Unconscionable Contracts

Question 1

What is the definition of unconscionability?

Answer 1

○ Absence of meaningful choice for one party together with contract terms that unreasonably favors another party
○ Gross Inequality of bargaining power

Question 2

What are some factors to consider in determining whether a contract is unconscionable?

Answer 2

○ Price is one of the most important factors in determining if a contract is unconscionable

Other factors to consider:
○ Did each party have a reasonable opportunity to understand the terms of the contract, considering education and experience?
○ Was there a maze of fine print?
○ Deceptive sales practices?

Question 3

What is the difference between Procedural Unconscionability and Substantive Unconscionability?

Answer 3

Procedural Unconscionability - the procedures of formation of a contract were followed, were you allowed to read it? Did you understand the terms? Was it a “take it or leave it” scenario

Substantive Unconscionability - even if the procedures were followed, was it an unfair contract?

Question 4

What options does UCC 2-302 allow a court if a contract is determined to be unconscionable?

Answer 4

• If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may
  ○ Refuse to enforce the contract
  ○ Enforce the remainder of the contract without the unconscionable clause
  ○ Limit the application of the unconscionable clause as to avoid any unconscionable result

Question 5

What is the preexisting duty rule?

Answer 5

• The primary purpose of the preexisting duty rule is to prevent what has been referred to as the “hold-up” game e.g. a contractor refuses to complete work under an unprofitable contract unless he is awarded additional compensation
• A preexisting duty is not consideration. The subsequent agreement to impose the obligation of a contract must rest upon a new and independent consideration
• An act of forbearance required by a legal duty owing to the promisor is not sufficient consideration
• The promise not to breach is not fresh consideration
• Obtaining a modification to an agreement under duress is not fresh consideration.
• Restatement Second section 73 - performance of a legal duty neither doubtful nor the subject of honest dispute is not consideration

Question 6

What is the exception to the preexisting duty rule?

Answer 6

• The courts have been reluctant to apply the preexisting duty rule when a party to a contract encounters unanticipated difficulties and the other party not influenced by coercion or duress, voluntarily agrees to pay additional compensation for work already required to be performed under the contract
• The modern trend is that courts should enforce agreements modifying contracts when unexpected or unanticipated difficulties arise during the course of performance of a contract, even though there is no consideration as long as the parties agree voluntarily
• Restatement Second 89D(a) enforces a modified contract
  ○ If the parties voluntarily agree
  ○ The promise to modify the contract was made before the contract was fully performed
  ○ The circumstances were unanticipated by the parties
  ○ The modification is fair and equitable

Also - An undertaking to pay part of a debt, or at a place other than where the obligor was legally or to pay in property regardless of its value, or to pay an amount less than what is due to creditors has been held to constitute consideration sufficient in law

Question 7

What is the rule for modifications under the UCC

Answer 7

• An agreement modifying a sales contract needs no consideration to be binding
• Modifications must meet the good faith test
  ○ The test of good faith between merchants includes observance of reasonable commercial standards of fair dealing in trade…and may require an objectively demonstrable reason