Contractual Unconscionability: Identifying and ...

1 Contractual Unconscionability: Identifying and UnderstandingIts Potential ElementsBYPAULBENNETTMARROWI magine appearing before a court on behalf of a liti-gant. The theory for your position is grounded in astatute that lacks any statement of criteria. You haveno idea what the legal elements of your position have checked the case law, and not one opinionsuggests a criteria or lists any of the elements. Yet youhave found decisions that say your pleadings should bedismissed if they recite mere unsubstantiated this isn t enough, you have found many decisionsindicating that courts know a valid claim arising underthis statute when they see one! Now you are before thecourt and compelled by the enabling statute to limityour proof to matters that appear to have no direct rela-tionship to the facts that brought your client into youroffice in the first nightmare scenario becomes all too real everytime someone claims that a contract or lease, or a provi-sion in a contract or lease, is unconscionable.

2 Anyone who asserts a claim of Contractual uncon-scionability is, by definition, acknowledging that some-one made a bad deal. Courts do not normally act to pro-tect contracting parties from mistakes in are made only when the court is persuadedthat the faulted action is per seunfair or that it resultedfrom unusual circumstances usually beyond the controlof the complainant. Fairness and restraint are the watchwords that aresaid to govern this process. When is a Contractual provi-sion so unfair as to be offensive? It s far from has been written about the theoretical exis-tence of Contractual unconscionability,2but little hasbeen said about what components actually make upsuch a claim. Rules do exist, but few courts have for-mally identified them. This article is designed to helpboth draftsman and litigants identify and understandpotentially unconscionable common law, traditional doctrines such as fraud,duress and mutual mistake went only so far.

3 They didnot cover every situation in which a contract might beoppressive. Developed to resolve specific types of strife,the doctrines required litigants to accommodate techni-cal elements. The doctrine of unconscionability evolvedto fill the unconscionability was thought to in-volve contracts as no man in his senses and not underdelusion would make on the one hand and as no honestand fair man would accept on the other. 3 Unfortu-nately, this abstraction was short on details, which werethought best left to the judgment of courts on a case-by-case basis. But what standards were to be applied? Un-certainty was the order of the recently the situation had not changed much. In1951 the New York Court of Appeals declared that anunconscionable contract is one that is so grossly unrea-sonable or unconscionable in the light of the mores andbusiness practices of the time and place as to be unen-forcible according to its literal terms .

4 4 Commentators have struggled to provide notable has been the contribution by ProfessorArthur Allen Leff, who suggested a two-step frameworkfor any the parties negotiate terms , thenthey incorporate the final terms into a definitive agree-ment. He characterized the first stage as procedural, thesecond as substantive. Using this approach, courtssometimes identify offensive conduct during the firststage as being procedurally unconscionable. Coarsesubstantive terms are frequently referred to as beingPAULBENNETTMARROW practices in Chappaqua, Hegraduated from Case Western Reserve University and re-ceived his degree from New York Law | February 2000 CONTINUED ON PAGE2020 Journal| February 2000substantively unconscionable. These descriptions fallshort in that they merely tell us where in the process theunconscionability is thought to have occurred. What ismissing is any information about what makes the provi-sion per seunconscionable.

5 In 1962, the legislature attempted to include the con-cept of unconscionability in New York s commercial ju-risprudence when it passed 2-302 of the UniformCommercial Code6(UCC) governing sales contracts. In1976, Real Property Law 235-c7(RPL), a provisionsimilar in content to the UCC,was enacted to govern realestate leases. Although theofficial comments and muchof the legislative history stateotherwise,8the litigants aretold only that courts have thepower to do what the legislature has failed to do, , de-fine and defeat unconscionability when and if they seeit. This was a power the courts already possessed, rais-ing the question of whether these statutes contributedanything of York courts still reserve for themselves the com-mon law power to review covenants that fall outside thescope of these statutes. Challenges based on uncon-scionability are commonplace in the context of agree-ments involving matrimonial disputes,9covenants notto compete found in employment agreements,10and ar-bitration agreements found in agreements relating tomergers and acquisitions,11to name a few.

