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Contracts 101: What Is Unconscionability and Can it Void Arbitration Clauses?

Contracts 101 - What Is Unconscionability and Can it Void Arbitration Clauses?
Contracts 101 - What Is Unconscionability and Can it Void Arbitration Clauses?

If a contract falls under the definition of unconscionable, it may not be legally valid. That means it could be voided, even if it’s signed by both parties. But for a contract to be unconscionable, it has to meet certain criteria.

What exactly is the definition of unconscionability and what are the rules about it?

Unconscionability in Contracts Defined

Even though all the elements of a contract are present in an agreement, it may still not be enforceable if something violates legal“doctrine.”

Doctrines are legal principles that protect the parties, such as fraudulent concealment or duress, to name just a few. One of these contract doctrines is unconscionability. It’s been codified in the Uniform Commercial Code (UCC), which says “if the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse the contract….” (UCC Section 2-302). But what does that mean?

Subsequent court decisions give some clarity, and focus on whether the original process of entering into the contract was deficient (“procedural unconscionability”), and/or on whether the terms of the contract are oppressive (“substantive unconscionability”).

Unconscionability is an “affirmative defense” to enforcement of a contract. With an affirmative defense in contract litigation, both sides to the contract may well be admitting that a contract does indeed exist, but one side is arguing that, despite the existence of the contract, there is a valid defense for why a court should not enforce the terms of that contract against the party.

Affirmative defenses to a contract can include fraud (the other party lied about a significant fact to obtain agreement to the contract) or duress (the proverbial “gun to the head” contract, or, to quote The Godfather, “I made him an offer he couldn’t refuse”), but unconscionability goes to something else entirely: the inherent fairness of the contract.


Defining Unconscionability in California Contract Law

In essence, when one party argues unconscionability, they are saying that the contract was so inherently unfair that a court should not enforce it. At the same time, much of deal making is about getting favorable terms for your side, so what is the difference between a deal that works out badly and one that should not be enforced at all because it is unconscionable?

California state law states that: “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”

Which does not by itself answer the question of what unconscionable actually means. But the California Supreme Court has ruled that “the central idea (of the) unconscionability doctrine is concerned not with ‘a simple old-fashioned bad bargain‘…but with terms that are ‘unreasonably favorable to the more powerful party.‘“ In other words, courts will not enforce contracts that are “overly harsh,” “unduly oppressive,” or “so one-sided as to shock the conscience.”

In making this determination, courts look at both the substantive aspects of the contract (are the terms on their own unfair to one party?) as well as the procedural aspects by which the contract was reached (did the complaining party have the time and/or resources to fully understand the contract?).

In particular, a court will look at what the reasonable expectations of the parties were in making the contract, and how clear the disputed terms were to the complaining party, e.g. whether they were buried in the fine print of the contract and contrary to what a reasonable person would expect in making the agreement.

If this all sounds somewhat subjective, it certainly can be, and judges have a fair amount of discretion in determining what is and is not unconscionable. Whether you believe you have entered into an unconscionable contract, or are facing an argument of unconscionability from a party with whom you have a contract, you are advised to speak with a breach of contract attorney about your particular circumstances.


Procedural Unconscionability in a Nutshell

“Procedural unconscionability” relates to the bargaining process that occurred before the contract was finalized. In general, this is akin to other doctrines such as duress (for example, feeling forced to enter an agreement out of fear), or duty to disclose (for example, the offeror did not disclose an important defect in the goods) before the contract was signed.

In other words, this means that the wrangling and bargaining that occurred before a contract was signed had major problems.

Substantive Unconscionability in a Nutshell

“Substantive unconscionability” relates to a term (or terms) in the contract. For example, if the terms require that payment be received by the end of the day or the price will go up dramatically, but it’s a banking holiday and it’s impossible for the purchaser to get the funds, that term might be considered unconscionable depending on the context of the entire agreement.

Another example would be a Regus Co-working service agreement, where Regus requires it’s tenants to pay their invoice one full month in advance and if they don’t they threaten to suspend the very services they are charging you in advance for and they will also charge you obscene late fees with interest.

In other words, it concerns the content of the contract, not the process that took place before singing.


Order Your Own Affairs

While contract law has some simple elements, there are also vastly complex doctrines and theories associated with contract law. Whether you are entering into a simple transaction or a complex one involving high-dollar amounts, you will want to ensure that there are no unconscionable terms in your contracts.

This article contains general legal information and does not contain legal advice. Entertainment Heat is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask an attorney.

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