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Unconscionability by Joseph D. Holmes, Esq.


What Is an Unconscionable Contract?

An unconscionable contract is not the same as an illegal contract.  An illegal contract is one that is against the law because the subject matter of the contract is illegal.  For example, a court would obviously not enforce a contract between Gary and Steve whereby Gary agreed to pay Steve $5,000.00 to murder Gary’s wife.

In comparison, an unconscionable contract may be perfectly legal in terms of subject matter.  However, the circumstances under which the contract was signed or presented to one party are usually brought into question.  It is a type of contract that leaves one party with no real, meaningful choice, usually due to major differences in bargaining power between the parties.

In a lawsuit, if a court finds a contract to be unconscionable, it will typically declare the contract to be void, meaning both parties are released from their contractual obligations.

What Makes a Contract Unconscionable?

Put simply, the basic characteristic of an unconscionable contract is that one party signed the agreement under situations involving pressure, lack of information, or by being deceived.

The California Supreme Court spelt out its approach to determining whether a contract or provision thereof is unconscionable in Graham v. Scissor–Tail, Inc. (1981) 28 Cal.3d 807.  Under Graham, the court first determines whether an allegedly unconscionable contract is one of adhesion.  A contract of adhesion is one where the terms and conditions are set by one party while the other party has little or no ability to negotiate.

We encounter contracts of adhesion all the time.  Think of all the credit card terms and conditions we encounter on a daily basis – the small print and block paragraphs that seem to go on forever.  These are presented to us on a take-it-or-leave-it basis.  But this alone does not make a contract unconscionable.  Once a court deems an agreement a contract of adhesion, the court must then determine whether: (1) the contract term was outside of the reasonable expectations of the weaker party; or (2) was unduly oppressive or unconscionable.

If your credit card terms and conditions imposed stiff penalties once a card goes into default, such penalties would almost certainly be deemed “reasonably expected.”  However, if the terms buried deep in the terms and conditions stated that upon default, ABC Bank has the right to break in your home and seize all your worldly possessions, such a contract would clearly fall outside reasonable expectations, even if such a proviso were present in the contract you signed.

Another common issue in contract interpretation and unconscionability is the actual language used in the agreement.  Does the contract contain complicated and technically precise language that the average person wouldn’t understand?  If so, unconscionability may be a valid defense to enforcement of the agreement.  Was one party in a dominant position of power while the other was in a markedly weaker one?  These are just some of the factors courts consider when determining whether a contract is unconscionable.

If you find yourself involved in a contract dispute, the Law Office of David Philipson is here to help.  Our attorneys are skilled drafters and interpreters of contracts.  This allows us to litigate cases involving questions of contract, but also uniquely situates us to draft innovative contracts designed to avoid interpretation issues such as unconscionability.

If you think you may have an unconscionable contract that you would like to dispute, call the Law Office of David Philipson today for a free consultation to see how we can help you.