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Unconscionability and Contracts

Published online by Cambridge University Press:  23 January 2015

Alan Wertheimer
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Abstract

This article considers the principles that underlie the claim that some contracts are unconscionable and that such contracts should not be enforceable. It argues that it is much more difficult to explain unconscionability than is often supposed, particularly in cases where the contract is mutually advantageous or Pareto superior. Among other things, the article considers whether unconscionability is a defect in process or result, whether the gains in an unconscionable contract are disproportionate, whether there is a strong link between the use of standard forms and unconscionability, and whether the principle of inequality of bargaining power can account for unconscionability. After rejecting several standard explanations of unconscionability, I consider several alternative ways in which it might be explained.

Type
Articles
Information
Business Ethics Quarterly , Volume 2 , Issue 4 , October 1992 , pp. 479 - 496
Copyright
Copyright © Society for Business Ethics 1992

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References

Notes

1 Murphy v. McNamara, 38 Conn. Super. 183, 416 A. 2d 170 (1979). The injunction was granted, but McNamara was permitted to file suit for the difference between the amount Murphy had already paid and the value of the set.

2 Id. at 416 A.2d at 177.

3 Some may argue that there is, in the final analysis, no distinction between these justifications. For the purpose of the present argument, I do not need to take a position on that argument.

4 See Charles, Fried, Contract as Promise (Cambridge, MA: Harvard University Press, 1981).Google Scholar

5 The classic defense of this view is Richard, Posner, Economic Analysis of Law (Boston: Little Brown, 1977).Google Scholar

6 Arthur Leff, “Unconscionability and the Code—The Emperor's New Clause,” 115 U. Pa. L. Rev. 485, 486 (1967). These are necessary but not sufficient requirements of a valid contract. An agreement which meets these criteria may be unenforceable on paternalistic grounds, as when a tenant is not permitted to waive a warranty of habitability, because it threatens to harm third parties, or because society has decided that certain goods should not be “commodified”—for example, votes, drugs, or sex. More generally, an agreement which is against “public policy” is not enforceable, even though it may meet the tests of capacity, assent, and consideration.

7 Lord Nottingham in Maynard v. Moseley 3 Swans, 651, at 655,36 Eng. Rep. 1009 (1676), cited in S.M. Waddams, The Law of Contracts, 326 (2d ed. 1984).

8 Waddams, S.M., The Law of Contracts, 326.Google Scholar

8 The Port Caledonia and the Anna (1903), p. 184, 190. Quoted in Waddams, S.M., Unconscionability in Contracts, 39Google ScholarMod. L. Rev. 369, 385 (1976). Also see Lord Goff of Chieveley and Gareth Jones, The Law of Restitution 267 (3d ed. 1986).

10 In addition, equity cases typically involved a claim of specific performance. Unlike many modern cases of unconscionability, equity cases did not generally involve a dispute about the price of a transaction or an effort to have the transaction go through on more favorable terms. Rather, the promise demanded transfer of the land and the promisor sought to overturn the transaction in its entirety. See Leff, supra note 6.

11 Thomas, M. Quinn, et al., Uniform Commercial Code Commentary and Law Digest 2–94 (1978).Google Scholar

12 It seems that unconscionability is defined as “a matter of law” rather than a matter of fact in order to make it easier to appeal a lower court's decision.

13 32 N.J. 385, 161A2d 69 (1960).

14 350 F.2d 445 (D.C. Cir. 1965).

15 Id., at 447.

16 Id., at 449.

17 Id., at 450, quoting 1 Corbin, Contracts § 128 (1963). Although the Court did not claimthat the contract was unconscionable in light of these criteria, it concluded that the District Court had a legal basis for considering the question. Judge Danaher, dissenting, maintainedthat Williams knew just where she stood, that the pricing and credit policies may have beenreasonably consistent with the risk of default. Id., at 450.

18 151 Mich. App. 598, 391 N.W. 2d 760 (1986).

19 Id., at 762.

20 3 W.L.R. 501 (1974).

21 1 W.L.R. 1308 (1974).

22 Actually, the Court noted that the agreement had been signed “with a few alterations”— implying that at least some negotiation had, in fact, occurred. Id., at 1309.

