In Atlas Electrical Construction, Inc. v. Flintco, LLC, 550 P.3d 881 (N.M. Ct. App. 2024), the Court of Appeals for New Mexico declared an arbitration provision in a contract, in which the contractor retained the exclusive right to choose the dispute resolution method, was so one-sided it was substantively unconscionable and unenforceable.

Flintco, LLC (“Flintco”) contracted with the City of Albuquerque, New Mexico for renovations to the Albuquerque International Sunport (“the Project”).  As part of the Project, Flintco entered into a subcontract with Atlas Electrical Construction, Inc. (“Atlas”) for electrical work.  The subcontract contained a binding arbitration provision which gave Flintco sole discretion to decide whether to submit disputes to arbitration or litigation proceedings.

Atlas eventually filed a breach of contract action in district court arising from the subcontract.  Flintco moved to compel arbitration. The district court granted Flintco’s motion to compel.  The district court did not issue a memorandum opinion with findings of fact, but concluded in an oral ruling that the arbitration provision was neither procedurally nor substantively unconscionable.

Atlas appealed the district court’s ruling, arguing the court erred in granting the motion to compel because the arbitration provision was substantively unconscionable.  Flintco argued the provision was enforceable because it was commercially fair and reasonable.

The Court of Appeals noted this was the first time it had been asked to assess the unconscionability of a contract provision entered between two sophisticated commercial entities.  Generally, unconscionability is assessed in the context of contracts where there is unequal bargaining power between the parties.

Atlas conceded that the arbitration clause at issue was procedurally conscionable.  Atlas argued the provision was substantially unconscionable.

To determine substantive unconscionability, the Court employed a two-step analysis.  First, the Court analyzed the arbitration agreement on its face to determine the legality and fairness of the contract terms.  The Court held “a presumption of unfair and unreasonable one-sidedness arises when a drafting party excludes its likeliest claims from arbitration, while mandating the other party arbitrate its likeliest claims.”  The Court further held that if a Court determines an arbitration agreement is facially one-sided, the court should allow the drafter to present evidence justifying the agreement as fair and reasonable, such that enforcement would not be substantively unconscionable.

Flintco conceded that the arbitration provision was one-sided, but asserted the provision was still commercially fair and reasonable.  Flintco argued that both parties were sophisticated business entities with equal bargaining power and, despite Atlas having the ability to negotiate terms of the subcontract, Atlas had not made any changes to the arbitration provision prior to execution.

The Court concluded the provision was not fair or reasonable because Flintco failed to present any evidence it had greater liability or contract obligations to support the provision being one-sided.  Moreover, Flintco failed to offer any “legitimate, neutral reasons” for it to exercise exclusive control over the manner of dispute resolution.

The holding of this case is important because, while procedural unconscionability in the formation of a contract may be absent, a court may still find substantive unconscionability in the terms of the contract.  Unequal bargaining power is the most likely scenario in which a contract provision may be found substantively unconscionable and unenforceable.  It is important for parties, when negotiating contracts, to address and specifically negotiate provisions such as this.