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May 13, 2020 Practice Points

Cost-Shifting Provisions May Not Make Agreement Unconscionable

Many factors can affect the assessment of unconscionability and such a defense needs to be evaluated on a case-by-case basis.

By Leah Lewis

In Rizzio v. Surpass Senior Living LLC, 2020 WL 479342, the Arizona Court of Appeals severed a cost-shifting provision that it found to be unconscionable and otherwise enforced the parties’ arbitration agreement.

In Rizzio, Georgianni, on behalf of her mother, Rizzio (the plaintiff), entered into two contracts with Mariposa Point, a nursing care facility managed by Surpass. Both contracts included identical agreements to arbitrate all claims arising from the contract along with a cost-shifting provision stating that the plaintiff would be responsible for all “costs of arbitration, including defense’s legal costs and attorney’s fees, arbitration fees and similar costs,” should she make a claim against Surpass. The cost-shifting provision stated that it would apply even if the plaintiff were to prevail. The agreements also contained a provision in boldface type that encouraged the plaintiff to seek the advice of legal counsel before signing the agreements.

The Arizona Superior Court found that the agreements were procedurally and substantively unconscionable and that it violated Plaintiff’s reasonable expectations because “(1) the contract was drafted by Defendants; (2) Plaintiff’s daughter had little opportunity to review the contract; (3) the arbitration terms were not verbally explained to her; and (4) Plaintiff’s daughter had no opportunity to bargain with Defendants.” Id. at 2. The Arizona Court of Appeals affirmed the finding of unconscionability (and by extension unenforceability) as to the cost-shifting provision of the Agreement. However, after severing the cost-shifting provision, the court held that the arbitration agreements were not unconscionable nor did they violate plaintiff’s reasonable expectations. Id. at 6.

The Court of Appeals held that the agreements were not procedurally unconscionable because Georgianni herself had limited the amount of time she took to review the agreements and her mother’s acceptance into the nursing home was not contingent on the agreements being signed. Id. at 3. Additionally, the agreements contained boldface type recommending consultation with legal counsel and there were no “emergency circumstances” or other time pressures imposed by the Defendants. Id.

The court held that the cost-shifting provision was substantively unconscionable because it was an unusual and one-sided provision that operated as a prospective penalty on any resident wishing to bring a meritorious claim. Id. at 4. However, because the agreements contained a severability clause, the court severed the cost-shifting provision. The court then held that the remainder of the agreements were not unconscionable. Although the agreements were now silent on the allocation of arbitration costs, such silence did not support invalidating the agreements. Id. Additionally, pursuant to a retainer with counsel, plaintiff was not responsible for up-front costs, and therefore there was no argument that costs were an impediment to arbitration. Id. at 5.

The court also found that the agreements did not violate plaintiff’s reasonable expectations. There was no evidence that Surpass had reason to believe Ms. Georgianni would have declined to sign the contract if she had known about more relevant portions of the agreements. Id. at 6. Additionally, Georgianni’s signature on the agreements was not a condition of treatment for her mother, and Georgianni had been handling matters relating to her mother’s healthcare as her power of attorney for many years. Id. Accordingly, the arbitration provision was held enforceable and the case reversed and remanded.

Many factors can affect the assessment of unconscionability and such a defense needs to be evaluated on a case-by-case basis. But a one-sided cost-shifting provision, need not render an entire arbitration agreement invalid, particularly if the contract contains a severability clause. 

Leah Lewis is a 2020 J.D. candidate at DePaul University College of Law in Chicago, Illinois. 

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