Key Takeaways

  • Unconscionable conduct typically involves terms or conditions so one-sided they shock the conscience.
  • Courts evaluate both procedural and substantive unconscionability to determine if a contract or term is enforceable.
  • Real-life examples include predatory lending, deceptive arbitration clauses, unfair waiver provisions, and one-sided contract terms in adhesion contracts.
  • Contracts of adhesion are especially scrutinized when they involve consumer transactions or employment relationships.
  • A finding of unconscionability can result in full or partial invalidation of a contract or clause.
  • Both federal and state courts have ruled on cases involving unconscionable conduct in diverse industries, from real estate and auto sales to telecommunications.

Unconscionable conduct cases refer to cases in which actions are shockingly unfair and can lead to the invalidation of a contract by a court. A popular unconscionable conduct cases example is the Rochin v. California case, in which the U.S. Supreme court ruled in 1952 that it is unconscionable to forcefully extract evidence from a suspect's body.

Types of Unconscionable Conduct

What constitutes unconscionable conduct varies from state to state but typical examples of unconscionable conduct include:

  • A business tricking an uneducated man into a one-sided contract
  • Financial institutions levying shockingly high interest rates on their lenders
  • A business signing a contract with a minor
  • A business levying unfairly high financial penalties on another entity
  • A contract in which a business prohibits another signatory from seeking court intervention if disgruntled by the contract
  • A contract clause that absolves a business of any liability in case its products are defective

Below are some examples of popular court rulings involving unconscionable conduct.

Unconscionable Conduct and Loan Terms

  • Harsh Loan Contract
    In the James v. National Financial, LLC, C.A. case, a woman was given a loan at an interest of 800%. She sued the lender on the grounds that the loan contract was unconscionable. In its 2016 ruling, the Delaware Court of Chancery ruled that the loan contract was null and void because it was unconscionable. In this case, the terms of the of the loan contract were too harsh.
  • "Unreasonably Generous" Loan Terms
    Several West Virginia homeowners filed lawsuits claiming that the loan amounts they got for their homes are too high. They claimed that the loan contracts are unconscionable because they were allowed to borrow too much. In one of the cases a homeowner, McFarland, sued Wells Fargo for giving him a loan that was $62,000 more than the value of his house. He reasoned that the loan amount and the conduct of Wells Fargo were unconscionable. On appeal in 2014, the U.S. District Court for the Southern District of West Virginia ruled in favor of Wells Fargo. The court stated that a home loan cannot be unconscionable because of the amount of the loan. The judge observed that the loan amount actually disadvantaged the lender which is the direct opposite of unconscionable. He ruled that unconscionability would have to result because of harsh interest rates or payment schedule.

Unconscionable Conduct and Class Action Waivers or Compulsory Arbitration Clauses

  • Compulsory Arbitration Clause
    In 2015, the U.S Supreme court upheld compulsory arbitration clauses in consumer contracts. In the DIRECTV, Inc. v. Imburgia case, California courts had upheld the right of DIRECTV customers to file a class action lawsuit against their TV provider over high termination fees reasoning that class action waiver clause in their consumer contracts in unconscionable. However, the U.S. Supreme Court threw out the lawsuit hence affirming the validity of arbitration clauses.
  • The Arbitration Clause and Costs
    A woman bought a trailer home from a manufacturer whose contract mandated that any dispute with the seller should be settled through arbitration. This kind of arbitration clause is supported by the Federal Arbitration Act and the Uniform Arbitration Act. But the buyer sued the trailer manufacturer for millions of dollars citing fraud. The seller told her to halt court proceedings to pursue arbitration but the woman refused saying that she could not afford arbitration costs which were proportional to the amount of damages claimed. The case went up to the U.S. Supreme Court which upheld the arbitration clause.

