Definitions

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Unconscionability

[uhn-kon-shuh-nuh-buhl]

Unconscionability (also known as Unconscientious dealings) is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms 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.

Typical scenarios

There are several typical scenarios in which unconscionability is most frequently found:

  1. 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 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.
  2. Where a seller offers a contract of adhesion for the purchase of necessary goods (e.g. food, shelter, means of transportation).
  3. 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.

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.

Case law

U.S. case law

The leading case on unconscionability in the United States is Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965). In this case, the plaintiff, a retail furniture store, sold multiple items to a single mother on a pro rata credit basis.

English case law

The leading case on this point is considered to be the English case of Lloyd's Bank v. Bundy. In that case, Bundy had agreed to increase the mortgage on his house in order to maintain the credit line being extended to his son's business. The English Court of Appeal 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.

Canadian case law

In the case of Harry v. Kreutziger, a member of the First Nations was allowed to rescind a contract for the sale of his boat and fishing license for a nominal amount. The boat was worthless but, unknown to the seller, his fishing license 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 license 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 favor 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 Australian case is Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447. 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. Key elements that were relied upon were:

  1. The weaker party has some 'special disadvantage', so they cannot exercise judgement in their own best interests. 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
  2. The stronger party knows of the special disability, or should have been aware of the special disability, and takes advantage of it.
  3. 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 Trade Practices Act 1974 (Cth).

Legislation

United States legislation

In the United States, the concept is established in Section 2-302 of the Uniform Commercial Code.

Legal Commentary

Restatement of contracts

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.

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

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

References

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