Contracts II Outline

CONTRACTS: SPRING 2012 – WORKS
UNCONSCIONABILITY
Unconscionability is the worst and last arrow in the quiver.  Only use it if desperate.  Unconscionability is only good against arbitration clauses
–          R2K 208
o   A K is considered unconscionable if it “shocks the judicial conscience.”  If a K (or a term in the K) is unconscionable at the time the K is made, a court may refuse to enforce the K, or may enforce the remainder of the K without the unconscionable term.
–          UCC 2-302
o   UCC § 2-302 applies to all contracts, not just sale of goods.
o   (1)  If the court as a matter of law finds the K or any clause of the K to have been unconscionable at the time it was made the court may refuse to enforce the K, or it may enforce the remainder of the K without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result
o   (2)  When it is claimed or appears to the court that the K or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.
§  Subsection 2 means that there must be “word done,” meaning that there must be an evidenciary hearing as to whether the K or Term is unconscionable.
–          “Adhesion K’s”
o   An Adhesion K is a type of K in which one side has all the bargaining power and uses it to write the K primarily to his or her advantage.  An adhesion K contains standard terms that are presented on a take it or leave it basis.  Most adhesion K’s are valid, but some can be considered unconscionable if it is so unfair to the weaker party that a court will refuse to enforce it (or the specific term, according to R2K 208 and UCC 2-302(a))
–          Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one or the parties together with K terms which are unreasonably favorable to the other party.
§  Substantive Unconscionability – “Unreasonably favorable”
·         Where the clause of the K itself (as opposed to the process used to arrive there) is unduly unfair and one sided.
·         Protects against unfair exchange
§  Procedural Unconscionability – “Absence of meaningful Choice”
·         Where one party is induced to enter into a K without having any meaningful choice.
·         If you have a procedural problem, a judge can protect one against unfair surprise and unfair pressure
–          Eisenberg  model of Unconscionability
–          4 types of Unconscionability claims
o   Distress
§  “My kingdom for a glass of water,” or, “My kingdom for brain surgery.”
·         Glass of water hypo – Distress might work.  Man lost in the desert, a woman finds him with a large jug of water in her jeep and negotiates the water for a large portion of the man’s estate.  Man agrees, takes the water, but later doesn’t pay.  She sues.
o   Distress is different from Duress because there is no threat.
·         Brain surgery hypo – Distress is not likely to work.  The surgeon invested time, energy and money to get through med school, create a special form of brain surgery with tiny robots for which he charges millions of dollars, take it or leave it.  People should not be deterred from specialization (we want financial incentives in place).  Man was a millionaire, came in with a splitting headache, and agreed to pay for the surgery, but once the surgery is finished and he gets the bill, he claims that it “shocks his conscience.” 
§  Distress is not a strong argument, and there are very few instances in which it would work.
o   Unfair Persuasion
§  (1)  Odorizzi:  Teacher who resigned under pressure of potential sexual molestation charges.  Teacher claimed undue influence because he was in a fragile emotional state, and the principal and superintendant took advantage of him.  Undue influence could open the door to unfair persuasion.  
§  (2)  Promising at funeral to pay dead son’s debts.  At funeral, someone tells grieving mother that son owed him money, and wanted her to promise to pay him.  The mom, in a vulnerable state, promised.  The mom was not a rational bargainer.  He is “striking while the iron is hot.”
o   Price Ignorance
§  Tree Trimmers – one neighbor gets trees trimmed for $3000, and another for $600.  The person paying more is upset.  The person may have assumed risk by not seeking other offers, there were other tree trimmers.  The argument may be that the person had no idea what the price was and was surprised.  (probably a loser)
§  Toker:  Welfare mother in inner city makes promise to pay money for items.  Was approached by a door to door salesman and he sells a fridge for 3 times the market value.  Mother is ignorant of price and doesn’t have a way to figure out the price.  (Should we treat mom the same as the man in the desert?)
o   Transactional Incapacity
§  Williams v. Walker Thomas: Welfare mother buys items on credit and collaterals her other purchases that are then taken from her from her inability to pay.  Judge rules unconscionable
–          Carnival Cruise Lines v. Schute – Standard form – K on ticket in small print that Carnival is not liable for any accidents that may happen on the boat.  The court argued on the basis of economic fundamental fairness that the forum selection clause was not unconscionable, since with that specific term the cruise line was able to lower its prices for its patron, allowing all to benefit from the clause.
–          C&J Fertilizer Inc. v. Allied Mutual Insurance Co – Farmer bought a burglary insurance policy.  Comes back from a trip and discovers there was a theft.  The thieves did not leave any exterior markings that there had been a forced entry into the building.  The insurance terms require that there must be evidence of the theft on the exterior of the building.  There had clearly been a theft, even tire tracks on the outside of the building showing where the thieves loaded the materials and took off.  This case applies the Doctrine of Reasonable Expectations
o   The Doctrine of Reasonable Expectations:  2 Pronged:
§  (1) The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance K’s will be honored even though painstaking study of the policy provisions would have negated those expectations
§  (2) If the enforcement of a policy provision would defeat the reasonable expectations of the great majority of policyholders whose claims it is relevant, it will not be enforced even against those who know of its restrictive terms
o   The provision in this K was deemed unconscionable, violated the reasonable expectations of the insured.
o   (DRE doesn’t work well outside of insurance K’s)
–          R2K 211
o   (1) Except as stated in (3), where a party to an agreement signs or otherwise manifests assent to a writing that has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the agreement
o   (2)  Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing
o   (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not a part of the agreement.
 
How to use Unconscionability: