as a result of Venture’s waiver.  According to the court,

The court of appeals concludes, however, that Venture waived its right to enforce the remainder of the arbitration clause by not asking the trial court to sever the offending limitation of statutory remedies. 395 S.W.3d at 277. But this is an interlocutory appeal, and the case remains pending in the trial court. We are therefore unsure about what Venture has waived. If the court merely means to suggest that Venture waived the right to complain about severance in this interlocutory appeal, the waiver argument serves only to delay a decision in the case. Conservation of time and resources recommend that we consider the issue now because nothing prevents Venture from urging severance in the trial court and, if denied, from renewing its complaint in yet another interlocutory appeal.

The Supreme Court of Texas continued,

Quite clearly, the arbitration agreement’s essential purpose here was to provide for a speedy and efficient resolution of disputes to ensure timely performance under the contract. The agreement’s collateral effect on statutory rights and remedies appears to be a peripheral concern to this essential purpose. We accordingly conclude that the court of appeals erred in declining to sever the objectionable limitation on the farmers’ statutory rights.

After that, the high court addressed the 11^th District’s holding that the arbitration provision was unconscionable as a result of the one-sided legal fees clause,

… we conclude that a contract that fails to provide reciprocal rights to attorney’s fees is not unconscionable per se. We further disagree with the court of appeals’ opinion to the extent it uses the contract’s “one-sided” attorney’s fees provision as an independent reason to hold the arbitration agreement unconscionable.

Finally, the Texas Supreme Court stated the 11^th District failed to address many of the farmers’ arguments regarding the fairness and enforceability of the arbitral provision because the court erroneously declared the entire agreement substantively unconscionable.  Since the court erred in its prior decision, the Supreme Court of Texas reversed the holding of the 11^th District Court of Appeals and remanded the case for consideration of the farmers’ remaining complaints.