In a much-anticipated ruling on the applicability of the unconscionability doctrine to arbitration clauses in consumer loan contracts, the Pennsylvania Supreme Court has rejected the anti-business, anti-arbitration approach taken by some of the lower courts in Pennsylvania.

In Salley v. Option One Mortgage Corp., 925 A.2d 115 (Pa. 2007), the Supreme Court expressly rejected lower courts’ holdings that arbitration clauses in consumer loan contracts that require most disputes to be arbitrated, but that allow in rem proceedings (including foreclosures) to proceed in court, are unconscionable and unenforceable.

Salley, which was before the Supreme Court on a certified question of law from the U.S. Court of Appeals for the Third Circuit, resolved the tension between the Third Circuit’s formulation
of Pennsylvania law and a much-criticized opinion the Pennsylvania Superior Court a issued in 2002. In so doing, the court sent the message that Pennsylvania courts are not to scrutinize agreements to arbitrate more closely than they scrutinize other consumer contracts, and restores Pennsylvania’s historic respect for agreements to arbitrate
disputes.

Mark Melodia, a partner in Reed Smith’s Financial Services Litigation Group, and Donna Doblick, a partner in the firm’s Appellate Group, represented Option One before the Pennsylvania Supreme Court. For more information on the Salley case, go to: http://www.reedsmith.com/library/search_library.cfm?FaArea1=CustomWidgets.content_view_1&cit_id=15248.