Unconscionability
Encyclopedia
Unconscionability is a term used in contract law to describe a defense against the enforcement of a contract
based on the presence of terms that are excessively unfair to one party. Typically, such a contract is held to be unenforceable 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.
In and of itself, inadequate consideration is likely not enough to make a contract unenforceable. However, a court of law will consider evidence that one party to the contract took advantage of its superior bargaining power
to insert provisions that make the agreement overwhelmingly favor the interests of that party. Usually for a court to find a contract unconscionable the party claiming unconscionability will have to prove both that there was a problem with the substance of the contract and the process through which that contract was formed. The substantive problem will usually be the consideration, but could also be the terms, interest payments, or other obligations the court finds unfair. Procedural issues that a court could consider include a party's lack of choice, superior bargaining position or knowledge, and other circumstances surrounding the bargaining process.
Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract, refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.
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 or not it is unconscionable is unknown, as the court agreed that it was illusory
(not enforceable), and disregarded all further consideration.
For the defense of unconscionability to apply, the contract has to have been unconscionable at the time that it was made - later circumstances that have the effect of making the contract extremely one-sided are irrelevant. The determination of unconscionability is made by the judge
, not by a jury
.
, 350 F.2d 445 (D.C. Cir. 1965). In this case, the defendant, a retail furniture store, sold multiple items to a customer. The contract was written so that none of the furniture was considered paid for until all of it was paid for. When the plaintiff failed to make payments on the last furniture item, the furniture store attempted to repossess all of the furniture, not just the last one purchased. The court ruled that the lower court could rule the contract unconscionable and refuse to enforce it, and returned the case to the lower court to decide whether or not the contract was in fact unconscionable.
case of Lloyds Bank Ltd v Bundy
. In that case, Bundy had agreed to increase the mortgage
on his house in order to maintain the line of credit
being extended to his son's business. The Court of Appeal of England and Wales
ruled that as Bundy received no direct benefit from the agreement to increase the mortgage amount, and that the bank had threatened to call in the son's loan if Bundy had not agreed to the extension, and that the amount of the loan was already higher than the existing mortgage, that the transaction was unconscionable and Bundy only had to honor the lower mortgage. Essentially, the court ruled that only the bank benefitted from the agreement to raise the amount of the mortgage. Note that Lord Denning's judgment was held not to represent the law in National Westminster Bank Ltd v Morgan.
was allowed to rescind a contract for the sale of his boat and fishing licence for a nominal amount. The boat was worthless but, unknown to the seller, his fishing licence was worth a great deal of money, and could have been mortgaged to finance a new boat. The court ruled that the buyer was merely trying to take advantage of the seller's lack of knowledge of the value of the licence and refused to allow the contract to be enforced.
However, sorely inadequate consideration in and of itself is not a determination of whether a transaction is unconscionable. For example, in an Ontario
case, a property owner agreed to sell an option
for the sale of his property for the sum of $1.00. The owner later learned that options to purchase property usually sell for more than nominal sums. The court enforced the contract in favour of the option holder, ruling that the negotiations over the price of the option and the price the option holder would pay for the house if he chose to buy were both fairly negotiated and that the seller had adequate opportunity to investigate the market and simply did not do so.
n case is Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447. http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1983/14.html In this case, an elderly Italian couple with little command of written English secured their son's debts arising from his failing business. Their son misled them as to the extent of the guarantee, and the bank did nothing to explain it to the parents. When the son's business failed, the Amadios had the contract set aside due to unconscionable dealing by the bank. Deane J reformulated the Early Test in Blomley v Ryan making it easier for the plaintiff to succeed as they don't have to prove actual exploitation.
Key elements set out by Deane J:
Amadio, and other cases have seen a greater willingness by courts to set aside contracts on the grounds of unconscionability. This has been partly influenced by recent statutory developments such as the Contracts Review Act 1980 (NSW) and the Competition and Consumer Act 2010 (Cth).
, the concept as applied to sales of goods is codified in Section 2-302 of the Uniform Commercial Code
.
, 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.
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.
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
based on the presence of terms that are excessively unfair to one party. Typically, such a contract is held to be unenforceable because the consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
offered is lacking or is so obviously inadequate that to enforce the contract would be unfair to the party seeking to escape the contract.
