Unconscionability is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms unfair to one party. Typically, such a contract is held to be unenforceable because the consideration offered is lacking or is so obviously inadequate that to enforce the contract would be unfair to the party seeking to escape the contract.
In and of itself, inadequate consideration is not enough to make a contract unenforceable. However, a court of law will consider evidence that one party to the contract took advantage of its superior bargaining power to insert provisions that make the agreement overwhelmingly favor the interests of that party. In such circumstances, the fact that the consideration was lower than what would ordinarily be expected in the circumstances will often result in the court refusing to allow the contract to be enforced.
There are several typical scenarios in which unconscionability is most frequently found:
1. Where a party that typically engages in sophisticated business transactions inserts boilerplate language into a contract containing terms unlikely to be understood or appreciated by the average person. Such terms might include a disclaimer of warranties, or a provision extending liability for a newly purchased item to goods previously purchased from the same seller.
2. Where a seller offers a contract of adhesion for the purchase of necessary goods (e.g. food, shelter, means of transportation).
3. Where a seller is vastly inflating the price of goods, particularly where this inflation is conducted in a way that conceals from the buyer the total cost for which the buyer will be liable.
For the defense of unconscionability to apply, the contract has to have been unconscionable at the time that it was made – later circumstances that have the effect of making the contract extremely one-sided are irrelevant. An interesting aspect of unconscionablity is that the determination is made by the judge, not by a jury, despite the fact that such a determination is very fact-intensive.
English case law
The leading case on this point is considered to be the English case of Lloyd’s Bank v. Bundy. In that case, Bundy had agreed to increase the mortgage on his house in order to maintain the credit line being extended to his son’s business. The English Court of Appeal ruled that as Bundy received no direct benefit from the agreement to increase the mortgage amount, and that the bank had threatened to call in the son’s loan if Bundy had not agreed to the extension, and that the amount of the loan was already higher than the existing mortgage, that the transaction was unconscionable and Bundy only had to honor the lower mortgage. Essentially, the court ruled that only the bank benefitted from the agreement to raise the amount of the mortgage.
Canadian case law
In a Canadian case, a member of the First Nations was allowed to rescind a contract for the sale of his boat and fishing license for a nominal amount. The boat was worthless but, unknown to the native, his fishing license was worth a great deal of money, and could have been mortgaged to finance a new boat. The court ruled that the buyer was merely trying to take advantage of the seller’s lack of knowledge of the value of the license and refused to allow the contract to be enforced.
However, sorely inadequate consideration in and of itself is not a determination of whether a transaction is unconscionable. For example, in an Ontario case, a property owner agreed to sell an option for the sale of his property for the sum of $1.00. The owner later learned that options to purchase property usually sell for more than nominal sums. The court enforced the contract in favor of the option holder, ruling that the negotiations over the price of the option and the price the option holder would pay for the house if he chose to buy were both fairly negotiated and that the seller had adequate opportunity to investigate the market and simply did not do so.
Australian case law
The leading Australian case is Commercial Bank of Australia Ltd v. Amadio (1983) 151 CLR 447. In this case, an elderly Italian couple with little command of English secured their son’s debts arising from his failing business. Their son misled them as to the extent of the guarantee, and the bank did nothing to explain it to the parents. When the son’s business failed, the Amadios had the contract set aside due to unconscionable dealing by the bank. Key elements that were relied upon were:
1. The parties must meet on unequal terms, such that one party has a disability vis a vis the other party, through such things as infirmity, age and language.
2. The stronger party knows of the special disability, or should have been aware of the special disability, and takes advantage of it.
3. The stronger party obtains a bargain which would be unconscionable to retain.
United States legislation
In the United States, the concept is established in Section 2-302 of the Uniform Commercial Code.