The parties to a contract may agree to resolve any disputes via arbitration, rather than litigation; however, courts can elect not to enforce an arbitration agreement on the grounds that pursuing a claim in arbitration would be “so cost prohibitive that it prevents a party from vindicating its rights.”[1]
Recently, the Texas Supreme Court held that a homeowner who sued his builder had not provided enough evidence to justify the trial court’s denial of the builder’s motion to compel arbitration. Pursuant to the contract at issue, the parties had agreed that an arbitrator, not the court, would decide “whether the cost of arbitration forecloses an adjudication of the claim in arbitration.”[2] But, when the builder moved to compel arbitration, the homeowner claimed that the arbitral forum was inadequate to answer this question. To be successful in such a claim, the homeowner had to provide evidence of (1) the cost for an arbitrator to decide arbitrability, (2) the cost for a court to decide arbitrability, and (3) his ability to afford one but not the other. The homeowner, as the party opposing arbitration, had the burden to show unconscionability and, under these circumstances, he was required to show particularly that the delegation to an arbitrator of the arbitrability question was unconscionable (cost prohibitive).
The evidence provided by the homeowner to support his claim of unconscionability failed to quantify the cost difference between arbitration and litigation of the arbitrability question. The trial court, then, had no numbers to compare and no information from which it could have concluded that the homeowner could have afforded litigation, but not arbitration. Accordingly, the Texas Supreme Court held that the record failed to support the trial court’s finding that “the delegation clause was unconscionable due to prohibitive costs to adjudicate [the] threshold issue in arbitration.”[3]
Parties moving to compel arbitration should remember that if a party wishes to challenge an arbitration agreement (or a delegation clause), the challenging must have specific, quantified evidence to show that the cost of arbitration is prohibitive, and that the party can afford litigation over arbitration. Importantly, when drafting arbitration agreements, these requirements should be kept in mind. The drafting party should craft the agreement in such a way as to reduce the financial burden on the party likely to oppose arbitration.
[1] Lennar Homes of Tex. Inc. v. Rafiei, 687 S.W.3d 726, 729 (Tex. 2024)
[2] Id.
[3] Id. at 732
