Mandatory Arbitration Clause Found Unconscionable and Therefore Unenforceable in Nursing Home Contract

On October 11, 2024, the Illinois First District Appellate Court affirmed the trial court’s decision to deny a Motion to Dismiss and Compel Arbitration, finding that mutually binding arbitration clauses or agreements in adhesion contracts that are so one-sided as to be deemed illusory can be substantively unconscionable and unenforceable, regardless of a severability provision. See Joan Hwang v. Pathway LaGrange Property Owner, LLC, d/b/a Aspired Living of LaGrange, 2024 IL App (1st) 240534.

Joan Hwang was a resident of Aspired Living of LaGrange (“Aspired”), an assisted living facility located in LaGrange, Illinois. On July 18, 2022, one day prior to her admission at Aspired, Hwang executed a residency and services agreement with Aspired, consisting of 75 pages and 16 attachments, including an arbitration agreement (the “Agreement”). The Agreement required all disputes, including personal injury and malpractice claims, between the facility and resident to be submitted to mandatory arbitration, except for rent disputes or actions for involuntary transfer, discharge, or eviction. The Agreement had a strict confidentiality clause requiring all filings, discovery, and outcomes to remain confidential, including settlement amounts, names of parties, and name or location of the residence. The Agreement also contained a $250,000.00 cap on any damages, a prohibition on any punitive damages, a waiver of the right to recover attorney fees, and equal cost sharing for the arbitration proceedings. Finally, the Agreement contained a severability clause permitting a court to sever any portions of the Agreement deemed unenforceable.

While walking through a hallway at the facility, an Aspired employee opened the door, striking Hwang and knocking her to the ground and causing injuries, including a broken hip. Hwang filed a five-count complaint against Aspired and the employee in the Circuit Court of Cook County, Illinois, alleging violations of the Nursing Home Care Act, negligence, and premises liability. Aspired moved to dismiss and to compel arbitration pursuant to Section 2-619(a), seeking to enforce the mandatory arbitration provisions of the Agreement. Aspired argued that because Hwang entered into a valid and enforceable agreement to arbitrate, her claims must be dismissed and compelled to arbitration. Hwang argued the Agreement was unenforceable because it was procedurally and substantively unconscionable based on the nature of the agreement and the circumstances in which it was executed.

The trial court agreed and denied Aspired’s motion. The court found the Agreement unenforceable due to a lack of consideration because “Hwang received no benefit and Aspired suffered no detriment by signing” the Agreement. Further, the court found that the Agreement was procedurally unconscionable as it was part of a voluminous contract, with the arbitration agreement separated into multiple sections of dense and confusing language and was executed without the benefit of attorney review. The court also found that the Agreement was substantively unconscionable because it contained a waiver of any right to recover attorney fees, equal cost sharing of arbitration fees and costs, a strict confidentiality provision, capped damages at $250,000.00, and an exclusion for punitive damages.

Aspired filed an interlocutory appeal pursuant to Supreme Court Rule 307(a)(1), arguing, among other things, that the arbitration agreement is not substantively unconscionable because it is supported by consideration and alternatively, the court may sever any offending provisions of the Agreement while enforcing the remainder. The appellate court affirmed the trial court’s decision and found the mutually binding arbitration agreement to be “so one-sided as to be illusory.”

Whether an agreement is unenforceable as unconscionable is a question of law and may be based on procedural or substantive unconscionability. See Bain v. Airoom, LLC, 2022 IL App (1st) 211001; Kinkel v. Cingular Wireless, LLC, 223 Ill. 2d 1, 21 (2006). Substantive unconscionability looks at the actual terms of the contract and examines the relative fairness of obligations assumed. Bain, 2022 Il App (1st) 211001, ¶ 25 (quoting Kinkel, 223 Ill. 2d at 28). Agreements are found to be substantively unconscionable when the agreements are “so one-sided that they oppress or unfairly surprise an innocent party, when there is an overall imbalance in the obligations and rights imposed by the bargain,” or when a significant cost-price disparity exists. Turner v. Concord Nursing & Rehabilitation Center, LLC, 2013 Il App (1st) 221721. Factors to consider include whether a consumer is involved in the drafting of the agreement, a disparity in bargaining power and whether the agreement is on a pre-printed form. See Razor v. Hyundai Motor America, 222 Ill. 2d 75 (2006); and Kinkel, 223 Ill. 2d.

The appellate court found the Agreement was “entirely one-sided” and greatly favored Aspired, exempting all of Apsired’s likely claims against residents, while forcing residents to arbitrate nearly all of their likely claims against Aspired. While Aspired argued the Agreement was not unconscionable because it was supported by adequate consideration, the court treated consideration and substantive unconscionability as distinct legal concepts under Illinois law, with the unconscionability analysis turning upon the relative fairness of obligations assumed.

Additionally, the court found the confidentiality clause contained in the Agreement unfairly favored Aspired. Under the Agreement, Aspired benefits from its vast access to information about past arbitration proceedings, including awards and precedential outcomes, that residents cannot access. The court also found the prohibition of punitive damages and a damages cap of $250,000 was intended to limit Aspired’s liability from personal injury and malpractice claims brought by residents with potential awards far in excess of that sum. Other factors supporting a finding of substantive unconscionability included that the Agreement was a pre-printed form drafted entirely by Aspired, unequal bargaining power, and Hwang’s inability to seek the advice of counsel prior to executing the Agreement. Considering the totality of these circumstances, the court found the Agreement substantively unconscionable and therefore, unenforceable. Finding the Agreement substantively unconscionable, the court did not address procedural unconscionability.

With respect to the severability provision, because of the significant number of provisions that were substantively unconscionable, it would be impossible to sever those provisions without completely rewriting the agreement. As such, the court concluded that the Agreement was unenforceable as a whole.

Standard, non-negotiable adhesion contracts between parties with unequal bargaining power are a fact of modern life. Hwang v. Pathway LaGrange Property Owner illustrates the fact-intensive, language-determinative analysis used to assess the unconscionability and enforceability of mandatory arbitration provisions in adhesion contracts. One-sided contracts that benefit one party to the other party’s detriment deserve careful consideration and consultation with an attorney.

Albert E. Durkin is a founding member of MDR Law with over 40 years of experience, currently serving Of Counsel to the firm since 2019.

Peter W. Buchcar is an associate at MDR Law LLC.