Other Cases Involving Unconscionable Conduct

One-Sided or Superior Bargaining Power Cases

Entities have successfully brought claims against others on the basis that the contract is unconscionable because one of the parties to the contract had superior bargaining power. Examples include:

  • When the warranty period of a product expires before the good is even installed
  • A clause that limits the time to make a claim against a product with latent defects
  • A handwritten contract that is not legible
  • A clause buried in a big stack of company rules and regulations
  • A disclaimer of warranties which specifically discusses issues of a new car when actually a used car was sold

Real-Life Examples of Unconscionable Contracts

Understanding what are some real-life examples of unconscionable contracts helps illustrate how courts apply this doctrine. Below are notable instances and patterns where courts found contracts or specific terms unconscionable:

1. High-Interest Payday Loans

In James v. National Financial, LLC, a borrower was charged over 800% interest. The court found the loan unconscionable due to the exploitative interest rate and the borrower’s limited education and understanding. This is a textbook example of both procedural and substantive unconscionability.

2. Contracts with Hidden or Buried Terms

Contracts that obscure critical terms—such as disclaimers or waivers—within lengthy, fine-print documentation may be deemed unconscionable. Courts have invalidated clauses buried in employee handbooks, consumer service agreements, or multi-page product disclaimers when they deprive the weaker party of meaningful choice.

3. Excessive Penalty Clauses

A clause that imposes extreme financial penalties for minor breaches—such as early termination fees exceeding the value of the services provided—can be considered unconscionable. Courts have struck down clauses where penalties were grossly disproportionate or where there was no genuine negotiation.

4. Adhesion Contracts in Consumer Transactions

Contracts of adhesion (standard-form, “take-it-or-leave-it” agreements) are scrutinized when paired with unequal bargaining power. In Aral v. Earthlink, Inc., a California court ruled that a mandatory arbitration clause in an ISP contract—combined with a waiver of class actions—was unconscionable due to the unfair burden on consumers.

5. Used Car Sales Deception

An auto dealer was found liable for unconscionable conduct where it sold a used car with “as-is” language, but the contract included language meant for new cars. Additionally, the car was defective, and the buyer was unaware of those issues. The discrepancy in disclosures contributed to a finding of procedural and substantive unfairness.

6. Unequal Arbitration Terms

In Armendariz v. Foundation Health Psychcare Services, Inc., the California Supreme Court struck down an arbitration agreement in an employment contract. It compelled the employee to arbitrate all claims while reserving the employer’s right to sue in court. The one-sided nature rendered it substantively unconscionable.

7. Warranty Clauses That Limit Consumer Rights

A clause that limits a customer’s ability to claim compensation—even when the product is defective—can be deemed unconscionable. For example, courts have invalidated warranty disclaimers that expire before the customer has a chance to use or test the product, especially in cases involving hidden (latent) defects.

8. Overcollateralization and Foreclosure Traps

In some lending contracts, low-income homeowners were made to secure loans worth far more than the value of their homes, leading to inevitable foreclosure. While not always ruled unconscionable, courts have considered the lender’s knowledge of the borrower’s inability to repay as a factor in such cases.

9. Healthcare Arbitration and Waivers

Patients have sometimes unknowingly signed away rights to sue medical providers due to clauses in hospital admission forms or consent documents. Courts have ruled some of these clauses unenforceable when presented in emergency situations without adequate explanation or choice.

Frequently Asked Questions

  1. What are some real-life examples of unconscionable contracts?
    Examples include payday loans with excessive interest rates, hidden arbitration clauses, contracts of adhesion with one-sided terms, and warranty disclaimers that limit consumer rights.
  2. What makes a contract unconscionable in court?
    A court may find a contract unconscionable if it is both procedurally unfair (lack of negotiation, hidden terms) and substantively unfair (terms that heavily favor one party).
  3. Can a standard-form contract be unconscionable?
    Yes. Contracts of adhesion—especially in consumer and employment contexts—are often scrutinized for unconscionable terms, particularly when there's unequal bargaining power.
  4. Are arbitration clauses always enforceable?
    No. Courts may strike down arbitration clauses that are overly burdensome, prohibit class actions unfairly, or are one-sided in favor of the drafter.
  5. Can unconscionable clauses be removed without voiding the whole contract?
    Often, yes. Courts can sever the unconscionable terms while enforcing the remainder of the agreement, depending on the jurisdiction and the contract's structure.

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