Key Takeaways:

  • Definition: An unconscionable contract is one that is so unfairly one-sided that courts may declare it unenforceable in whole or in part.
  • Legal Considerations: Courts evaluate unconscionability based on factors like bargaining power (oppression) and unfair terms (surprise).
  • Indicators of Unconscionability: Unequal bargaining power, undue influence, duress, and hidden provisions in the contract.
  • Legal Consequences: Courts may void the entire contract, remove specific provisions, or require modifications.
  • Preventative Measures: Clear contract terms, equal negotiating power, and fair provisions can reduce the risk of a contract being deemed unconscionable.
  • Types of Unconscionability: Procedural (lack of meaningful choice) and substantive (overly harsh terms).
  • Real-World Examples: Loan agreements with predatory interest rates, adhesion contracts, and fraudulent inducements.
  • Legal Recourse: Affected parties can seek to have an unconscionable contract declared void or renegotiated in court.

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

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.

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.

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.

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.

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. What makes a contract unconscionable?
    A contract is unconscionable if it is excessively unfair, one-sided, or if one party had significantly more bargaining power than the other.
  2. How do courts determine if a contract is unconscionable?
    Courts evaluate procedural unfairness (lack of meaningful choice) and substantive unfairness (overly harsh terms) when determining unconscionability.
  3. Can an unconscionable contract be enforced?
    If a court finds a contract or certain provisions unconscionable, it may be declared unenforceable in part or in full.
  4. What are common examples of unconscionable contracts?
    Examples include predatory loan agreements, non-negotiable employment terms, unfair arbitration clauses, and misleading lease agreements.
  5. What can I do if I signed an unconscionable contract?
    You can attempt to renegotiate the terms or take legal action to have the contract voided. Consulting an attorney can help determine the best course of action.

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