Unconscionability
Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, 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.
Overview
Unconscionability is determined by examining the circumstances of the parties when the contract was made, such as their bargaining power, age, and mental capacity. Other issues might include lack of choice, superior knowledge, and other obligations or circumstances surrounding the bargaining process. Unconscionable conduct is also found in acts of fraud and deceit, where the deliberate misrepresentation of fact deprives someone of a valuable possession. When a party takes unconscionable advantage of another, the action may be treated as criminal fraud or the civil action of deceit.For a contract to be unconscionable, it must have been unconscionable at the time it was made; later circumstances that make the contract extremely one-sided are irrelevant. Criteria for determining unconscionability vary between jurisdictions and the question of whether a contract is unconscionable is regarded as a question of law rather than a question of fact; meaning that, in jurisdictions where juries are employed in civil cases, it is the judge and not the jurors who decide whether to apply the doctrine. Upon finding unconscionability, a court has significant flexibility on how it remedies the situation. It may refuse to enforce the contract against the party unfairly treated on the theory that they were misled, lacked information, or signed under duress or misunderstanding; it may refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome and damages are usually not awarded. For instance, in Uber Technologies Inc v Heller the Supreme Court of Canada found an arbitration clause requiring gig workers in Ontario to litigate before the Dutch International Chamber of Commerce was unconscionable and so void.
Procedural unconscionability is seen as the disadvantage suffered by a weaker party in negotiations, whereas substantive unconscionability refers to the unfairness of terms or outcomes. Most often the former will lead to the latter, but not always. The existence of the procedural unconscionability without substantive unconscionability may be sufficient to set aside a contract, but the latter, by itself, may not. As with issues of consideration, the court's role is not to determine whether someone has made a good or bad bargain, but merely whether that party had the opportunity to properly judge what was best in their own interests.
There are several typical examples in which unconscionability are most frequently found:
- 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 as a disclaimer of warranties, or a provision extending liability for a newly purchased item to goods previously purchased from the same seller.
- Where a seller vastly inflates the price of goods, particularly when this inflation is conducted in a way that conceals from the buyer the total cost for which the buyer will ultimately be liable. A similar example would be severe penalty provisions for failure to pay loan installments promptly that are physically hidden by small print located in the middle of an obscure paragraph of a lengthy loan agreement. In such a case a court may find that there is no meeting of the minds of the parties to the contract and that the weaker party has not accepted the terms of the contract.
- Where a seller offers a standardized contract of adhesion for the purchase of necessary goods or services to consumers on a "take it or leave it" basis, without giving consumers realistic opportunities to negotiate terms that would benefit their interests. While there is nothing unenforceable or even wrong about adhesion contracts in themselves, specific terms may render them unconscionable. Examples of gross one-sidedness would be provisions that limit damages against the seller, or limit the rights of the purchaser to seek relief in the courts against the seller. In the 2009 case of Harris v. Blockbuster, Inc., the plaintiff argued that Blockbuster's provision to compel arbitration and forbid class action lawsuits was illusory and unconscionable. However, whether that contract was unconscionable is unknown, as the court ruled that it was illusory and therefore not enforceable, and disregarded all further consideration.
By country
Australia
The leading Australian case is Commercial Bank of Australia Ltd v Amadio, in which an elderly Italian migrant couple guaranteed their builder son's business debts to the Commercial Bank. At the time the mortgage was executed, the bank manager was aware of the son's precarious financial position and knew that the Amadios, who did not speak English well, were not so informed, but did nothing to further explain the situation to them or suggest they get independent advice. In addition, the bank did not advise the Amadios that there was no limit on their liability under the guarantee; the Amadios believed their liability was limited to $50,000.When the son's business failed, the Amadios had the contract set aside due to unconscionable dealing by the bank. The court held that the bank manager knew about the "special disability" of Amadios, referring to their advanced age, lack of business acumen, lack of fluency in written English, and their reliance on their son's disclosure of his finances. A special disability is one which seriously affects the ability of the person subject to it to make sensible decisions of their own best interest. This "disability" was sufficiently evident to the bank, as the stronger party, to make their acceptance of the weaker party's assent to the transaction manifestly unfair. The bank did not ensure that the Amadios fully understood the nature of the transaction; therefore, the bank's taking advantage of the opportunity that presented itself was unconscionable.
While Amadio is the leading authority on unconscionable dealing in Australia, courts have frequently relied upon other cases to help define what constitutes special disability. Courts have extended the scope of what is special disability to include infatuation causing vulnerability and mental disorder. In Louth v Diprose, the Respondent, a solicitor, was infatuated with Louth. He provided her with a multitude of gratuitous gifts and a marriage proposal, which Louth declined. Louth suffered from depression and threatened to commit suicide if she were to become evicted. In response, the Respondent bought her a house and put it in Louth's name. Following a deterioration of the relationship, the Respondent requested Louth to transfer the property in his name, which Louth refused. The Respondent initiated legal proceedings to recover the property, alleging he had suffered a special disability entitling rescission of the contract. Deane J, in the majority, held that Diprose's infatuation placed him in a position of emotional dependence which placed Louth in a position of ascendancy and influence. Louth was found to be aware of the special disability she had deliberately created and exploited it for her benefit, even though Louth articulated her lack of romantic interest in Diprose on numerous occasions.
Intoxication is generally not regarded as a special disability, although in Blomley v Ryan it was found that the severity of Ryan's drunkenness, in combination with Blomley's knowledge of his alcoholism, was enough to warrant special disability. In Blomley v Ryan, the Plaintiff purchased a property from the Defendant at a very low price. During the transaction, the Defendant was of old age and heavily intoxicated which was conspicuous to the Plaintiff. After the transaction, the Defendant refused to perform the transfer of property and so the Plaintiff sought specific performance while the Defendant sought to set aside the contract. The Court ruled that 'mere drunkenness' is not a defence to resist a contract. However, it stated that where there is knowledge of one party that the other party is seriously inebriated and that party takes advantage of such inebriation, equity will intervene to refuse specific performance.
Courts have also frequently relied upon the observation of the majority of the High Court in Krakowski v Eurolynx Properties Ltd when considering the amount of knowledge that can be imputed to a company.
Based on this case, the new concept of "unconscionability" in general and contractual law was passed by Australian legislation, defining it in two ways:
- Using undue influence or coercion, where the consumer is not in a position to make an independent decision based on the fact that undue influence is made to bear upon him/her.
- The stronger party is taking advantage of the fact that the consumer either does not have enough knowledge or understanding of the contract or is incapable of making an independent decision. The trader does not point out that the consumer has avenues in getting help in clearly understanding the contract. So, in this case, the trader is taking advantage of the consumer's lack of understanding for his own benefit.