In and of itself, inadequate consideration is likely not enough to make a contract unenforceable. However, a court of law will consider evidence that one party to the contract took advantage of its superior bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
to insert provisions that make the agreement overwhelmingly favor the interests of that party. Usually for a court to find a contract unconscionable the party claiming unconscionability will have to prove both that there was a problem with the substance of the contract and the process through which that contract was formed. The substantive problem will usually be the consideration, but could also be the terms, interest payments, or other obligations the court finds unfair. Procedural issues that a court could consider include a party's lack of choice, superior bargaining position or knowledge, and other circumstances surrounding the bargaining process.
Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract, refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.
Typical scenarios
There are several typical scenarios in which unconscionability is most frequently found:- Where a party that typically engages in sophisticated business transactions inserts boilerplateBoilerplate (text)Boilerplate is any text that is or can be reused in new contexts or applications without being changed much from the original. Many computer programmers often use the term boilerplate code. A legal boilerplate is a standard provision in a contract....
language into a contract containing terms unlikely to be understood or appreciated by the average person. Such terms might include 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 offers a contract of adhesion for the purchase of necessary goods (e.g. food, shelter, means of transportation).
- Where a seller is vastly inflating the price of goods, particularly where this inflation is conducted in a way that conceals from the buyer the total cost for which the buyer will be liable.
In the 2009 case of Harris v. Blockbuster, Inc., the plaintiff argued that Blockbuster's provision to compel arbitration
Arbitration
Arbitration, a form of alternative dispute resolution , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons , by whose decision they agree to be bound...
and forbid class action lawsuits was illusory and unconscionable. However, whether or not it is unconscionable is unknown, as the court agreed that it was illusory
Illusory promise
In contract law, an illusory promise is one that courts will not enforce. This is in contrast with a contract, which is a promise that courts will enforce. A promise may be illusory for a number of reasons...
(not enforceable), and disregarded all further consideration.
For the defense of unconscionability to apply, the contract has to have been unconscionable at the time that it was made - later circumstances that have the effect of making the contract extremely one-sided are irrelevant. The determination of unconscionability is made by the judge
Judge
A judge is a person who presides over court proceedings, either alone or as part of a panel of judges. The powers, functions, method of appointment, discipline, and training of judges vary widely across different jurisdictions. The judge is supposed to conduct the trial impartially and in an open...
, not by a jury
Jury
A jury is a sworn body of people convened to render an impartial verdict officially submitted to them by a court, or to set a penalty or judgment. Modern juries tend to be found in courts to ascertain the guilt, or lack thereof, in a crime. In Anglophone jurisdictions, the verdict may be guilty,...
.
U.S. case law
The leading case on unconscionability in the United States is Williams v. Walker-Thomas Furniture Co.Williams v. Walker-Thomas Furniture Co.
Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 , was a court opinion, written by Judge J. Skelly Wright, that had a definitive discussion of unconscionability as a defense to enforcement of contracts in American contract law. As a staple of first-year law school contract law courses, it has...
, 350 F.2d 445 (D.C. Cir. 1965). In this case, the defendant, a retail furniture store, sold multiple items to a customer. The contract was written so that none of the furniture was considered paid for until all of it was paid for. When the plaintiff failed to make payments on the last furniture item, the furniture store attempted to repossess all of the furniture, not just the last one purchased. The court ruled that the lower court could rule the contract unconscionable and refuse to enforce it, and returned the case to the lower court to decide whether or not the contract was in fact unconscionable.
English case law
The leading case on this point is considered to be the EnglishEngland
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
case of Lloyds Bank Ltd v Bundy
Lloyds Bank Ltd v Bundy
Lloyds Bank Ltd v Bundy [1974] is a landmark case in English contract law, on undue influence. It is remarkable for the judgment of Lord Denning MR who advanced that English law should adopt the approach developing in some American jurisdictions that all impairments of autonomy could be collected...
. In that case, Bundy had agreed to increase the mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
on his house in order to maintain the line of credit
Line of credit
A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of...
being extended to his son's business. The Court of Appeal of England and Wales
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
ruled that as Bundy received no direct benefit from the agreement to increase the mortgage amount, and that the bank had threatened to call in the son's loan if Bundy had not agreed to the extension, and that the amount of the loan was already higher than the existing mortgage, that the transaction was unconscionable and Bundy only had to honor the lower mortgage. Essentially, the court ruled that only the bank benefitted from the agreement to raise the amount of the mortgage. Note that Lord Denning's judgment was held not to represent the law in National Westminster Bank Ltd v Morgan.