6 In disposingof these non-statutory cases, the courts appear to usethe same equitable principles that apply in cases arisingunder the the Statutes Say Both the UCC as adopted in New York and the RPLfollow a similar format. They: Give courts the power to define and identify as amatter of lawif contracts or leases, or their provi-sions, were unconscionablewhen made. Give courts the power to refuse to enforce any un-conscionable provision or to enforce the contractor lease so as to avoid any unconscionable result. When either someone claims unconscionability, orthe court on its own suspects unconscionability,the parties are afforded a reasonable opportunityto present evidence: in the case of a contract, about its commercialsetting, purpose and effect; in the case of a lease, about its purpose and ef-fect, so as to aid the court in making a determina-tion about its face, the legislation appears almost mystical inthat it assumes that the lack of definition notwithstand-ing, unconscionability nevertheless exists and thatcourts can spot and defeat it.

7 It s a bit like religion: un-conscionability exists in the minds of true believers. Thisseems to leave the draftsman with the charge of predict-ing the whims of mysterious is clear is that courts are empowered to policeand protect against whatever theyperceive to be uncon-scionable covenants. The courts are given the power to(1) definewhat as a matter oflaw is unconscionable, (2) de-cide whether to enforce acovenant if doing so wouldlead to an unconscionable re-sult given (a) the court s def-inition and (b) where appro-priate, receive proof offeredby the parties. Both statutes require a plenary hearing for the intro-duction of evidence if a party raises the issue in plead-ings orthe court on its own suspects that uncon-scionability may be present. Presumably this means thatthe court on its own has the power at any time to deter-mine that, as a matter of law, unconscionability ispres-ent, in which case a plenary hearing is not for Defining UnconscionabilityWithin the context of cases decided under thesestatutes, now examine the rules the courts have fash-ioned to define what they believe is meant by uncon-scionability.

8 Bear in mind that these rules appear to haveapplication to non-statutory cases. Inherent in the statutory scheme is the assumptionthat unconscionability, whatever it is, actually the failure of the legislature to define what itmeant by unconscionability, the courts appear free toapply any equitable standard developed prior to thelegislation, together with whatever standards are devel-oped thereafter. This reality is the basis for the questionof whether the statutes actually add anything of sub-stance to the it is not stated in the statutory text, the leg-islative history does provide a hint regarding what un-conscionability was actually thought to involve. Thedraftsman of the Uniform Commercial Code declares:The basic test is whether, in the light of the general com-mercial background and the commercial needs of theparticular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstancesexisting at the time of the making of the contract.

9 The principle is one of the prevention of oppression andunfair surprise and not of the disturbance of allocationof risks because of superior bargaining FROM PAGE18 CONTINUED ON PAGE22 Inherent in the statutory schemeis the assumption that unconscionability actually | February 2000 Thus, under the statutes at least, the question is notwhether a covenant is or is not unconscionable, butrather is it so one-sided or oppressive and likely to re-sult in unfair surprise that it becomes primary judicial responsibility therefore is to createrules that define the looking for clauses that are one-sided, oppres-sive and result in unfair surprise, what should courtswatch for?For the most part, the issue of when a contract is one-sided involves a review of only the substance of thequestionable provision. What makes a contract one-sided is most often tied directly to the substantive resultof the language in question, such as when contractuallanguage is profoundly discriminatory in its effect onone of the parties.

10 In making this determination, thecourt normally looks no further than the substance ofthe covenant itself. But does this mean that no questionsof fact exist? This issue is discussed below. By contrast, determining oppression or the possibil-ity for unfair surprise will almost always necessitate aconsideration of the factual circumstances leading up tothe contract and the substantive provision bespeaks trying to sanction abusiveness,arbitrariness or the imposition of a needlessly burden-some condition. The evaluation exercise usually re-quires considering the circumstances that led to theagreement. Usually, but not always, neither the sub-stance nor the circumstances alone leads to the conclu-sion that unconscionability exists. To reach such a result,there is a need to couple the two. Because the circum-stances are rarely self-evident from the terms of anagreement, a hearing of some sort is needed for the pre-sentation of contract results in unfair surprise when the realmeaning of its terms are intentionally obscured fromone of the parties, thereby precluding the complainantfrom making a reasoned choice.