Jurisprudence controlling the enforceability of arbitration provisions has been at the forefront of legal attention for the past decade, and the unanimous decision of a North Carolina Court of Appeals’ (“COA”) panel Torrence v. Nationwide Budget Finances proves that it is still evolving.  Here, evolution breeds uncertainty.

In 2008, the North Carolina Supreme Court (“NCSC”) decided the then landmark case of Tillman v. Commercial Credit Corp.,  In Tillman, the NCSC held that an arbitration clause in a commercial contract is enforceable unless it is declared to be both procedurally and substantively unconscionable.  Under Tillman, an arbitration clause will be declared substantive unconscionability if the following factors exist: (1) the arbitration costs borrowers may face are “prohibitively high”; (2) “the arbitration clause is excessively one-sided and lacks mutuality”; and (3) the clause prohibits joinder of claims and class actions.

In Torrence, the COA revisited the substantive unconscionability standard as articulated in Tillmanand, in an unusual move that dramatically reshapes North Carolina law, declared that it is no longer good law.  In reaching this decision, the Torrence Court applied the United States Supreme Court’s opinions in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant which have limited the ability of state courts to find that arbitration clauses are unconscionable on state law grounds.

Since the substantive unconscionability factors announced in Tillman had been rejected by SCOTUS, the COA was left with no basis upon which to find the Torrence clause to be substantively unconscionable.  Thus, it reversed the trial court decision and implemented a sweeping change to contract and arbitration jurisprudence in North Carolina.

While the North Carolina Supreme Court does not accept many cases based upon Petitions for Discretionary Review, it is likely that Torrence will be closely considered because it eliminated the substantive unconscionability test announced in Tillman and will impact on consumer transactions across the state.