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Contracts: Unconscionability

Unconscionability is one of those limits to the bargain principle. In Schnell v. Nell we can see parts of it when the court says that 1¢ for $600 is too uneven. In Williams v. Walker-Thomas Furniture Co. the plaintiff had purchased several items from the defendant’s store, the most recent being a stereo for over $500. The plaintiff had a limited income and really couldn’t afford the stereo. The financing agreement the plaintiff signed had a cross-collateral clause that said the defendant retained title in the property until it was paid off, and it combined all the debt into one. At the time of the suit, there were several items that had less than $10 left to pay, but because of the structure, payment on those items was minimal because most went to the stereo.

The court held that where the element of unconscionability is present at the time a contract is made, the contract shouldn’t be enforced. Unconscionability includes an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

The remedies for an unconscionable contract are put forth in section 208 of the Restatement Second which says that if a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

 

Maxwell v. Fidelity Financial Services, Inc. says that there are two kinds of unconscionability: procedural and substantive. Procedural unconscionability is concerned with things that mean the bargaining didn’t proceed as it should. Factors to look at are age, education, intelligence, business acumen, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, whether alterations were possible, and whether there were alternative sources. Substantive unconscionability is an unjust or “one-sided” contract where the contract terms are so one-sided as to oppress or unfairly surprise an innocent party, and an overall imbalance in the obligations and rights imposed by the bargain. A claim of unconscionability can be established by showing substantive unconscionability alone; both types aren’t needed, though some courts do require both types.

Unfortunately, there aren’t a lot of guidelines on how to define “unconscionability,” but the contracts that are clearly unconscionable should be easy to spot.

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January 16, 2007 - Posted by | Contracts

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