Savings Clauses as Life Savers: How to Resuscitate a Contract

From the Desk of Josh Hayward:  

Agreements to Arbitrate are common in contracts, as arbitration is often favored over more expensive litigation. Often, one of the two parties to the contract do not want to be bound by the arbitration agreement. A court can void the arbitration agreement if the agreement to arbitrate is unconscionable. For a court to determine whether an agreement is unconscionable and should not be enforced, the court must only look to the potential unconscionability of the arbitration agreement, and other terms contained in the contract.

Claims Pointer:

In this case, the Oregon Supreme Court reviewed the enforceability of an agreement to arbitrate coupled with a provision that prohibited an arbitrator from amending, altering, or modifying the terms of the contract. The Court held that the two provisions were not necessarily in conflict and that while an arbitrator could not alter, amend, or modify the terms of the contract, the arbitrator could still determine that some provisions were invalid or unenforceable, and sever those terms and provisions. In coming to this conclusion, the Court emphasized that a contract that limits an arbitrator’s ability to alter, amend, or modify a contract, is not automatically deemed unconscionable.

Gist v. ZoAn Management, Inc., 370 Or 27 (2022).

Facts:

Plaintiff and Defendant entered a contract for Plaintiff to provide delivery services for Defendant called the “Driver Services Agreement” (DSA). The DSA contained a provision that stated that any party could propose mediation as a means for resolving a dispute arising out of or relating to the DSA. It also provided that if mediation was not pursued or failed, any dispute would be resolved through binding arbitration. The DSA also contained a savings clause that allowed for the severance of any unenforceable or invalid terms or provisions within the DSA.

Approximately three years after the parties executed the DSA, Plaintiff filed suit against Defendant. Plaintiff asserted that since he was an employee, not an independent contractor, Defendant violated Oregon statutes that governed employee wages and hours. Plaintiff brought his claims as a class action on behalf of himself and all individuals, both current and former, subjected to the DSA.

Defendant filed a motion to compel arbitration in response to Plaintiff’s complaint. Plaintiff argued that the arbitration agreement in the DSA was not enforceable as it was unconscionable. The trial court granted Defendant’s motion, Plaintiff appealed, and the Court of Appeals affirmed. Plaintiff then petitioned the Oregon Supreme Court for review.         

Law:

Savings Clauses are a common mechanism to ensure that a contract can still be enforceable and valid even if it is determined that a specific provision or term within that contract is unenforceable or invalid.

When a court is reviewing a challenge of an arbitration agreement, The Federal Arbitration Act requires courts to only consider the unconscionability of the arbitration provisions, and not the contract as a whole.

Analysis:

On review Plaintiff argued that the arbitration agreement within the DSA was unconscionable because it required him to arbitrate his wage and hour claims but did not allow an arbitrator to grant him the appropriate remedy related to those claims. Plaintiff’s argument was based on the fact that the DSA classified Plaintiff as an independent contractor. He argued that the arbitration agreement prevents an arbitrator from altering, amending, or modifying the terms of the DSA. Thus, the arbitrator would be prohibited from determining that Plaintiff was an employee and enforce his rights as an employee.

Defendant argued that the DSA does not prohibit an arbitrator from classifying Plaintiff as an employee and applying the corresponding law. Further, Defendant argued that a limitation on an arbitrator’s authority to alter, amend or modify the terms of the DSA does not limit any statutorily mandated rights.

The Oregon Supreme Court agreed with the Defendant, and the Court of Appeals. The Court determined that the provision that limited an arbitrator’s ability to alter, amend, or modify the terms of the DSA did not restrict the arbitrator’s authority to determine what terms are enforceable or what law controls. Further, the DSA provides for the severance of unenforceable or invalid terms or conditions. Thus, while an arbitrator cannot alter, amend, or modify the terms of the DSA, the arbitrator can potentially determine that some provisions are invalid or unenforceable and sever those terms and provisions. For example, an arbitrator could determine that the clause classifying Plaintiff as an independent contractor was invalid and that Plaintiff was in fact an employee.

Big Picture:

Just because a contract has a provision that prohibits an arbitrator from altering, amending, or modifying the contract, that does not mean that an arbitration agreement contained in the same contract is automatically unconscionable. Additionally, a savings clause is one way to ensure that, in the event a court or an arbitrator finds a clause or term in a contract to be invalid or unenforceable, it does not necessarily mean that the remainder of the contract will also be invalid or unenforceable.