23 Id., pp. 251-52.

24 See my Coercion (Princeton: Princeton University Press, 1987), Chapter 2.

2 “ … despite indications of increasing freedom for courts to maipulate contract terms, the concept of unconscionability still directs judicial inquiry to the bargaining behavior of the parties. “Lewis Kornhauser, Unconscionability in Standard Forms, 64 Cal. L. Rev.. 1151, 1162 (1976).

26 I borrow this example from Brian Barry's, “Lady Chatterley's Lover and Doctor Fischer's Bomb Party: Liberalism, Pareto Optimality and the Problem of Objectionable Preferences,” in his collection, Democracy, Power and Justice (Oxford: Clarendon Press, 1989), p. 374.Google Scholar

27 Id.

28 I shall use the term “price” to refer to monetary price in what follows although it is obvious that the terms are part of the overall price of a contract.

29 For an interesting analysis of this case, see Trebilcock, M.J., The Doctrine of Inequality of Bargaining Power in the House of Lords, 26 U. Toronto L. J. 359 (1976).Google Scholar

30 See Richard, Epstein, Unconscionability: A Critical Reappraisal, IS J. L. & Econ. 293 (1975).Google Scholar

31 See Id., at 307.

32 Robert, Frank, Passions Within Reason (New York: W.W. Norton, 1988), p. 164.Google Scholar

33 Duncan, Kennedy, “Distributive and Paternalist Motives in Contract and Tort Law With Special Reference to Compulsory Terms and Unequal Bargaining Power,” 41 Md. L. Rev. 563, 616 (1982).Google Scholar

35 As Duncan Kennedy puts it, “If there is competition among sellers, and good information about buyer preferences, sellers will offer whatever terms they think buyers will pay for.” “Distributive and Paternalistic Motives in Contract and Tort Law,” Id.

36 Richard, Posner, Economic Analysis of Law, p. 85.Google Scholar

37 As Thomas Schelling reminds us, we must be very cautious. ‘“Bargaining power,’ ‘bargaining strength’, ‘bargaining skill’ suggest that the advantage goes to the powerful, the strong, or the skillful. It does, of course, if those qualities are defined to mean only that negotiations are won by those who win. But if the terms imply that it is an advantage to be more intelligent… or to have more financial resources, more physical strength … or more ability to withstand losses, then the term does a disservice. These qualities are by no means universal advantages in bargaining situations; they often have a contrary value.” The Strategy of Conflict (New York: Oxford University Press, 1963), p. 22.Google Scholar

38 The distinction between bargaining ability and bargaining potential cannot be pressed too far. It appears, for example, that blacks and women pay more for new cars than white males, not because of animus, but because profit-maximizing dealiers believe that blacks and women are less likely to shop around. If so, a black or a woman may have less bargaining power not because of some characteristic qua individual, but because of other's perceptions. In this sense, we might count the perception of one's bargaining ability as an external resource. If this belief were false, and if only some dealers had this belief, then blacks and women would not pay more. They would go to other dealers. Yet if many dealers have this false belief, then the market will still settle on a higher price for blacks and women. Ian, Ayres, “Fair Driving: Gender and Race Discrimination in Retail Car Negotiations,” 104 Harv. L. Rev. 817, 845 (1991).Google Scholar

39 I say relatively unproblematic, because it is not clear whether a contract should be nullified if A neither caused nor knowingly took advantage of B's incapacity.

40 Nor is Bethlehem Steel at a disadvantage in dealing with the (much larger) United States government when the government needs its ship-building capacity during a war.

41 As Duncan Kennedy remarks, “If there are many sellers of a necessity, none of them will be able to charge more than the going package of price and terms without losing all his buyers.” Supra, note 35 at 618-19.

42 Jody, S. Kraus and Jules, L. Coleman, “Morality and the Theory of Rational Choice,” in Peter, Vallentyne (ed.) Contractarianism and Rational Choice (New York: Cambridge University Press, 1991), p. 267.Google Scholar

43 “What we have here is a situation in which someone may be better off doing a certain deal than not doing it if he is permitted to do it, but would be better off still if he were not permitted to do it.” Brian Barry, “Lady Chatterley's Lover and Doctor Fischer's Bomb Party: Liberalism, Pareto Optimality, and the Problem of Objectionable Preferences.” in Jon, Elster and Aanund, Hylland (eds.) Foundations of Social Choice Theory (Cambridge: Cambridge University Press, 1986), p. 21.Google Scholar

44 Joel, Feinberg, Harmless Wrongdoing (New York: Oxford University Press, 1988).Google Scholar