In today's lecture, we continue discussing formation defenses. While the defenses we have considered to this point have focused on how the contract was formed, we now turn our attention to defenses that focus as well on what the contracts say. We begin by examining the unconscionability doctrine, which in part inquires into the fairness of the contract's terms. As with our other information defenses of incapacity, mistake, fraud, and undue influence, you should be able to see that a finding of unconscionability is consistent with the goal of policing the revealed preference inference. When courts are not confident that a party is a manifestation of assent indicates that the contract is value enhancing, the courts are more likely to let that party void the agreement. We already introduced the unconscionability defense when we earlier discussed Williams versus Walker Thomas Furniture. The excerpt assigned for today's lecture which comes from a 1989 case called Fleet versus US Consumer Council delves further into how courts apply the unconscionability doctrine today. In Fleet, the defendant United States Consumer Counsel represented that it would be able to help consumers facing the loss of their homes through foreclosure. In fact, the USCC simply charge consumers for referring them to attorneys when free referrals were available to these consumers through their state bar associations. The plaintiff Fleet was a consumer who had paid defendant for this service. Fleet brought this consumer class action suit against USCC in the instant court, The Federal District Court for the Eastern District of Pennsylvania and the court found the USCC's practices were unconscionable. So, did USCC's practice of charging ill-informed consumers for a simple service that could be freely obtained elsewhere, violate New Jersey's Unfair and Deceptive Practices Act? The court held that it did. The court first notes that unconscionability is hard to define but states that its purpose is to establish a broad business ethic. Among other factors, the court will consider whether the price grossly exceeded the price at which similar services were readily obtained in similar transactions by like consumers and whether a professional seller is seeking the trade of those most subject to exploitation. In this case, the court found that USCC's practices were fraudulent because, "Goods sold have little or no value to the consumer for the purposes for which she was persuaded to buy them," and, "The consumers who turned to USCC for help were financially troubled and distraught." The modern unconscionability doctrine is only about 50 years old but has historical antecedents. In 1750, the Court of Chancery described an unconscientious bargain as one such as no man in his senses and not under delusion would make on the one hand and as no honest and fair man would accept the other. This quotation is suggestive of what I earlier described as the abstention inversion. Some bargains are so substantively unconscionable that there must have been some procedural defect in their formation. One of the parties must have been not in his senses or under delusion or somehow tricked into the contract. This case and other similar earlier cases however, were not brought under a single clearly established doctrinal umbrella until the latter part of the 20th century. Crucial in this process was the publication and enactment of the UCC's Section 2-302 which permitted courts to deny enforcement with regard to contracts for the sale of good, where a contract is unconscionable at the time it was made. This language, unconscionable at the time it was made, makes clear that the doctrine is a formation defense to be judged at the time of a contract formation, as opposed to the impracticability defense that we'll study later, that often concerns impracticability or impossibility that arises after the contract is formed. While the consideration doctrine does not inquire into the adequacy of consideration, when courts decide unconscionability cases, they demand proof. Not only that the contract terms are substantively unfair, but they also require some procedural defect in the process through which the parties arrived at the agreement. In other words, although the unconscionability doctrine focuses on what the contract's terms are, this is substantive unconscionability, courts must also consider and find some degree of procedural unconscionability, some defect in the process of its formation. The excerpt from Fleet illustrates this point. The court considered factors other than the simple disparity between the price paid and the market value of the services. The court noted that unconscionability is more likely to be applicable when a professional seller is seeking to the trade of those most subject to exploitation, the uneducated, the inexperienced and people of low incomes. Applying this asymmetry to the case at hand, the Court observed the consumers who turn to USCC for help were financially troubled and distraught. Some were unemployed or disabled. Many were facing the loss of their homes through foreclosure. These factors were indicative of imposition. They had nothing to do with what the contract said the substantive terms but it helped explain how these unfair terms came about. So, let's imagine the following quiz. A large manufacturer enters into a routine contract to purchase a large number of widgets from one of its suppliers, also a large company. After signing the contract but before accepting delivery, the manufacturer learns that several alternative suppliers would have provided the same number of widgets for 30 percent less. Can the manufacturer assert an unconscionability defense under Fleet and get out of the contract? No. Even assuming that the manufacturer could show the price was unfair, this hypothetical is missing the element of procedural unconscionability. It's missing evidence that there was a defect in the process. The contracts in Fleet were between a professional seller exploiting vulnerable consumers. The manufacturer and this example is a large sophisticated company engaged in routine business transactions. Standard form contracts presented on a take-it-or-leave-it basis are often referred to as contracts of adhesion. California courts have taken the lead in holding that a contract of adhesion is always procedurally unconscionable. The unconscionability question in California then boils down to whether the bargain is sufficiently unconscionable from a substantive standpoint to warrant non enforcement. Notwithstanding California's position, however, contracts of adhesion are generally enforceable. Thus, while the phrase "contract of adhesion" has a pejorative overtone, it's important to keep in mind that most adhesive contracts will be judicially enforced merely arguing that your client signed a standardized contract. A contract of adhesion that was presented on a take-it-or-leave-it basis will not normally be sufficient to avoid the finding of an enforceable agreement. If this were not the case, internet commerce would be dead because virtually all internet purchases come via click-it-or-leave-it contract she offers. The unconscionability doctrine might be conceptualized merely as a default. If a seller cures the procedural defects information and the consumer still consents to a substantively one-sided contract, the doctrine at least as a conceptual matter, would allow enforcement. But to my mind, a fair reading of these unconscionability cases suggests that unconscionability is more of a mandatory rule. While fine print procedural defects can be remedy, other defects concerning consumers' circumstances and the party's relative bargaining power are virtually impossible to cure so that the doctrine's substantive cap on one-sidedness represents a mandatory restriction on freedom of contract. Let's end with a hypothetical. A pharmacist in a small town in a mountain valley typically sells medicine X over-the-counter for five dollars and has a good inventory for the winter. There are no other drugstores. A violent snowstorm closes in the valley with 30-foot drifts. An outbreak of illness creates a demand for this very medicine. The pharmacist has enough in stock to supply everyone who is ill but now charges $25 per bottle on a take-it-or-leave-it basis. Most take it. Two days later, a helicopter lands with enough medicine for everyone at five dollars. Those who took it demand their money back. Should they get it? What about the nonlegal sanctions against the pharmacist? While there are some statutes prohibiting price gouging during weather disruptions in the marketplace, these statutes are inconsistent with one type of efficiency theory. If the blizzard makes medicine more valuable, it's efficient for pharmacists to raise the price even if the current inventory was presumably purchased by the store at a lower price. Price gouging gives the stores better incentives to stock larger quantities and make sure that the medicine ends up in the hands of the highest valuing users. Instead, the price gouging statutes tend to randomly distribute the medicine or force higher value users to waste efforts racing to the stores. This is not to say that the price gouging statutes are wrong. Sometimes, equity trumps efficiency concerns in the public consciousness and in our laws. Well, let's review. Today, we talked about the unconscionability doctrine and under the unconscionability doctrine, a contract will not be enforced if its terms are seriously unfair to one of the parties. However, such substantive unfairness is not usually enough to set aside a contract. The complaining party must also demonstrate some flaw in the bargaining process that allowed the unfair terms to arise.
