Contracts II Unconscionability Not to be shared FH Buckley fbuckleygmuedu 2 Forms of Unconsionability UCC 2302 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 ma ID: 430172
Download Presentation The PPT/PDF document "1 1 George Mason School of Law" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
![This article was downloaded by: [George Mason University], [Mr Paul Go](https://thumbs.docslides.com/129456/this-article-was-downloaded-by-george-mason-university.jpg)
Slide1
1
1
George Mason School of Law
Contracts II
Unconscionability
Not to be shared
© F.H. Buckley
fbuckley@gmu.eduSlide2
2
Forms of UnconsionabilityUCC § 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.Slide3
3
Forms of UnconsionabilityUCC § 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.Slide4
4
Forms of UnconsionabilityUCC § 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.Slide5
5
Forms of UnconsionabilitySubstantive UnconscionabilityThe “just price” doctrineProcedural Unconscionability“bargaining naughtiness”Slide6
6
Was secured lending in Walker-Thomas a problem of substantive unconscionability?
6Slide7
7
Substantive UnconscionabilityUsury legislationBarriers to personal property security interests in consumer goods in Article 9Slide8
8
Procedural UnconscionabilityWas Mrs. William’s consent tainted in some way, short of actual duress or fraud?Slide9
9
Why might a consumer agree to “excessive” interest rates?Lack of capacity?Something like Duress?Something like Fraud: An informational problem?Slide10
10
Lloyds Bank v. Bundy Slide11
11
Lloyds Bank v. Bundy What did the bank manager (Head) do that was wrong?Did he owe any duties to the borrower (Michael)?Did he owe any duties to Herbert?Slide12
12
Denning’s Categories“Duress of goods”: Inequality of bargaining powerHochman at 407Austin v. LoralSlide13
13
Denning’s CategoriesThe expectant heir: One-and-twentyWealth, my lad, was made to wander, Let it wander as it will; Call the jockey, call the pander, Bid them come and take their fill. 20 When the bonny blade carouses, Pockets full, and spirits high— What are acres? What are houses? Only dirt, or wet or dry. Should the guardian friend or mother 25 Tell the woes of wilful waste, Scorn their counsel, scorn their pother;— You can hang or drown at last! Samuel JohnsonSlide14
14
Denning’s CategoriesUndue influenceFiduciary relationshipEmployer exploiting employeeD&C Builders v. ReesD&C accepts £300 as full payment of a debt of £482 when it desperately needed money to fend off bankruptcy, and Rees knew thisSlide15
15
Denning’s CategoriesSalvage AgreementsPost v. JonesSlide16
16
A General Principle of Inequality of Bargaining Power?“English law gives relief to one who, without independent advice, enters into a contract or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.” Slide17
17
Why look at an English case?Maryland is a foreign jurisdiction to Virginians…Slide18
18
Why look at an English case?The importance of style:Broadchalke is one of the most pleasing villages in England. Old Herbert Bundy was a farmer there. His home was at Yew Tree Farm. It went back for 300 years. His family had been there for generations. It was his only asset. But he did a very foolish thing. He mortgaged it to the bank. Up to the very hilt. Slide19
19
Why look at an English case?The Analogic Imagination:Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on "inequality of bargaining power". Slide20
20
Why might a consumer agree to “excessive” interest rates?An informational problemThornborrow v. Whitacre, 92 Eng.Rep. 270 (1705): W. borrows £5 and in return promises to pay two grains of rye-corn in the first week, four in the second, eight in the third, and so on for a year. The court refused to enforce the contract when it appeared that there was not enough grain in the whole world to satisfy this.Was Lloyd’s Bank such as case? Or Williams v. Walker-ThomasSlide21
21
Why might a consumer agree to “excessive” interest rates?A moral hazard problemWhat does bankruptcy law and the welfare safety net do to our investment decisions?Slide22
22
Moral Hazard
A range of outcomes associated with an investment opportunitySlide23
23
Moral Hazard
How is one
’
s economic calculus affected if costs
are curtailed at 0 on the left side of the curve?Slide24
24
Moral Hazard
In that case, it
’
s all
upside:
Heads I win, tails you loseSlide25
25
Moral Hazard: We make risker choices when we don’t pay for downsides Thank God I have insurance!Slide26
26
Moral Hazard Do traffic signals cause accidents?Slide27
27
How to reduce speed levels…Slide28
28
Moral HazardSo a consumer might be more willing to court default with a high risk loan because of the welfare safety net.Slide29
29
Moral HazardSo what’s “excessive”?Is there such a thing as “excessive risk aversion”Slide30
30
Why might a consumer agree to “excessive” interest rates?SignallingSlide31
31
SignallingTwo borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them?Slide32
32
SignallingTwo borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them?Assume that default is costly for both borrowers. However, the low risk borrower has a lower probability of default and a lower cost of defaultSlide33
33
SignallingA signalling equilibria if a “non-mimicry” constraint By their willingness to accept the cost of a high interest loan one can tell them apart and they don’t have an incentive to switchSlide34
34
SignallingSeparating equilibrium: Benefit > Cost*High Quality Borrower Benefit < Cost*Low Quality Borrower
*Cost is a function of the probability of defaultSlide35
35
SignallingSignalling doesn’t work if a pooling equilibriumLow quality can mimic high qualitySlide36
36
SignallingPooling equilibrium Benefit > CostHigh Quality Borrower Benefit > Cost
Low Quality BorrowerSlide37
37
Cheap Talk as a Pooling Equilibrium
Hobbes: He which performeth
first doth but betray himself
to his enemy.Slide38
38
SignallingA separating equilibrium if the low risk borrower is unwilling to accept a penalty on default?Slide39
39
Seabrook: 502Apartment to be ready three months later
39
Unfinished Apartment BuildingSlide40
40
SeabrookHow long was the delay?
