The Alabama Supreme Court held that a provision of an arbitration agreement that disallowed awarding punitive damages was unfair. However, the Court severed the offensive portion of the agreement and allowed the parties to proceed to arbitration.

In Sloan v. McQueen, Nos. 1041893, 1041906, 1050068, 2006 WL 2383256 (Ala. Aug. 18, 2006), McQueen contracted with Sloan to build a home. The construction contract required all disputes to be submitted to arbitration under the rules of the Better Business Bureau (“BBB”), but if the services of the BBB were “unavailable,” the rules of the American Arbitration Association (“AAA”) would apply.

When McQueen sued for improper construction, Sloan moved to compel arbitration. The trial court denied Sloan’s motion, finding that the arbitration clause was unconscionable because the BBB’s arbitration rules prohibit the recovery of punitive damages. Sloan appealed, arguing that it was not invoking the services of the BBB but instead seeking arbitration in accordance with the rules of the AAA.

The Court found that the provision for BBB rules, however unconscionable, did not render the arbitration clause unenforceable because the contingent provision for AAA rules was “the functional equivalent of a severability clause.” As the Court noted, “the parties expressly agreed that the unavailability of the BBB would not void the overall right to arbitrate.”

The unavailability of the BBB simply meant that arbitration should proceed in accordance with AAA rules. Accordingly, the Court remanded the case with instructions to compel arbitration.

Even absent a clear alternative to an otherwise unconscionable term, courts have a duty to preserve as much of a contract as may properly survive while severing illegal provisions. See Anders v. Hometown Mortgage Servs., Inc, 346 F.3d 1024, 1032 (11th Cir. 2003); McCullough v. Clinch-Mitchell Constr. Co., 71 F.2d 17, 21 (8th Cir. 1934). In this respect, arbitration clauses should be treated like any other contract clause.

As the parties learned in this case, the way to avoid litigating over the interpretation of an arbitration agreement is to incorporate by reference a set of arbitration rules that allows the arbitrator to award all remedies available under applicable law. See, e.g., National Arbitration Forum Code of Procedure Rule 20D.

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