The unconscionability of a contract refers to when the bargaining power of the parties are so unbalanced that the resulting contract is extremely unfair for one party. So, even when other defenses such as fraud, duress, or undue influence are lacking, the courts will still restrict the enforceability of the agreement.
Williams v. Walker-Thomas Furniture Co.
350 F.2d 445 (D.C. Cir. 1965).
Williams and Thorne are the plaintiffs. They lost and appealed.
Question
Should this jurisdiction adopt the approach that a contract can be considered unconscionable?
Rule
A contract is unconscionable if there is an absence of meaningful choice by one party which unreasonably favors the other party.
Holding
The court adopts the unconscionability standard. Remanded to determine whether the present cases meet that standard.
Facts
Walker-Thomas Furniture Co. provides customers to pay for their goods in monthly installments to mitigate the cost of the goods. However, there is a provision in the contract that allows Walker to maintain title on all goods purchased (previously paid for or still being paid for) until the balance has been paid in full. If the balance is not paid in full, then Walker retained the right to repossess all items purchased from the store.
The plaintiffs here had purchased several furniture items and had not paid it off in full before defaulting.
Analysis
The district court had argued that even though there was a disparate bargaining power, it was up to the legislature to protect the interest of the consumers through legislation, not the courts by voiding contracts.
This court disagreed. They said that unconscionability can be determined if there is a disparate bargaining power that benefits one party over the other. For instance, if there is a lack of education, to where the party does not understand the terms of the agreement, then there is a disparate bargaining power that the furniture store could use.
The test to use to determine fairness is to consider the background of the case. “Terms considered in light of the general commercial background and the commercial needs of the particular trade or case.” Thus, the contract needs to be extreme considering the standard business practices for a contract to be deemed unconscionable.
Because no facts were found as to whether this contract was unconscionable, the cases are remanded for further proceedings.
Additional Notes
Here, there was a unique feature of this credit on purchase, because it was a lease. Walker maintained title until the payment was made in full. The contract though was interesting. What happened here is that if you purchase multiple items, any payments made apply to all, rather than to the single item. This process is called cross-collateralization. The goal is to have all the furniture to serve as collateral for all the payment obligations. In other words, nothing is paid in full until everything is paid in full.
The way a person can work around this is to make payments under different people.
With that background, the claim is that the contract is unconscionable. How so?
Elements
UCC 2-302(1) outlines how a contract is unconscionable. Here, the court interprets this to mean “an absence of meaningful choice together with contract terms which are unreasonably favorable to the other party. So, there are two ways to show this is the case. First, process, which is the absence of meaningful choice. Second, substance, which is when there are contract terms that are unreasonably favorable.
The absence of a meaningful choice can be shown by:
- A gross inequality of bargaining power.
- The manner in which the contract was entered into.
- The education of the party, leading to a misunderstanding or lack of clarity of the contract.
As for the the reasonable and fairness of terms, they can be factored by showing
- “the terms of the contract considered in light of the circumstances existing when the contract was made.”
- Additionally, “the terms are to be considered in the light of the general commercial background and the commercial needs of the particular trade or case.”
Both the substantive and process elements should be met. However, under extreme circumstances, one could account for the other.
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Higgins v. Superior Court of Los Angeles County
45 Cal. Rptr. 293 (App. 2006).
The Higgins are the plaintiffs seeking this case to be heard in court not in arbitration. They lost and appealed.
Question
Was the arbitration clause unconscionable?
Rule
If this is an adhesive contract (disparate bargaining power to either adhere or reject) then the clause can be subject to procedural and substantive unconscionability analysis.
Procedural unconsionability focuses on the surprise of the clause. What did it look like and what was the condition of the parties?
Substantive unconscionability focuses on the one-sidedness of the clause. Who does the clause affect? If both parties, does it affect them equally?
Holding
The arbitration clause is unconscionable.
Facts
The plaintiffs are 5 siblings who were participants on an extreme home makeover edition in 2005. They had recently lost both there parents and had moved in with a family in their church. The church approached the petitioners about the opportunity to participate in the program and several contracts were executed. In this instance, the home of the family they were staying with would be remodeled to better meet the needs of both families living there.
At one point during the execution of the contracts, the family was asked to read and execute the documents. That family then approached the plaintiffs and said “flip through and sign the pages.” The documents were signed by the siblings and returned within 10 minutes. Here, the plaintiffs said that they did not read, or know what the arbitration clause was.
