CHAPTER 15 " ILLEGALITY"

Under classical contract law, courts were reluctant to inquire into the fairness of an agreement. Because the prevailing social attitudes and economic philosophy strongly favored freedom of contract, American courts took the position that so long as there had been no fraud, duress, misrepresentation, mistake, or undue influence in the bargaining process, unfairness in an agreement entered into by competent adults did not render it unenforceable.

As the changing nature of our society produced many contract situations in which the bargaining positions of the parties were grossly unequal, the classical contract assumption that each party was capable of protecting himself was no longer persuasive. The increasing use of standardized contracts (preprinted contracts) enabled parties with superior bargaining power and business sophistication to virtually dictate contract terms to weaker and less sophisticated parties.

Legislatures responded to this problem by enacting a variety of statutory measures to protect individuals against the abuse of superior bargaining power in specific situations.Examples of such legislation include minimum wage laws and rent control ordinances. Courts became more sensitive to the fact that superior bargaining power often led tocontracts of adhesion(contracts in which a stronger party is able to determine the terms of a contract, leaving the weaker party no practical choice but to "adhere" to the terms). Some courts responded by borrowing a doctrine that had been developed and used for a long time in courts of equity,5the doctrine ofunconscionability.Under this doctrine, courts would refuse to grant the equitable remedy of specific performance for breach of a contract if they found the contract to be oppressively unfair. Courts today can use the concepts of unconscionability or adhesion to analyze contracts that are alleged to be so unfair that they should not be enforced.

Unconscionability

One of the most far-reaching efforts to correct abuses of superior bargaining power was the enactment of section 2-302 of the Uniform Commercial Code, which gives courts the power to refuse to enforce all or part of a contract for the sale of goods or to modify such a contract if it is found to be unconscionable.By virtue of its inclusion in Article 2 of the Uniform Commercial Code, the prohibition against unconscionable terms applies to every contract for the sale of goods.The concept of unconscionability is not confined to contracts for the sale of goods, however. Section 208 of theRestatement (Second) of Contracts, which closely resembles the unconscionability section of the UCC, provides that courts may decline to enforce unconscionable terms or contracts. The prohibition of unconscionability has been adopted as part of the public policy of many states by courts in cases that did not involve the sale of goods, such as banking transactions and contracts for the sale or rental of real estate. It is therefore fair to state that the concept of unconscionability has become part of the general body of contract law.

Consequences of Unconscionability

The UCC and theRestatement (Second)sections on unconscionability give courts the power to manipulate a contract containing an unconscionable provision so as to reach a just result. If a court finds that a contract or a term in a contract is unconscionable, it can do one of three things: It can refuse to enforce the entire agreement, it can refuse to enforce the unconscionable provision but enforce the rest of the contract, or it can "limit the application of the unconscionable clause so as to avoid any unconscionable result." This last alternative has been taken by courts to mean that they can make adjustments in the terms of the contract.

Meaning of Unconscionability

Neither the UCC nor theRestatement (Second) of Contractsattempts to define the termunconscionability. Though the concept is impossible to define with precision, unconscionability is generally taken to mean theabsence of meaningful choicetogether withterms unreasonably advantageousto one of the parties.

The facts of each individual case are crucial to determining whether a contract term is unconscionable. Courts will scrutinize the process by which the contract was reached to see if the agreement was reached by fair methods and whether it can fairly be said to be the product of knowing and voluntary consent.

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Procedural UnconscionabilityCourts and writers often refer to unfairness in the bargaining process asprocedural unconscionability. Some facts that may point to procedural unconscionability include the use of fine print or inconspicuously placed terms; complex, legalistic language; and high-pressure sales tactics. One of the most significant facts pointing to procedural unconscionability is the lack of voluntariness as shown by a marked imbalance in the parties' bargaining positions, particularly where the weaker party is unable to negotiate more favorable terms because of economic need, lack of time, or market factors.In fact, in most contracts that have been found to be unconscionable, there has been a serious inequality of bargaining power between the parties. It is important to note, however, that the mere existence of unequal bargaining power does not make a contract unconscionable. If it did, every consumer's contract with the telephone company or the electric company would be unenforceable. Rather, in an unconscionable contract, the party with the stronger bargaining powerexploitsthat power by driving a bargain containing a term or terms that are so unfair that they "shock the conscience of the court."

Substantive UnconscionabilityIn addition to looking at facts that might indicate procedural unconscionability, courts will scrutinize the contract terms themselves to determine whether they are oppressive, unreasonably one-sided, or unjustifiably harsh. This aspect of unconscionability is often referred to assubstantive unconscionability. Examples include situations in which a party to the contract bears a disproportionate amount of the risk or other negative aspects of the transaction and situations in which a party is deprived of a remedy for the other party's breach. In some cases, unconscionability has been found in situations in which the contract provides for a price that is greatly in excess of the usual market price.

There is no mechanical test for determining whether a clause is unconscionable. Generally, in cases in which courts have found a contract term to be unconscionable, there are elements ofbothprocedural and substantive unconscionability.Though courts have broad discretion to determine what contracts will be deemed to be unconscionable, it must be remembered that the doctrine of unconscionability is designed to prevent oppression and unfair surprisenot to relieve people of the effects of bad bargains.

The cases concerning unconscionability are quite diverse. Some courts have found unconscionability in contracts involving grossly unfair sales prices. Although the doctrine of unconscionability has been raised primarily by victimized consumers, there have been cases in which businesspeople in an inherently weak bargaining position have been successful in asserting unconscionability.

QUESTION

Gianni Sport (Seller) was a New York manufacturer and distributor of women's clothing.Gantos(Buyer) was a clothing retailer headquartered in Grand Rapids, Michigan.In 1980,Gantos's sales total was 20 times greater than Gianni Sport's, and in this industry, buyers were "in the driver's seat" (meaning they had the upper hand).In June 1980,Gantossubmitted to Gianni Sport a purchase order for women's holiday clothing to be delivered on October 10, 1980.The purchase order contained the following clause:

Buyer reserves the right to terminate by notice to Seller all

or any part of this Purchase Order with respect to Goods that

have not actually been shipped by Seller or as to Goods which

are not timely delivered for any reason whatsoever.

Gianni Sport made the goods in question especially forGantos.This holiday order made up 20% - 22% of Gianni Sport's business.In late September 1980, before the goods were shipped,Gantoscanceled the order.

1.Was the cancellation clause unconscionable?

2.Explain why or why not.[Be sure to discuss the factors in this case that lead you to your conclusion].

3.What does a court focus on when it considers whether all or part of a contract is unconscionable?