unconscionability contracts – prof. merges march 31, 2011

Unconscionability

Contracts – Prof. Merges

March 31, 2011

Onconscionability and Standard Form Contracts

Fritz KesslerOne of the last surviving German legal

scholar/refugees who fled Nazi Germany for the United States in the 1930s, "Fritz" Kessler, as he was known, taught the law of contracts, negotiable instruments, insurance, jurisprudence and anti-trust.

Most of his career in the United States, starting in 1935, was spent at the Yale Law School, with a few intervening years at the University of Chicago and short terms as visiting professor at Harvard and Berkeley.

After retiring from Yale in 1970, he taught as a member of the faculty at Boalt for seven years.

Legal system is efficient

Rakoff v. Epstein

Standard Form Contracts

• Pro’s

• Cheaper to write, enforce

• National uniformity• Consumers can

“shop” for terms if they care to

• Con’s

• Perversion of “consent”

• No meaningful choice

• Disparities in power continue, are magnified

“[G]ross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms.”

Restatement Second, Contracts § 208, Comment d.

Do consumers “shop” for terms?

Robert A. Hillman, On-Line Boilerplate:Would Mandatory Website Disclosure of E-Terms Backfire?, 104 Mich. L. Rev. 837 (2006)

Most do not shop

• Competition and the Quality of Standard Form Contracts: An Empirical Analysis of Software License Agreements"

• BY: FLORENCIA MAROTTA-WURGLER, New York University School of Law

Marotta-Wurgler• Survey of 647 software license agreements

While software products' prices are highly sensitive to competitive conditions such as concentration and market share, license agreement terms are not.

By demonstrating that sellers with market power do not offer unusually harsh terms, the results suggest that an important aspect of the standard analysis of procedural unconscionability is misguided.

Carnival Cruise Lines

• Facts

• History

“It is agreed . . . That all disputes and matters whatsoever arising under . . . This Contract shall be litigated . . . Before a court located in the State of Florida . . .”

Forum Selection Clause

• NB: Acceptance of this K . . .

• P. 480

What is the holding?

What is the holding?

• Clause enforceable

What factors were important to the Court?

Key Factors: p. 483

• Notice

• “Business Justification”/Consumer benefits

• “Fairness”

Carnival

• Is there discussion of “acceptance”?

• How does the Court address the issue of the “bindingness” of the term at issue?

Carnival

• Is there discussion of “acceptance”?

• How does the Court address the issue of the “bindingness” of the term at issue?

NOTICE concept: p. 484

Business justification

• What is the motive of the large firm drafting the Contract?

• P. 392 bottom

Consumer benefits

• Top 484

• Does this makes sense to you?

“Fundamental fairness”

• P. 484

• Convinced?

• “Retained option of rejecting K” – agree?

Dissent

• Major points

Williams v Walker-Thomas Furniture Inc.

Williams v Walker-Thomas Furniture Inc.

• History

• Facts

The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker- Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title.

Unconscionability defined

“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.

…In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power.”

§ 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.

Law of consideration relevant?

• Factors present here . . .

Law of consideration outdated?

• Factors present here . . .

• Gross disparity in price (vs. market)

• Limited financial resources of buyer –

• Known to seller

Quick review

1. Status

2. Behavior/process

3. Substance

Rent to Own

Rent to own• 2.3 percent of U.S. households had used

rent-to-own transactions in the last year, and 4.9 percent had done so in the last five years.  Compared to households who had not used rent-to-own transactions, rent-to-own customers were more likely to be African American, younger, less educated, have lower incomes, have children in the household, rent their residence, live in the South, and live in non-suburban areas. 

• Seventy-five percent of rent-to-own customers were satisfied with their experience with rent-to-own transactions.  Satisfied customers gave a wide variety of reasons for their satisfaction, favorably noting many aspects of the transaction, the merchandise and services, and the treatment they received from store employees. http://www.ftc.gov/reports/renttoown/rtosummary.htm

• http://www.ftc.gov/bcp/conline/pubs/alerts/pdayalrt.htm

• “Payday loans”

Updating Williams

• Silva v. Rent-A-Center, Inc., 912 N.E.2d 945, 952 (Mass. 2009) – K was a lease, not a credit device; usury laws did not apply

• Contra: Perez v. Rent-A-Center, Inc., 892 A.2d 1255, (2006), cert. denied, 549 U.S. 1115 (2007)

Forty-seven States, including Massachusetts, as well as Guam, Puerto Rico, and the District of Columbia, have enacted rent-to-own legislation. Only New Jersey, Wisconsin, and North Carolina have not.   Hawkins, Renting the Good Life, 49 Wm. & Mary L. Rev. 2041, 2052 n. 37 (2008)

Interest or rental pmts?

Over thirty-eight per cent of leases result in an actual purchase either by renting for the term of the agreement or through an early purchase.   Anderson, Rent-To-Own Agreements:  Purchases or Rentals?, 20 J. Applied Bus. Res. 13, 15 (2004).