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Contracts II
University of South Dakota School of Law
Thatcher, Charles M.

Contracts Outline
Spring 2007

I. Chapter 3: The Justice Principle
1. Class 25
i. §4.27—Precursors of Unconscionability
1. Unconscionability: K so unfair as to “shock the conscience of the court”
2. Unconscionable Ks were not enforce in courts equity at common law
3. Campbell Soup Co. Wentz
a. Pp. 295
b. Campbell excused from buying carrots in circumstances beyond Campbell’s control, but Wentz prohibited from selling carrots elsewhere without permission
c. Court refused to grant equitable relief to a buyer of carrots
4. Constructive fraud:
a. Sharp and unscrupulous practices
b. Non-disclosure of material facts
c. Other unconscientious means
5. Woollums v. Horsley
a. Pp. 296
b. Huge diff. in price paid and market value, unequal bargaining positions contributed to finding of unconscionability
6. Standards for fairness of bargains that were fashioned in equity do not preclude the enforcement of bargains at law
ii. §4.28—Unconscionability
1. Llewellyn described UCC §2-302 as “perhaps the most valuable section in the entire Code.”
2. 2-302 applied by analogy or as an expression of a general doctrine to other kinds of Ks even though it strictly speaking only governs goods
3. Determination of unconscionability to be made by “the court as a matter of law” and not by a jury though evidence may be presented to aid in making of determination
4. BOP on party asserting defense of unconscionability
5. Term “unconscionability” incapable of precise definition
6. Basic test is “whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the K.”
7. Analogous provision of the UNIDROIT Principles on “gross disparity” which gives a few factors relevant to determination
8. Williams v. Walker-Thomas Furniture Co.
a. Pp. 300
b. “Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”
9. Two key factors, even today are “unreasonably favorable” (substantive unconscionability) and “an absence of meaningful choice” (procedural unconscionability)
10. Procedural unconscionability encompasses:
a. Employment of sharp bargaining practices
b. Use of fine print and convoluted language
c. Lack of understanding and inequality of bargaining power/skill
11. Judges have been cautious in applying doctrine of unconscionability
12. Most cases involve combination of substantive and procedural
13. If procedural alone rises to the level of misrepresentation, duress, or undue influence, K may be voidable w/out regard to substantive
14. Courts have resisted applying doctrine where there is only procedural w/out substantive unfairness though
15. “Customers who adhere to standardized contractual terms ordinarily ‘understand that they are assenting to the terms not read or not understood, subject to such limitations as the law may impose.’”
16. Factors making arbitration clauses unconscionable:
a. Lack of mutuality
b. Lack of consent
c. Prohibitive expense of arbitration
d. Preclusion of class representation
e. Courts have not uniformly condemned clauses though
17. Remedies:
a. Refusal to enforce entire K
b. Refuse to enforce/limit application of unconscionable term
c. Sever the offensive part of the clause and hold the remainder enforceable
18. Courts more reluctant to pass judgment on price term because parties can rarely claim surprise as to price and price is actually negotiable in many situations
19. Clauses limiting liability or remedies of a buyer of goods often have often been challenged
iii. UCC §1-103—Supplementary General Principles of Law Applicable
iv. UCC §2-302—Unconscionable Contract or Clause
v. R2d §208—Unconscionable Contract or Term

2. Class 26 – Unconscionability
i. §4.26 – Standardized Agreements
1. Traditional contract law was designed for a paradigmatic agreement reached by two parties of equal bargaining power through a process of free negotiation that is often not the case in today’s world where one party often assents with little or no negotiation.
2. Advantages of standardization
a. Simplify operations and reduce costs
b. The product of the skilled drafter becomes available to many
c. Standardization facilitates the accumulation of experience
3. Dangers of standardization
a. One party may impose terms on another
b. The party proffering the form has the advantage of time and expert advice in preparing the writing and it is almost inevitable produces a form slanted in its favor
c. The other party is usually completely or partially unfamiliar with the form and has not fully read it
d. Bargaining over terms of the form may not be between equals, it may be a contract of adhesion on a take-it-or-leave-it basis
4. The traditional response is that a party that signs an agreement is regarded as manifesting assent to it and may not later complain about not having read or understood it, even if the agreement is on the other party’s standard form.
5. Techniques the court uses in dealing with standard forms
a. Interpreting the language of the term to favor the weaker party
b. To refuse to hold a party to the entire form on the ground that it was not of a type that would reasonably appear to the recipient to contain the terms of a proposed contract
c. To refuse to hold a party to an offensive term on the ground that, although the writing may plainly have been an offer, the term was not one that an uninitiated reader out reasonably to have understood to be a part of that offer
6. The UCC and statutes reinforce these traditional judicial techniques.
7. Courts have held terms received after a contract has been made are ineffective
8. Shrink-wrap agreements are enforceable
9. Click-wrap agreements can be enforceable if the traditional requirements for assent are met, however, the mere act of downloading is not assent
10. These judicial techniques are not adequate to protect the problem of inequality, i.e., a person who has actual knowledge versus a person who is blissfully unknowing.
11. Example of O’Callaghan v. Waller Beckwith Realty Co.
a. Claim barred by an exculpatory clause in the lease
b. The court said the clause “does not appear to be amenable to the strict construction to which such clauses are frequently subject.”
c. The disparity of bargaining power was no unconscionable, there was no evidence O’Callaghan was concerned about the clause or attempted to negotiate over it or try to rent elsewhere.
d. The court felt this was better left to the legislature for action
12. Example of Henningsen v. Bloomfield Motors
a. Henningsen’s sued both the dealer and the manufacturer for breach of an implied warranty of merchantability due to the steering mechanism failing while the car was being driven.
b. The court did not hold the Henningsens to the declaimer on the back of the purchase order which was in eight and one-half inch fine print and disclaimed liability for breach of warranty and substitute for it a warranty that defective parts would be replaced for a limited period.
c. The dealer did not specifically call attention to the clause and an ordinary layman would not realize what he was relinquishing in return for what he was being granted
d. The court also said the standardized form designed for mass use imposed upon the automobile consumer a take-it-or-leave-it situation.
ii. §4.29 – Consumer Legislation
1. UCC was not initially intended to deal with problems of consumer protect, although consumer interests have been represented in its revisions, there has been both state and federal legislation to supplement protections afforded by common law and the UCC
2. Consumer legislation is usually directed at specific terms, such as finance charges or warranty disclaimers, singled out as likely to be unfair
3. Legislation designed to control terms two ways:
a. By specifying terms that are considered unfair and then prohibiting them and specified terms that are fair and requiring them
b. Disclosure of terms by giving adequate information to the consumer to make an informed choice
4. Example of Magnuson-Moss Act (1975)
a. A federal disclosure statute designed to prevent a consumer who is contemplating the purchase of durable goods from being confused or misled as to the warranties of the manufacturer or seller.
b. Requires a supplier of consumer product who gives a written warranty to designate it as either a “full” or a “limited” warranty
c. The supplier cannot disclaim implied warranties
5. Remedies by private lawsuit and public action are allowable
iii. R2d § 211 – Standardized Agreements
iv. Thatcher’s Board Notes for Class 26
1. Parties’ challenging the enforceability of the price term contends with the traditional rule that the court does not ordinarily inquire into the adequacy of the consideration.
2. When a litigant seeks “equitable remedy” in a “court of conscience,” the courts have inquired into the substantive fairness of the exchange R2d § 364(1)(c).
3. The doctrine of unconscionability was codified in UCC § 2-302 and adopted in R2d § 208 has its origins in cases where claimants sought such equitable remedies.
4. When someone claims that the contract price of goods or services is unconscionably high, the will court compare the price the personal challengening is obliged to pay under the terms of the contract with the value of the goods or services the challenger contracted to

