Contracts/Unconscionability

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Contracts Treatise
Table of Contents
Contracts Outline
Introduction and Definitions
Introduction
Definitions
Elements
Contract formation
Parties
Offer
Acceptance
Intention to Bind
Formal requisites
Mailbox rule
Mirror image rule
Invitation to deal
Firm offer
Consideration
Consent
Implication-in-fact
Collateral contract
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Uniform Commercial Code
Uniform Commercial Code
Course of dealing
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Uniform Commercial Code adoption
Defenses against formation
Lack of capacity
Duress
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Statute of frauds
Uncertainty
Non est factum
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Construction and Operation
Parol evidence rule
Contract of adhesion
Integration clause
Contra proferentem
Excuses for non-performance
Mistake
Misrepresentation
Frustration of purpose
Impossibility
Impracticability
Illegality
Unclean hands
Unconscionability
Accord and satisfaction
Rights of third parties
Privity of contract
Assignment
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Novation
Third-party beneficiary
Performance or Breach
Necessity of performance
Sufficiency of performance
Anticipatory repudiation
Cover
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Efficient breach
Deviation
Fundamental breach
Termination
Termination
Rescission
Termination and rescission
Abrogation and rescission
Subsequent contract
Termination
Forfeiture
Remedies
Specific performance
Liquidated damages
Punitive damages
Quasi-contractual obligations
Estoppel
Quantum meruit
Actions
Actions in General
Parties to Action
Pleading
Evidence
Questions of Law and Fact
Instructions
Trial and Judgment

Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

Unconscionability is determined by examining the circumstances of the parties when the contract was made, such as their bargaining power, age, and mental capacity. Other issues might include lack of choice, superior knowledge, and other obligations or circumstances surrounding the bargaining process. Unconscionable conduct is also found in acts of fraud and deceit, where the deliberate misrepresentation of fact deprives someone of a valuable possession. When a party takes unconscionable advantage of another, the action may be treated as criminal fraud or the civil action of deceit.

For the defense of unconscionability to apply, the contract has to have been unconscionable at the time it was made; later circumstances that make the contract extremely one-sided are irrelevant. There are generally no standardized criteria for determining unconscionability; it is a subjective judgment by the judge, not a jury, and is applied only when it would be an affront to the integrity of the judicial system to enforce such a contract. Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract against the party unfairly treated on the theory that they were misled, lacked information, or signed under duress or misunderstanding; it may refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.

Typical examples[edit | edit source]

There are several typical examples in which unconscionability are most frequently found:

  • Where a party that typically engages in sophisticated business transactions inserts boilerplate language into a contract containing terms unlikely to be understood or appreciated by the average person, such as a disclaimer of warranties, or a provision extending liability for a newly purchased item to goods previously purchased from the same seller.
  • Where a seller vastly inflates the price of goods, particularly when this inflation is conducted in a way that conceals from the buyer the total cost for which the buyer will ultimately be liable. A similar example would be severe penalty provisions for failure to pay loan installments promptly that are physically hidden by small print located in the middle of an obscure paragraph of a lengthy loan agreement. In such a case a court may find that there is no meeting of the minds of the parties to the contract and that the weaker party has not accepted the terms of the contract.
  • Where a seller offers a standardized contract of adhesion for the purchase of necessary goods or services (e.g. food, shelter, means of transportation) to consumers on a "take it or leave it" basis, without giving consumers realistic opportunities to negotiate terms that would benefit their interests. While there is nothing unenforceable or even wrong about adhesion contracts in themselves, specific terms may render them unconscionable. Examples of gross one-sidedness would be provisions that limit damages against the seller, or limit the rights of the purchaser to seek relief in the courts against the seller. In the 2009 case of Harris v. Blockbuster Inc., the plaintiff argued that Blockbuster's provision to compel arbitration and forbid class action lawsuits was illusory and unconscionable. However, whether that contract was unconscionable is unknown, as the court ruled that it was illusory and therefore not enforceable, and disregarded all further consideration.[1]

Procedural unconscionability is seen as the disadvantage suffered by a weaker party in negotiations, whereas substantive unconscionability refers to the unfairness of terms or outcomes. Most often the former will lead to the latter, but not always. The existence of the procedural unconscionability without substantive unconscionability may be sufficient to set aside a contract, but the latter, by itself, may not. As with issues of consideration, the court's role is not to determine whether someone has made a good or bad bargain, but merely whether that party had the opportunity to properly judge what was best in their own interests.

Case law[edit | edit source]

The leading case[citation needed] for unconscionability in the United States is Williams v. Walker-Thomas Furniture Co.,[2] in which the defendant, a retail furniture store, sold multiple items to a customer from 1957 to 1962. The extended credit contract was written so that none of the furniture was considered to be purchased until all of it was paid for. When the plaintiff defaulted and failed to make payments on the last item of furniture, the furniture store attempted to repossess all of the furniture sold since 1957, not just the last item. The District of Columbia Court of Appeals returned the case to the lower court for trial to determine further facts, but held that the contract could be considered unconscionable and negated if it was procured due to a gross inequality of bargaining power.

Legislation[edit | edit source]

In the United States, the concept as applied to sales of goods is codified in Section 2-302 of the Uniform Commercial Code.

Restatement of contracts[edit | edit source]

Under the Second Restatement of Contracts, a party may assert a claim for relief from unilateral mistake regarding the terms or conditions of a contract or a liquidated damages clause. Relief for unilateral mistake may be granted if the mistake would render enforcement of the contract unconscionable. The Restatement considers factors such as: 1) absence of reliance by the promisee; and 2) gross disparity in values exchanged.[3]

Despite the indication of these considerations, however, most challenges to liquidated damages clauses survive legal challenges based on unconscionability.

The Restatement also has a separate provision on unconscionability at §208, "Unconscionable Contract or Term," which broadly allows a court to limit the application of an unconscionable term or contract in order to avoid an unconscionable result.

See also[edit | edit source]

References[edit | edit source]

  1. Harris v. Blockbuster, Inc., 622 F.Supp.2d 396 (N.D. Tex. Apr. 15, 2009).
  2. Williams v. Walker-Thomas Furniture Co., 320 F.2d 445 (D.C. Cir. August 11, 1965).
  3. Restatement (Second) of Contracts § 153 (1979).