Unconscionability

A contract can be found unenforceable by virtue of it being unconscionable.

The doctrine of unconscionability comes from U.C.C. 2-302. However, courts apply the doctrine to all contracts cases and not just in cases dealing with the sale of goods. U.C.C. Section 2-302 basically says that if a court finds that a contract or any part of a contract was unconscionable at the time it was made, the court either:

1. can refuse to enforce the contract,
2. can enforce the contract without the unconscionable clause, or
3. can limit the unconscionable clause so that the result is not unconscionable.

For example:

It is the middle of July and New York City is suffering through the longest heat wave of its history with temperatures topping out at over one hundred degrees daily with high humidity. As a result, there is a shortage of air conditioners in the city. Sam goes to CoolAir Inc., one of the last places in the city that has air conditioners for sale. She contracts to buy an air conditioner for $3,000 and a refrigerator for $500. The market price of the refrigerator is $500. The market price of the air conditioner is $800, however, because of the shortage, CoolAir has drastically increased its prices. When CoolAir delivers the appliances to Sam, she refuses to pay the $3,000 for the air conditioner. In this case, a court may very well find the contract unconscionable given the circumstances and the fact that CoolAir increased its price of air conditioners so much.

If the court does find the contract unconscionable, it can do one of three things.

First, the court could void the entire contract. Second, it could void the contract as far as the sale of the air conditioner but still require Sam to pay for the refrigerator. Third, the court could uphold the entire contract but modify the unconscionable part of it. In other words, the court could require Sam to pay for the air conditioner and the refrigerator but only require her to pay the market value ($800) for the air conditioner. In this way, the court will limit the unconscionable part of the contract in order to avoid an unconscionable result.

Most cases of unconscionability concern unconscionability in the negotiating process. Generally, unfair surprise is the hallmark of unconscionability in the negotiating process. Unfair surprise takes place where the party who drafts the contract includes terms in the contract knowing that those terms are not in line with the other party’s expectations and knowing that the other party will not notice that the terms have been inserted. For example:

The Boston Red Sox tell Ramon Garcia that they will sign him to a one-year contract for $500,000. When the team draws the contract up, they slip in a term saying that the money Garcia gets will be deferred so that Garcia will not be paid until 2018. This would qualify as unfair surprise if the Red Sox know that the deferment plan is not in line with Garcia’s expectations of the contract and if the Red Sox think that Garcia will not notice this term in the fine print.

Unfair surprise is fairly common where preprinted “adhesion” contracts are involved.

A preprinted adhesion contract is basically a contract written by the party who has the stronger bargaining position (for example, an insurance company where you need insurance and they don't really care if you buy it from them or not), which is presented to the weaker party in a "take it or leave it" manner.

Unfair surprise with adhesion contracts usually comes about in situations where the stronger party gives a “take it or leave it” offer to the weaker party that forces the weaker party to adhere to the terms that the stronger party has placed in the contract. The general rule as far as unfair surprise goes is that, where an adhesion contract is involved, the affected party is bound but only by the terms that are not unfairly surprising. For example:

One day before the April 1st signing deadline, the Boston Red Sox offer Ramon Garcia a one-year contract to play for them for $500,000. The Red Sox inform Garcia that there will be no negotiation and that he can either take their offer or leave it. Garcia immediately signs the contract. Later, Garcia finds out that the Red Sox have inserted a provision into the contract that defers his payment until 2010. In this case, the deferment is unfairly surprising and will not be enforced. See California State Auto Association v. Barrett Garages Inc., 257 Cal.App.2d 71 (1967).

There is also unconscionability that exists where the bargaining process is fair, but the terms are unfair.

U.C.C. Section 2-302 says that the doctrine of unconscionability is meant to prevent an unfair bargaining process and it is not meant to overturn agreed upon terms where the bargaining process was fair. However, there are a few cases where the courts have overturned agreed upon price terms on the grounds that the price the contract called for was unconscionable. For example:

George is the owner and manager of Babe’s Baseball Memorabilia. One of George’s fastest selling items are reproductions of signed Ted Williams baseball bats. George cold-calls a number of people, offering them the bats at a price of $3,000 each. Mickey, who likes baseball and wants to buy a gift for his son, agrees to buy a bat from George. What Mickey does not know is that the bat is only worth $200. Certain courts would invalidate the contract that Mickey and George have if they determine that the price charged for the bat is unconscionable. See Kugler v. Romain, 279 A.2d 640 (N.J. 1971).

Two general types of potentially unconscionable provisions are exculpatory clauses and disclaimers / limitations of warranty liability.

Exculpatory clauses are clauses which release a party from liability for injuries that he causes. If an exculpatory clause relieves a party from liability for intentional wrongs, the exculpatory clause is unconscionable and will not be enforced.

Exculpatory clauses for negligence are a little bit different. Usually these exculpatory clauses are considered unconscionable. However, some courts will enforce them. See Garretson v. United States, 456 F.2d 1017 (9th Cir. 1972).

Most contracts for the sale of goods contain one or more warranties that protect the buyer. A seller may try to limit certain implied warranties and, usually, as long as the clause limiting the warranty is written and obvious to the buyer, it will be upheld.

Further, sellers may try to limit their liability in the event that a buyer sues them. For the most part, these limitations will be upheld as well.

However, clauses limiting a seller’s liability in the event that a buyer is injured as a result of the goods he has bought are unconscionable and will not be upheld.