29th Nov 2016
In deciding whether to sever terms rather than to preclude enforcement of the provision altogether, the overarching inquiry is whether the interest of justice would be furthered by severance; strong preference is to sever unless the agreement is PERMEATED by unconscionability. [Magno v. College Network, Inc. (2016) 1 Cal. App. 5th 277, 292]
When “permeated” is established
An agreement to arbitrate is considered “permeated” by unconscionability where it contains more than one unconscionable provision. Such multiple defects indicate a systemic effort to impose arbitration on the non-drafting party not simply as an alternative to litigation, but as an inferior forum that works to the drafting party’s advantage. [Armendariz v. Foundation Health (2000) 24 Cal. 4th 83, 124-125] An arbitration agreement is also deemed “permeated” by unconscionability if there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. If the court would have to, in effect, reform the contract, not through severance or restrictions, but by augmenting it with additional terms, the court must void the entire agreement. [Magno v. College Network, Inc. (2016) 1 Cal. App. 5th 277, 292 (court found three unconscionable provisions (1) authorizing the drafting agreement to select the arbitrator solely, (2) the forum of the arbitration was to be Indiana, (3) a six-month statute of limitations was shorter than provided by law)] There is no abuse of discretion in voiding an entire arbitration provision where there are multiple unconscionable terms that could not be cured by severance. [Ajamian v. Cantor CO2e (2012) 203 Cal. App. 4th 771, 803-804] See § A2.01 AB USE OF DISCRETION [§ A2.01:1 In general].
Where the unconscionable provisions cannot be severed from the arbitration agreement
Where the arbitration agreement is permeated with illegality and unconscionability, it is unenforceable. If so, a trial court errs in compelling arbitration under the unconscionable agreement, where the unconscionable provisions cannot be severed to avoid the illegal result. [Martinez v. Master Protection Corp (2004) 118 Cal. App. 4th 107, 119; Ajamian v. Cantor CO2e (2012) 203 Cal. App. 4th 771, 803]
The reason for permitting severance as well as the factors relevant to whether severance is appropriate is discussed in Ontiveros v. DHL Exp. (USA), Inc. (2008) 164 Cal. App. 4th 494, 514-515, cert. denied, 123 S. Ct. 1048, 173 L. Ed. 2d 470 (2009)]
Full recovery of damage; arbitration limitation provisions
An arbitration agreement is one-sided if arbitration does not permit a full recovery of damages for employees, while placing no such restrictions on the employer. [Armendariz v. Foundation Health (2000) 24 Cal. 4th 83, 103-104] A contractual term limiting an arbitrator’s power to award consequential, incidental, punitive or special damages on breach of contract, tort and statutory claims is substantively unconscionable. [Suh v. Superior Court (2010) 181 Cal. App. 4th 1504, 1509-1510, 1515]
An arbitration provision that limits punitive damage awards is unlawful. An improper limitation of punitive damages supports a finding of substantive unconscionability. [Penilla v. Westmont Corp (2016) 3 Cal. App. 5th 205, 223] See § A86 ARBITRATION [§ A86:11.1 Limitation of remedies]; § A87 ARBITRATOR [§ A87:1.1Injunctive relief; provisional remedies – authority of arbitrator]
References in bold are to Mr. Cornblum’s legal text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (2016 Edition), published by ThomsonReuters (1-800-344-5008 to order 3-Volume text).