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Covenant Health v. Moulds

Citing to leading franchise law cases, the Supreme Court of Mississippi issued a blistering attack on unconscionable arbitration clauses and reversed the appellate court.

Despite this Court's admonitions to the drafters of such contracts to eliminate unconscionable clauses and the reluctance of courts to reform and rewrite contracts, a veritable deluge of contests over arbitration issues continues in the courts of our state.

So begins the high court's ruling in Covenant Health & Rehabilitation of Picayune LP v. Estate of Mittie M. Moulds (6 August 2009).

Covenant Health draws on cases from across the country, including such franchise law landmarks as Casarotto,  Bolter, Soler Chrysler-Plymouth, and Keating. It is about as blunt a rebuke as any court has given on the subject of arbitral unconscionability, and notes a lowered standard for substantive unconscionability where the underlying contract is one of adhesion:

[F]inding a contract to be one of adhesion does not automatically mean that the contract or any provision thereof is substantively unconscionable. [cite omitted] However, such a finding 'makes an argument targeting a provision for a substantive unconscionability review easier to prove.... [Thus, it] can make a facially opressive term presumptively invalid.'

The Court found that the particular contract "weaves unconscionable nonforum terms into the arbitration provision" and in the course of the ruling specified several types of terms which would be unconscionable:

  • "A one-sided agreement whereby one party is deprived of all the benefits of the agreement or left without a remedy for another party's non-performance or breach"
  • A clause "that allows one party to go to court, but restricts the other to arbitration."
  • Attempts to shorten the statute of limitations.
  • Limits on liability "because it left the customer without an effective remedy."
  • Waiver of punitive damages, limits on non-economic damages, disallowance of attorney fees [citing a Florida case].
  • Upfront fees of $18,000 to initiate arbitration [citing a Tennessee case].
  • A meaningful choice to not enter into the contract [citing an Alabama case].
  • Surrender of statutorily-protected rights by weaker party, while allowing protection of liability for fraud, willful injury, and violation of laws by the stronger party [citing California cases].

The arbitral provider specified in Covenant Health was the AAA, and that provider had announced it would no longer accept such cases. So another issue before the Court was whether a judge could impose an alternative provider. The appellate court had done just that, but the Supreme Court reversed, saying:

 A court should not be used to reform a contract to select a forum not anticipated by either of the parties. To do so, the court must become involved and assume powers over parties. Courts' involvement is limited to determining whether to compel agreed-upon arbitration vel non. As the court's participation and involvement increase, the reason for arbitration in the first place becomes greatly diminished, and its purpose defeated.

The Court quoted prior holdings in refusing not merely to sever the unconscionable clauses, but the Court went on to find the entire contract tainted by the arbitration provisions:

 Neither is it wise to allow companies to draft arbitration clauses with unconscionable provisions and then let them try them out in the marketplace, secure in the knowledge that the courts will at worst sever the offending [provisions] after plaintiffs have been forced "to jump through hoops in order to invalidate those agreements."

[P]resence of an unlawful provision in the arbitration agreement may serve to taint the entire arbitration agreement, rendering the agreement completely unenforceable.

Accordingly, we hold that the contract in its entirety, and this arbitration agreement specifically, are unconscionable and unenforceable. To do otherwise would "result in this Court rewriting a contract which favors a goal of the nullifying party; an undeserved reward for unconscionable conduct." [cite omitted]

6 of the justices joined in the majority opinion. One justice concurred in the result only, and makes a persuasive case that the decision could have been rendered on more narrow grounds. The majority brushes this aside in a single paragraph, and it is  apparent that the Supreme Court of Mississippi decided to take this opportunity to issue a wide-ranging ruling designed to reverberate among the members of the bar.

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