After the home was built, the family kicked the plaintiffs out and received no further support from the program. The plaintiffs sued the family and the television program for misrepresentation, breach of contract, etc. As a result, the program moved to compel arbitration because of the clause in the contract. The plaintiffs countered saying the clause was unconscionable.
Analysis
This is an adhesive contract because the television producers developed the contract and presented it to the plaintiffs on a take-it-or-leave-it basis. Meaning, they could either sign and continue or reject and be rejected.
Procedural unconscionability focuses on the surprise of the contract. Here, the clause was drafted at the end, with no heading or means of alerting, and was in a smaller font. Additionally, the plaintiffs are young and the defendants knew that. Even though the plaintiff’s were instructed to read the contract, the surprise of the clause still overpowers this notice.
As for substantial unconscionability, this clause also fails. Here, the substantial element focuses on the clause being “unfairly one-sided.” In this instance, the clause is one sided because it only requires the plaintiffs to arbitrate. The defendants then, still have the choice of forum. Defenses against this by saying that the clause says “all claims” is unpersuasive because only the plaintiffs signed the agreement prior to the motion to compel arbitration.
Additional Notes
Although arbitration is favored, a contract mandating arbitration still has the standard defenses. Unconscionability is one of those defenses.
The first question is whether this was a contract of adhesion. Here, this is a contract of adhesion because it is a standardized form 1) where one party has superior bargaining strength and 2) where the weaker party has not choice but to adhere or reject.
Next, you consider the unconscionability of the contract which requires both a procedural and substantive element. The procedural element is met if there is oppression or surprise due to unequal bargaining power. The substantive element is met if the clause is overly harsh or has a one-sided result.
In this case both elements were met:
- Procedure
- There was a surprise because the arbitration clause was hidden and it was not pointed out.
- Substantial
- This is one-sided because only the plaintiffs had to arbitrate, the other party still had the opportunity to go to the court.
McFarland v. Wells Fargo Bank, N.A.
810 F.3d 273 (4th Cir. 2016).
McFarland is the plaintiff. He lost and appealed.
Question
Two questions. First, did McFarland establish the elements (specifically substantive) of unconscionability? If not, does the court recognize a possibility of unconscionable inducement?
Rule
There are two ways to cause a contract to be unenforceable due to unconscionability. First, through the standard approach (procedural and substantive elements). Second, through unconscionable inducement. Unconscionable inducement has a higher burden of proof than the traditional elements of unconscionability.
Standard approach: “A contract term is substantively unconscionable only if it is both ‘one-sided’ and ‘overly-harsh’ to the disadvantaged party.”
Unconscionable inducement: Examination of the proceedings leading up to signing a contract and the fairness of those proceedings.
Holding
The standard elements of unconscionability were not met, so that claim is dismissed. However, there is a possibility of unconscionable inducement and therefore the case is remanded for further proceedings.
Facts
McFarland was told that his house was worth double what it was when he purchased it. As a result, he got a loan for the appraised amount to pay of his other debts. However, when the market failed in 2007, he was unable to maintain those payments and worked with the bank to adjust interest rates and the premium. Despite the adjustments, he still failed to make payments and the bank started proceedings to foreclose.
McFarland sued, to stop foreclosure proceedings. He claims that the contract was unenforceable for two reasons. First, through the traditional approach of unconscionability, the bank gave him a loan more than his home was worth. Second, through unconscionable inducement.
The trial court dismissed both claims.
Analysis
The trial court did not error in the first claim but did in the second.
For the first claim, it is not sufficient to state that receiving too much money is substantively unconscionable. This is because it does provide a benefit to the borrower (able to pay off debts) and creates a risk for the bank (that the borrower will be unable to pay back and thus default). Even though there are potential harms to the borrower, this does not make it unconscionable.
For the second claim, the court accepts that the state could recognize unconscionable inducement to hold a contract unenforceable. There are three reasons for this. First, the state has nearly accepted the approach in the past. Second, the statutory language says that it could be an option. Third, the UCCC allows examinable of unconscionable conduct to determine whether a contract is enforceable.
Additional Notes
The plaintiff’s first argument is that this is unconscionable because the bank loaned him too much money. The substantive element is not met here because because loaning too much money is no unconscionable. This is because it is not overly harsh against him since both sides are benefited and both receive risks.
His second argument is that there was unconscionable inducement. This can be shown by misrepresentations meant to induce him into the loan (e.g. “your home is worth this much” when it was worth much less). This only looks at the process, not substance.
The court determines that both methods of determining whether the contract was unconscionable. However, in this instance, the first argument does not work but the second might. So this goes back to the trial to determine if the contract meets the requirements.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
