Monopoly

• Common law contains weak protections against monopoly

• Statutes provide protection against price gouging

• Exceptions– Contracts of adhesion– Unconscionability

Unconscionability

Defense against the enforcement of a contract because the conditions were unfair to one party

Relevant Questions

• Were the terms unreasonably favorable to one party?

• Was there gross inequality of bargaining power?

• Did each party have a reasonable opportunity to understand the contract?

• Are the terms so unfair that enforcement of the contract should be withheld?

• One party would not voluntarily have accepted the terms. Therefore, they must either be incompetent or a victim of distress.– Infers distress from the terms of the contract.

Cooter and Ulen

• ..Lawyers frequently distinguish between substantive and procedural Unconscionability. Substantive Unconscionability usually refers to a price that is utterly disproportionate to market value. In contrast, procedural Unconscionability consists of circumstances and procedures in the bargain that violate widely-accepted norms of fairness. Thus, substantive Unconscionability refers to the terms or results of the contract whereas procedural Unconscionability refers to the circumstances and procedures under which the contract was formed. Substantive and procedural Unconscionability are often combined in actual cases because an unfair procedure frequently results in an unfair price. Instead of thinking of substantive and procedural Unconscionability as types of cases, it is better to think of them as different aspects of the same case.

Unconscionability

• Procedural and substantive unconscionability– Procedural – focuses on

unfairness at the formation of the contract

– Substantive – disproportionate value

Procedural Unconscionability

• Procedural – Focuses on unfairness at the

formation of the contract• Inequality in bargaining power

– Monopoly power

• Unfair surprise

– Terms highly favorable to one party

– Lack of mutuality

Examples of Procedural Unconscionability

• Use of incomprehensible or legalistic fine-print standard form contract provisions;

• Inequality between parties due to factors like age or illiteracy

• Switching contract documents at the last moment to include non-negotiated, one-sided terms;

• Pressuring signature on a contract before client can read it, or rushing the signing at a time when the consumer is vulnerable;

• Purposefully selecting impoverished consumers to target for sales.

Substantive Unconscionability

• Procedural unconscionability often results in substantive unconscionability. – Results are unreasonably favorable to one

party

• Disproportionate price (price above opportunity cost?)

• Economic analysis might determine whether the bargain was one sided by determining whether there was a legitimate business justification for the contract terms.– Is it efficiency enhancing?

Examples of Substantive Unconscionability

• Limitations or waiver of remedy clauses;• Disclaimer of warranties or limitation of

damages • Liquidated damages clauses; • Arbitration clauses• Notice requirements; • Blanket security interests; • Excessive price terms where there is a gross

disparity between price and value; • Clauses authorizing venue or jurisdiction in

distant forums; waiver of right to jury trial.

Add-on Clause

• A clause in a loan contracts that determines the default conditions on the loan

• The amount borrowed on the most recent purchase is added to the amount borrowed from previous purchases

• If the borrower defaults on the loan, all of the goods for which credit was extended may be repossessed to pay for the remaining balance on the loan.

Willliams v. Walker-Thomas Furniture

• Add on clause• “On April 17, 1962, appellant Williams bought a stereo set of

stated value of $514.95. She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. …

• The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant's financial position. The reverse side of the stereo contract listed the name of appellant's social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.…We cannot condemn too strongly appellee's conduct. It raises serious questions of sharp practice and irresponsible business dealings. “

• Weblink

Williams Postscript

– Case brought by Georgetown Law Students.– Furniture store closed because it no longer

could afford to extend credit to residents.– Add-on clause created the necessary collateral

to secure the loans– Were the residents served well by this decision?– Is it every possible for an add-on clause to be

conscionable?– If a Harvard lawyer signed this contract would it

still be unconscionable?– Is this unilateral mistake? Does this mean that

Williams is exempt from reading the fine print?

Add-on clause may be a response to market failure• Goods depreciate when purchased• Down payment can cover the initial

depreciation• Add-on clause can serve as substitute for down

payment• An excess in value of reclaimed items over the

remaining debt must be returned.• Even with an add-on clause the dealer may not

claim more than the remaining debt.• Cooter suggests that not enforcing an add-on

clause hurts poor consumers.

Judicially imposed limitations on adhesion contracts

• A contract or provision which does not fall within the reasonable expectations of the weaker or "adhering" party will not be enforced against him.

