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The Tennessee Court of Appeals sided with the majority of courts by striking down an arbitration clause that only required one party to arbitrate.
In Brown v. Tennessee Title Loans Inc., No. E200600887COAR9CV, 2006 WL 2842788 (Tenn. Ct. App. Oct. 4, 2006), Brown brought a putative class action against Tennessee Title Loans (TTL), alleging violations of the Tennessee Pledge Act and Tennessee Consumer Protection Act. TTL filed a motion to compel arbitration, relying upon the arbitration clause in Brown’s loan agreement.
In opposing the motion, Brown argued that the arbitration clause was unconscionable because it required her, but not TTL, to arbitrate all claims. The trial court rejected this argument and ordered the parties to arbitrate. Brown appealed.
On appeal, the Court started its analysis by citing the rule that under the Federal Arbitration Act, states may invalidate arbitration agreements based on generally applicable contract defenses such as unconscionability. The Court thus proceeded with its unconscionability analysis.
As the Court observed, Tennessee courts will not enforce contracts of adhesion “which serve to limit the obligations and liability of the stronger party.” In Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004), the Tennessee Supreme Court applied this rule to an arbitration agreements that gave the party drafting the agreement a unilateral right to sue in court.
In reliance on Taylor, the Court held that a lack of mutuality rendered the arbitration clause unconscionable and therefore unenforceable. The arbitration clause lacked mutuality because it contained an exception for TTL’s “rights to enforce the [Brown’s] payment obligations, in the event of default, by judicial or other process.”
The Court acknowledged that a minority of jurisdictions have concluded that arbitration agreements do not require mutuality of obligation. However, the Court resisted TTL’s efforts to persuade the Court to follow the minority rule instead of its own supreme court.
Parties are much better off drafting a mutual arbitration agreement, instead of a one-sided clause. Mutuality avoids litigation like this which paves the way for a court to invalidate the agreement. And they miss out on the benefits of arbitration. Moreover, because arbitrators can grant the same remedies available in court, such a one-sided arbitration agreement is unnecessary.
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