Canadian case law
In the case of Harry v. Kreutziger, a member of the First NationsFirst Nations
First Nations is a term that collectively refers to various Aboriginal peoples in Canada who are neither Inuit nor Métis. There are currently over 630 recognised First Nations governments or bands spread across Canada, roughly half of which are in the provinces of Ontario and British Columbia. The...
was allowed to rescind a contract for the sale of his boat and fishing licence for a nominal amount. The boat was worthless but, unknown to the seller, his fishing licence was worth a great deal of money, and could have been mortgaged to finance a new boat. The court ruled that the buyer was merely trying to take advantage of the seller's lack of knowledge of the value of the licence and refused to allow the contract to be enforced.
However, sorely inadequate consideration in and of itself is not a determination of whether a transaction is unconscionable. For example, in an Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
case, a property owner agreed to sell an option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
for the sale of his property for the sum of $1.00. The owner later learned that options to purchase property usually sell for more than nominal sums. The court enforced the contract in favour of the option holder, ruling that the negotiations over the price of the option and the price the option holder would pay for the house if he chose to buy were both fairly negotiated and that the seller had adequate opportunity to investigate the market and simply did not do so.
Australian case law
The leading AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
n case is Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447. http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1983/14.html In this case, an elderly Italian couple with little command of written English secured their son's debts arising from his failing business. Their son misled them as to the extent of the guarantee, and the bank did nothing to explain it to the parents. When the son's business failed, the Amadios had the contract set aside due to unconscionable dealing by the bank. Deane J reformulated the Early Test in Blomley v Ryan making it easier for the plaintiff to succeed as they don't have to prove actual exploitation.
Key elements set out by Deane J:
- The weaker party has some 'special disadvantage', in dealing with the other party without any reasonable degree of equity between them. The relevant weaknesses here were age, limited understanding of written English, inexperience with business at the level being conducted in the relevant transaction such that they relied upon their son's expertise. Although these circumstances "are of great variety and cannot be satisfactorily classified... The common characteristic appears to be that they have the effect of placing one party at a serious disadvantage vis a vis the other"
- The disability was sufficiently evident to the stronger party to make it prima facie unfair that they accept the weaker parties assent to the transaction.
- Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable.
Amadio, and other cases have seen a greater willingness by courts to set aside contracts on the grounds of unconscionability. This has been partly influenced by recent statutory developments such as the Contracts Review Act 1980 (NSW) and the Competition and Consumer Act 2010 (Cth).
United States legislation
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the concept as applied to sales of goods is codified in Section 2-302 of the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
.
Restatement of contracts (U.S.)
Under the Second Restatement of ContractsRestatement (Second) of Contracts
The Restatement of the Law of Contracts is one of the most well-recognized and frequently-cited legal treatises in all of American jurisprudence. Every first year law student in every law school in the United States is exposed to it, and it is probably the most-cited non-binding authority in all...
, a party may assert a claim for relief from unilateral mistake regarding the terms or conditions of a contract or a liquidated damages
Liquidated damages
Liquidated damages are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach ....
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.
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.
Other contexts
"Unconscionability" can also be used in reference to an action, statement, or practice that is morally unjustifiable, especially if it seems particularly bold or audacious, as in "This is just unconscionable". In political controversy, proposed policies are often said by their opponents to be unconscionable: for example, in the U.S., social conservatives often label liberal public policies as such, and economic progressives often label conservative fiscal and defense policies as such.See also
- Armendariz v. Foundation Health Psychcare Services, Inc.Armendariz v. Foundation Health Psychcare Services, Inc.Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 , was a case decided by the Supreme Court of California that defined the California standard for unconscionability. The court required that there be both a procedural and substantive element of unconscionability for a...
- DuressDuressIn jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black's Law Dictionary defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner...
- Undue influenceUndue influenceUndue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible.-Undue influence in contract law:...
- Non est factumNon est factumNon est factum is a doctrine in contract law that allows a signing party to escape performance of the agreement. A claim of non est factum means that the signature on the contract was signed by mistake, without knowledge of its meaning, but was not done so negligently...