• A contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or "unconscionable.“

• Skier Sues for Injuries Even Though He Signed Release

Uniform Commercial Code

• § 2-302. Unconscionable contract or Clause.– (1) If the court as a matter of law finds the contract

or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

– (2) When it is claimed or appears to the court that the contract 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.

Contracts of Adhesion

• Drawn up by one party and presented to the other on a take it or leave it basis

• Party presented with the contract has little power

• Standard form contracts can increase the efficiency of exchange

• The term “contract of adhesion” should not be applied to all standard form contracts

Analysis of Unconscionability

• Analysis begins with an inquiry into whether the contract is one of adhesion

• Two judicially imposed limitations on adhesion contracts (See Jaramillo)

• A contract or provision which does not fall within the reasonable expectations of the weaker or "adhering" party will not be enforced against him.

• A contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or "unconscionable."

In Gillman v. Chase Manhattan Bank, (N.Y. 1988)

• The New York Court of Appeals held that in order to determine whether there has been procedural unconscionability in the contract formation process, a court must assess such factors as:

• (1) the size and commercial setting of the transaction;

• (2) whether there was a "lack of meaningful choice" by the party claiming unconscionability;

• (3) the "experience and education of the party claiming unconscionability;" and

• (4) whether there was "disparity in bargaining power.“ The court added that "deception," "high-pressured tactics," and the "use of fine print" were also appropriate factors to consider in the analysis.

Small v. HCF of Perrysburg, Inc. (6th Dist.-2004)

• Widow and executor brought negligence action against nursing home arising out of resident's death after he had been admitted in a semiconscious state, with his wife signing a durable health power of attorney when he was admitted, which included an arbitration clause. Trial court abused its discretion in staying action pending arbitration.

• Clause is substantively unconscionable as a condition of admission, despite its language to the contrary, where there was no means of rejecting the clause; it covered all claims; and it provided for payment of prevailing party's attorney fees.

• Clause is procedurally unconscionable where at time of signing, decedent appeared to be unconscious and was about to be transported to hospital; clause was not explained to elderly wife, who did not have an attorney present; and she was under considerable stress.

Review contracts

• Housing contract• EULA• Click wrap contract

Click Wrap Contract

• Other names– Click through– Shrink wrap contract

• Studies have found that very few read the contract (1 or 2 out of 1,000)

• Shrink-wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general

Liquidated damages

• Also called “stipulated damages”• The contract stipulates a sum

that will be paid upon breach• Not enforced when it is out of

line with the damages caused by the breach (unconscionable)

Reasons Courts Should Award Liquidated Damages

• Punitive element may be considered payment on an insurance contract

• They convey information about promisor’s reliability

• Penalties may be restated as bonuses

• Performance bonds are another alternative

Statutory Limitations

• Illegal contracts– Antitrust laws

• Predatory lending• Price gouging• PayDay Lending

Price Gouging

• State legislation – no federal prohibition

• At least 28 states have price gouging laws

• Usually limited to period of emergency

• Prices are capped at levels charged in the immediately preceding period

Hourly value in cleanup

Value of Groceries

Real cost of $1 ice with 4-

hour wait

Smith $10 $50 $41Buys Ice 

Jones $75 $300 $301Doesn't buy

ice

LaBand on Price Gouging

Posner on Price Gouging

• “Profound mistake”• The common law may not enforce

contracts because of– Necessity (Post v Jones)– Duress (Alaska Packers)

Posner on Price Gouging

• He argues that these cases are different from price gouging

• Post v Jones– The salvage ships did not create

the distress

• Alaska Packers– There was no shortage of labor.

The workers created the shortage

• Windfall profits are unavoidable

Are price ceilings an uncompensated taking?Is the controlled price just compensation?

Reasons for price gouging laws

• Those without cash (the poor) will suffer

• Crisis redistribution• High price may not stimulate

additional supplies in the immediate period

• Does reputation keep stores from price gouging?– Why don’t stores mark up the price of

umbrellas when it rains?

Price Gouging

• Price increase not due to a rise in costs

• How should cost be measured?– Historical cost– Market cost– Replacement cost– Opportunity cost

Florida v Medina

• Medina traveled from Miami-Dade County to the town of Matthews, North Carolina, where he purchased generators at a Costco store. (Map)

• Medina offered to consumers the Nikato generators for $600 that he had purchased for $279.99 each, and the Coleman generators for $900 that he had purchased for $529.99 each.

• Charged with violating Florida’s price gouging statute