“Illiterate Appellees” didn’t manifest even apparent assent (from an objective perspective) to the arb. clause when they were unable to read the written agreement and they did not have it read to them before signing it. Neither did the challengers manifest actual assent (from a subjective perspective) to the arb. clause when they signed the standard form contracts.
d. 5th Cir. reverses based on MI precedents, under which a party’s inability to understand a contract or a term of the contract is not a sufficient basis for concluding that the contract or term is unenforceable. The challengers could have had the written agreement read to them, court assumes they took risk in failing to do so. Challengers’ inability to read and their inability to understand the arbitration agreement does not render that agreement unconscionable or otherwise unenforceable. Nor does the failure of the proponent to inform the Illiterate Appellees that they were signing an arbitration agreement make that agreement unenforceable on grounds of unconscionability. Under Mississippi law, contracting parties are chargeable with an obligation to read the contract or have it read to them.

3. Class 27 – Standard Form Contracts
i. Thatcher’s Board Notes for Class 27
1. Invalidating Causes – Doctrines Under Which Courts “Police” Agreements
a. Incapacity/status
i. mental illness or defect – R2d § 15
ii. minority (“infancy”) – R2d § 14
iii. Intoxication – R2d § 16
b. Unenforceability on grounds of public policy – R2d §§ 178 and 179
i. Example – terms the enforcement of which unreasonably impair family relations – R2d § 191
c. Misleading conduct
i. Fraudulent or material misrepresentation – R2d §§ 159-172
d. Coercive conduct
i. Duress – R2d §§ 174, 176, and 176
e. Unfair persuasion
i. Undue influence – R2d § 177
f. Abuse of fiduciary relation – R2d § 173
g. Mistake
i. Mutual – R2d §§ 151, 152, 154, 157, and 158
ii. Unilateral – R2d §§ 151, 153, 154, 157, and 158
h. Unconscionability – UCC § 2-302; R2d § 208
i. Doctrine of reasonable expectations – R2d § 211(3)
2. Compare unconscionability and the doctrine of reasonable expectations
a. The two objectives of the doctrine of unconscionability are the prevention of unfair surprise and the enforcement of oppressive terms. Doctrine of unconscionability has most often been applied in cases involving non-negotiated terms in standard form contracts, it can also apply to terms in non-standard form contracts.
b. The doctrine of reasonable expectations applies exclusively in cases involving the enforcement of terms in standardized agreements. Objective is to prevent the enforcement of terms that would unfairly surprise the party that challenges those terms (the “challenger”; the “weaker” party; the “adhering party”; the “adherent”). Most unconscionability determinations are based upon a showing that (1) the challenger lacked a meaningful choice in acceding to the contract or to a particular term in the contract, and (2) the challenged term is unreasonably favorable to the party seeking its enforcement (the “proponent”; the “stronger” party; often the party who drafted the writing containing the challenged term(s)). In determining whether a party lacked a meaningful choice, the courts consider both the bargaining behavior of the parties and comparative status (bargaining power) of the parties.
c. In deciding whether a court should refuse to enforce a term in a standardized agreement under the doctrine of reasonable expectations, the courts consider
i. whether the challenger would not have manifested assent to a standardized written agreement if that party knew the writing contained the challenged term, and
ii. whether the proponent had reason to know that the challenger would not have manifested assent to the written agreement if the challenger knew it contained the challenged term.