Key Takeaways

  • Definition: Unconscionable contracts are agreements so unfair or one-sided that courts may declare them unenforceable in whole or in part.
  • Legal Criteria: Courts assess procedural unconscionability (lack of meaningful choice) and substantive unconscionability (overly harsh or oppressive terms).
  • Factors Considered: Unequal bargaining power, hidden terms, complex legal language, duress, undue influence, and deceptive sales tactics.
  • Common Examples: Predatory loan agreements, overly restrictive non-compete clauses, adhesion contracts, and lease agreements with excessive penalties.
  • Remedies: Courts can void the entire contract, remove specific provisions, or require modification of the unfair terms.
  • Prevention: Use clear, understandable language, allow negotiation, and ensure terms are balanced and transparent to avoid being deemed unconscionable.

An unconscionable contract is one that is so one-sided or so unfair that it shocks the conscience. The court usually deems such contracts unenforceable either in whole or in part, depending on if the entire contract is unconscionable, or if only certain terms or provisions identified therein are unconscionable.

Unconscionability is a common defense in a breach of contract claim. For example, if the plaintiff brings a breach of contract claim against the defendant for failing to perform under the contract, the defendant can make a counterclaim stating that either certain terms in the contract or the entire contract itself is unconscionable because it oppresses the party.

How a Court Determines Unconscionability

A court will usually look at two main factors when determining unconscionability:

  1. Bargaining power, i.e., oppression
  2. Unfair terms, i.e., surprise

Additional Factors Courts May Consider

In addition to examining bargaining power and fairness of terms, courts may look at:

  • Circumstances at Signing: Whether the disadvantaged party had time to review the agreement or seek legal advice.
  • Market Alternatives: If the weaker party had no realistic alternative but to accept the contract.
  • Sophistication of Parties: Courts may weigh the level of business or legal experience each party possessed.
  • Public Policy Concerns: Contracts that contradict statutory protections or promote unlawful conduct are more likely to be struck down.
    These considerations help the court determine if the contract’s formation process or terms were fundamentally unjust.

Procedural vs. Substantive Unconscionability

Courts analyze unconscionability under two categories:

  • Procedural Unconscionability: Occurs when a party lacks meaningful choice due to deceptive practices, complex legal jargon, or an imbalance in bargaining power. This often includes hidden clauses, rushed signings, or agreements presented as non-negotiable.
  • Substantive Unconscionability: Focuses on the terms of the contract itself. If provisions are excessively one-sided, punitive, or place undue hardship on one party, courts may find them unconscionable.

A contract may be voided if it meets both criteria, though in some cases, extreme substantive unfairness alone can be enough for courts to intervene.

Examples of Procedural and Substantive Unconscionability

  • Procedural: A lender rushes a borrower into signing a loan agreement without time for review, hiding key fees in fine print.
  • Substantive: A service contract imposes a penalty of five times the service cost for minor breaches, far exceeding reasonable damages.
    In many jurisdictions, courts require evidence of both types to declare a contract unconscionable, but an extreme case of either can be enough to warrant judicial intervention.

Bargaining Power

One party will have bargaining power over another party if the disadvantaged party is less knowledgeable in the industry, much younger than the other party, or of less intelligence. For example, if two individuals enter into a contract – one is fifty and another is nineteen-years-old. Generally, the older individual will have more knowledge regarding the legal concept of contract due to his or her age. This could be a consideration that courts will take into account when looking at unconscionability. Another example is if one party to the contract is a well-established business that has operated in the lighting industry for decades. The other party, the consumer entering into the contract, might have much less knowledge in the lighting industry, and not understand the technical jargon, costs associated with such materials, etc. In this case, the court could deem the contract, or some of its provisions, unconscionable.

Indicators of Grossly Unequal Bargaining Power

  • One party has exclusive access to critical market resources.
  • The weaker party faces urgent financial or personal pressure.
  • Only one party drafted the terms, and refusal to sign meant losing essential goods or services.
  • Use of technical or industry-specific language that a layperson could not reasonably understand.
    Such disparities often arise in consumer finance, healthcare, or employment contexts where individuals have little room to negotiate.

Unfair Terms

Unfair terms could include one-sided terms or provisions that benefit one party over another. For example, if one party includes a clause of limited liability if it breaches the contract, this will likely constitute unfairness and be unenforceable, particularly if the advantaged party is the cause of the breach. Another example of unfair terms would be hidden language found in the contract, whether it be included in small font or hidden in other clauses that are unrelated to the language being specified. Such hidden language will almost always constitute unfairness, particularly if the disadvantaged party was unaware of the verbiage in the agreement.

Hidden and Misleading Provisions

Courts are especially cautious about provisions that:

  • Are buried in unrelated sections of the contract.
  • Contradict oral promises made during negotiations.
  • Require the weaker party to waive legal rights without clear disclosure.
  • Include mandatory arbitration clauses that heavily favor the drafting party.
    The “element of surprise” is a hallmark of unconscionability, particularly when the disadvantaged party had no meaningful chance to discover the term before signing.

Unconscionable Contract Examples

A contract can be unconscionable in any one of the following circumstances:

  1. Undue influence
  2. Duress
  3. Unequal bargaining power
  4. Surprise

Undue influence could occur if one party puts significant pressure on the other party to sign the contract. This could involve the superior party making false promises, or trying to persuade the other party into signing the agreement.

Duress occurs when one party threatens the other party. The threat itself might be physical or verbal, and could be a threat to injure the other party, his family, or friends.

Unequal bargaining power, as previously noted, occurs when one party has a significant advantage over the other party, due to age, intelligence, or knowledge.

Surprise occurs when one party includes terms unknown to the other party. This could include technical jargon, small font, or even adding in terms and provisions after the other party already signed the agreement.

Real-World Examples of Unconscionable Contracts

Examples of unconscionable contracts include:

  • Predatory Loan Agreements: Some payday loans or mortgage agreements have exorbitant interest rates that disproportionately harm borrowers.
  • Employment Contracts with Unfair Non-Compete Clauses: Some contracts prevent employees from working in their field for an unreasonably long time.
  • Adhesion Contracts: These are “take-it-or-leave-it” agreements where consumers have no ability to negotiate (e.g., restrictive arbitration clauses in service contracts).
  • Fraudulent Inducement Cases: If a party is misled about key contract terms (e.g., undisclosed fees or bait-and-switch tactics), the contract may be invalidated.
  • Unfair Lease Agreements: Some landlords include hidden clauses that impose excessive penalties for minor infractions.

If a contract contains these elements, courts may determine that the terms are unenforceable.

Unconscionable Contract Remedies

The court has a few options when concluding that the contract or terms therein are unconscionable. Such options include:

  1. Voiding the entire contract
  2. Voiding part of the contract
  3. Having the party modify specific terms in the contract

If the court indicates that the entire contract is unconscionable, for any reason, it will deem the contract void. In this case, the parties will walk away free of any obligation to perform under the contract.

If the court determines that only part of the contract is void, then the terms and provisions that are deemed unconscionable will be stricken from the contract. In this case, the remainder of the contract will still be enforceable.

If the court asks the parties to modify the unconscionable terms of the contract, they will be able to keep that language in, but will ask only that those terms be modified. Thereafter, performance under the contract can continue.

Limits on Remedies

Even when a court finds a contract unconscionable, remedies are not unlimited. Judges often aim to restore fairness without overhauling the entire agreement. For example:

  • Partial Enforcement: Retaining fair provisions while striking only the offending terms.
  • Reformation: Modifying an excessively broad clause, such as reducing a non-compete from five years to one year.
  • Restitution: Requiring the advantaged party to return benefits obtained under an unfair provision.
    This approach ensures remedies are proportionate and preserve legitimate aspects of the agreement.

How to Avoid Unconscionable Contracts

To prevent disputes over unconscionability, businesses and individuals should:

  • Ensure transparency: Contracts should be written in plain language, with no hidden terms.
  • Allow negotiation: If an agreement is non-negotiable, it raises the risk of being deemed unconscionable.
  • Balance obligations: A contract should not disproportionately benefit one party at the expense of the other.
  • Understand legal rights: Consulting a legal professional before signing can help ensure fairness.

By following these practices, both businesses and individuals can reduce the risk of legal disputes related to unconscionable contracts.

Frequently Asked Questions

  1. Do both procedural and substantive unconscionability have to be proven?
    Not always. Many courts require both, but in extreme cases, a single type may be sufficient.
  2. Can standard form contracts be unconscionable?
    Yes. Adhesion contracts can be unconscionable if they leave no room for negotiation and contain unfair terms.
  3. Are unconscionable contracts always illegal?
    Not necessarily. They may be legally valid until challenged, but courts can void or modify them if found unconscionable.
  4. What industries are most associated with unconscionable contracts?
    Commonly in lending, rental housing, insurance, healthcare services, and some employment sectors.
  5. How can a business reduce the risk of unconscionability claims?
    By using plain language, allowing negotiation, providing clear disclosures, and ensuring terms are balanced for both parties.

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