Unconscionability
is a term used in contract law to describe a
defense against the enforcement of a contract
based on the presence of terms unfair to one
party. Typically, such a contract is held to be
unenforceable because the consideration offered
is lacking or is so obviously inadequate that to
enforce the contract would be unfair to the party
seeking to escape the contract.
In and of itself, inadequate consideration is not
enough to make a contract unenforceable. However,
a court of law will consider evidence that one
party to the contract took advantage of its
superior bargaining power to insert provisions
that make the agreement overwhelmingly favor the
interests of that party. In such circumstances,
the fact that the consideration was lower than
what would ordinarily be expected in the
circumstances will often result in the court
refusing to allow the contract to be enforced.
Typical
scenarios
There are several typical scenarios in which
unconscionability is most frequently found:
1. Where a party that typically engages in
sophisticated business transactions inserts
boilerplate language into a contract containing
terms unlikely to be understood or appreciated by
the average person. Such terms might include a
disclaimer of warranties, or a provision
extending liability for a newly purchased item to
goods previously purchased from the same seller.
2. Where a seller offers a contract of adhesion
for the purchase of necessary goods (e.g. food,
shelter, means of transportation).
3. Where a seller is vastly inflating the price
of goods, particularly where this inflation is
conducted in a way that conceals from the buyer
the total cost for which the buyer will be
liable.
For the defense of unconscionability to apply,
the contract has to have been unconscionable at
the time that it was made - later circumstances
that have the effect of making the contract
extremely one-sided are irrelevant. An
interesting aspect of unconscionablity is that
the determination is made by the judge, not by a
jury, despite the fact that such a determination
is very fact-intensive.
Case
law
English case law
The leading case on this point is considered to
be the English case of Lloyd's Bank v. Bundy. In
that case, Bundy had agreed to increase the
mortgage on his house in order to maintain the
credit line being extended to his son's business.
The English Court of Appeal ruled that as Bundy
received no direct benefit from the agreement to
increase the mortgage amount, and that the bank
had threatened to call in the son's loan if Bundy
had not agreed to the extension, and that the
amount of the loan was already higher than the
existing mortgage, that the transaction was
unconscionable and Bundy only had to honor the
lower mortgage. Essentially, the court ruled that
only the bank benefitted from the agreement to
raise the amount of the mortgage.
Canadian case law
In a Canadian case, a member of the First Nations
was allowed to rescind a contract for the sale of
his boat and fishing license for a nominal
amount. The boat was worthless but, unknown to
the native, his fishing license was worth a great
deal of money, and could have been mortgaged to
finance a new boat. The court ruled that the
buyer was merely trying to take advantage of the
seller's lack of knowledge of the value of the
license and refused to allow the contract to be
enforced.
However, sorely inadequate consideration in and
of itself is not a determination of whether a
transaction is unconscionable. For example, in an
Ontario case, a property owner agreed to sell an
option for the sale of his property for the sum
of $1.00. The owner later learned that options to
purchase property usually sell for more than
nominal sums. The court enforced the contract in
favor of the option holder, ruling that the
negotiations over the price of the option and the
price the option holder would pay for the house
if he chose to buy were both fairly negotiated
and that the seller had adequate opportunity to
investigate the market and simply did not do so.
Australian case law
The leading Australian case is Commercial Bank of
Australia Ltd v. Amadio (1983) 151 CLR 447. In
this case, an elderly Italian couple with little
command of English secured their son's debts
arising from his failing business. Their son
misled them as to the extent of the guarantee,
and the bank did nothing to explain it to the
parents. When the son's business failed, the
Amadios had the contract set aside due to
unconscionable dealing by the bank. Key elements
that were relied upon were:
1. The parties must meet on unequal terms, such
that one party has a disability vis a vis the
other party, through such things as infirmity,
age and language.
2. The stronger party knows of the special
disability, or should have been aware of the
special disability, and takes advantage of it.
3. The stronger party obtains a bargain which
would be unconscionable to retain.
Legislation
United States legislation
In the United States, the concept is established
in Section 2-302 of the Uniform
Commercial Code.
|