Unconscionability : Contract Law

1. Unconscionability
   1. UCC 2-302: Llewellyn recognized that the increased use of form contracts necessitated expanding the concept of unconscionability:
   2. “The boiler plate is assented to en bloc, ‘unsight, unseen,’ on the implicit assumption and to the full extent that 1) it does not alter or impair the fair meaning of the dickered terms when read alone, and 2) that its terms are neither in the particular nor in the net manifestly unreasonable and unfair.
      1. Prof. notes 2-302, comment 1:Prevention of oppression and unfair surprise; general commercial background; needs of the particular trade or case; so one-sided as to be unconscionable.
   3. Rst. 2d, Sec. 208: “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”
   4. U developed slowly in contracts doctrine. American courts are very wary of using this power, despite the fact that it gives the courts a lot of discretion.
   5. “The best reason for why courts should care about ‘cognitive asymmetry’ unconscionability cases is because these are cases in which courts have good reason to be concerned about fraud, undue influence, duress, or a simple failure to agree, but in which they lack direct evidence of the defect. Evidence of substantive unfairness provides indirect confirmation that the relevant risk materialized.” (Smith, Contract Theory).
   6. Definitions
      1. Procedural Unconscionability
         1. Court concerned with whether the people entering into the agreement had a meaningful choice in the agreement. 
         2. Focus on the process
         3. Court looks at above factors to determine what the bargaining position is 
      2. Substantively Unconscionable 
         1. Unreasonably favors one party or another
   7. Williams v. Walker-Thomas Furniture Co.
      1. Facts: Π entered a contract with Δ stating that payments on rent-to-own merchandise are to be applied equally to the outstanding balance of all debts owed pro rata. Π defaulted on a payment, and Δ used this clause to repossess all the belongings with any outstanding debt, some having owed less than a dollar remaining. 
      2. Analysis: 
         1. Unconscionability characterized by absence of meaningful choice on the part of one of the parties together with terms that are unreasonably favorable to the other party. It’s going to be a context-specific test.
         2. Justice Wright thinks meaningful choice can be negated by unequal bargaining power.
            1. “When a party of little bargaining power and hence little real choice signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent was ever given to all the terms.”
            2. Wright focuses on several aspects of Williams’ life (lots of kids, on welfare; that somehow, this tells us something about her education, knowledge, business savvy, and therefore her ability to bargain. Are these good “proxies” for knowledge about debt or bargaining power in a furniture store?) Is it appropriate for the court to perform these kinds of inquiries in to the lives of the litigants? 
            3. In such a case, the usual rule that the terms of the agreement should not be questioned must give way to the court’s consideration of whether the terms of the contract are so unfair that enforcement should be withheld.
         3. Prof. notes Williams’ behavior suggest that she was purchasing or spending rationally.
            1. Does the court’s decision suggest that stores just shouldn’t extend credit to poor people? That poor people aren’t going to be able to make a legally binding credit agreement? Individuals with fewer financial resources are going to have fewer financial opportunities; but now, in the scope of their limited opportunities, the courts are furthering narrowing them. The court opens the door to the idea that all such contracts with poor people will be unconscionable, so don’t enter into them (depriving a poor person of a financial opportunity).
      3. Held: This is classic unconscionability. 
      4. Note: Many courts hold that there must be both procedural and substantive unconscionability present to establish a claim.
   8. Cooper v. MRM Investment Co.
      1. Facts: P alleges that she was sexually harassed and constructively discharged. An arbitration agreement in her employment contract barred going to court. The appeals court reviewed the contract.
      2. Issue: Are arbitration provisions in employment contracts unconscionable?
      3. Analysis: Early problems in arbitration agreements only required the employee to arbitrate the company could go to court
         1. Now there is bilateral agreements. 
         2. Here the court found that the contract was still enforceable
         3. Why Arbitration Agreements are unenforceable?
            1. Looks at how burdensome having an arbitration agreement versus going to court?
            2. Sometimes there are a lot of upfront costs
   9. Discover Bank v. Boehr
      1. Public policy argument for class action suits
         1. Small amounts, no incentive
         2. Larger amounts, there is more incentive
         3. Would absolve credit card companies from acting conscionably
         4. In effect, it’s an exculpatory provision, even if you don’t have one in fact
   10. Batfilm Productions, Inc. v. Warner Bros. Inc.
       1. Facts: Ps, Benjamin Melniker and Michael Uslan. Ds, Warner Bros. & Polygram Pictures (not a participant in the bench trial).In 1979, P’s received the movie rights to Batman; subsequently they made a deal with Casablanca Productions (Polygram’s predecessor) for the development and production of a movie with those characters. P’s were entitled to certain fixed and contingent compensation if a Batman movie were produced. Polygram assigned its rights to Warner Bros. in 1981; P’s signed an amendment to the Casablanca agreement with Warner Bros. to this effect:
          1. P’s entitled to $300,000 in fixed compensation + $100,000 “deferment” once the film generated a certain level of receipts
          2. Plus 13% of “Net Profits”
       2. P’s brought suit alleging that they were denied their fair “Net Profits” compensation and that D’s definition of “Net Profits” is unconscionable
       3. Issue: Is the contract P’s have with D unconscionable?
       4. Analysis:
          1. The Court believed that the P’s had offered evidence to prove that the Warner Agreement was a contract of adhesion; 
             1. However, a contract of adhesion is not the same as an unconscionable contract, which is not a contract at all; they require different levels of proof.
          2. In regard to procedural unconscionability:
             1. Melniker negotiated the Warner Agreement, and Melniker is a former general counsel and senior executive at MGM and knew the industry, knew the functioning of such contracts, what they mean, and how they are negotiated. 
          3. In regard to substantive unconscionability:
             1. P’s complain that D knew that Batman would not generate “Net Profits” 
             2. P’s failed to prove that D knew that Batman would not generate it
             3. P’s core argument:
                1. Contract was not fair because they didn’t make tons of money
                   1. So what? Just because a contract is not fair is not grounds for unconscionability
                   2. Must “shock the conscience” or be “harsh, oppressive, and unduly one-sided”
          4. The P’s failed as a whole to prove that the contract was unconscionable; they also failed that show that any of the eight elements of the “Net Profits” provisions were unconscionable.
       5. Held: The contract is not unconscionable.
       6. Note: Courts are not likely to favor a unconscionability argument; unless it comes to arbitration agreements.
          1. In class hypo: rich lady contracts with celebrity floral arranger; arbitration clause
             1. What can she do to get out of it?
             2. In Cooper, courts may be concerned that employees are giving up their material rights without knowing, but not so concerned in a case like this
             3. Is the arbitration agreement bilateral?
             4. Unequal bargaining power?
             5. Need info. on some of the other factors: education, experience, etc.