40Slide41
41
SeabrookDo you think counsel for Commuter Housing was trying to pull a fast one in clauses 33 and 19?
41Slide42
42
SeabrookDo you think counsel for Commuter Housing was trying to pull a fast one in clauses 33 and 19?What did the court say was missing?
42Slide43
43
SeabrookDo you think counsel for Commuter Housing was trying to pull a fast one in clauses 33 and 19?What did the court say was missing?Why not strike the clause and imply a reasonable time (and might that be four months?
43Slide44
44
SeabrookCan you articulate the legal principle behind the case?
44Slide45
45
SeabrookCan you articulate the legal principle behind the case?“absence of meaningful choice”“Once the consumer enters to merchant’s trap … he is caught in a web”Land a “scarce commodity”“The concept of laissez-faire ... Has no place in our enlightened society”
45Slide46
46
Here’s one legal principle …
46Slide47
47
SeabrookDid the lessee have “no choice but to sign an unconscionable lease agreement”“does not have the option of shopping around”
47Slide48
48
SeabrookDid the lessee have “no choice but to sign an unconscionable lease agreement” Were there other rental properties in NYC?
48Slide49
49
SeabrookDid the lessee have “no choice but to sign an unconscionable lease agreement” Were there other rental properties in NYC?If they were hard to get, might rent control have had something to do with this?
49Slide50
50
SeabrookJust what was unconscionable?Did the lessee know that the building was not completed when he signed the lease?
50Slide51
51
SeabrookJust what was unconscionable?Do you think the lessee might have considered that there was a possibility that the building would not be completed three months later?
51Slide52
52
SeabrookJust what was unconscionable?Do you think the lessee might have considered that there was a possibility that the building would not be completed three months later?What do you think he would have expected to happen in that case?
52Slide53
53
SeabrookIf you thought that the lessor should have provided for a maximum period, is that the hindsight bias at work?
53Slide54
54
Henningsen1960 Plymouth
54
Look: Fins!!!Slide55
55
Henningsen1960 Plymouth … in two-tone!
55Slide56
56
HenningsenWith a push-button tranmission!
56Slide57
57
And today?
Chevrolet
SparkSlide58
58
Henningsen1960 Plymouth
58Slide59
59
HenningsenAnd what did they do with their car!!
59Slide60
60
HenningsenAre exemption clauses intrinsically suspect?
60Slide61
61
HenningsenA right to dicker?
61
“No bargaining is engaged
with respect to it”
$3.99? I think we can do better, don’t you?Slide62
62
HenningsenWhy only a three months warranty on parts?
62Slide63
63
HenningsenWere the Big Three immune from competition?Look at the list on 506
63Slide64
64
HenningsenWere the Big Three immune from competition?
64Slide65
65
HenningsenWere the Big Three immune from competition?If so, why do you think that was?
65Slide66
66
HenningsenWere the Big Three immune from competition?Is a similarity in prices or terms across a market evidence of cartelization or of a competitive market?
66Slide67
67
HenningsenWere the Big Three immune from competition?Is a similarity in prices or terms across a market evidence of cartelization?Would you expect to a monopolist exploit his clout with prices and not terms?
67Slide68
68
HenningsenWould you expect to a monopolist exploit his clout with prices and not terms? Is it different if the information about warranties is difficult to understand?
68Slide69
69
HenningsenWere the Big Three immune from competition?Is a similarity in prices or terms across a market evidence of cartelization?Does competition as to terms assume that all consumers screen?Free riding?
69Slide70
70
HenningsenWere the Big Three immune from competition?Is a similarity in prices or terms across a market evidence of cartelization?Does competition as to terms assume that all consumers screen?Suppose you heard that one firm had an extortionate contract?
70Slide71
71
Litigation or Regulation?OIRA’s Mandate: Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people. In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.
71Slide72
Federal Arbitration Act of 1925Partial preemption of state lawRent-a-Center v. Jackson at 51372Slide73
73
73
George Mason School of Law
Contracts II
Unconscionability
Not to be shared
© F.H. Buckley
fbuckley@gmu.eduSlide74
74
How thick are the fairness constraints?Fairness in the 18th, 19th and 20th centuriesThornborrow v. WhitacrePrinting v. SampsonHenningsen
74Slide75
Next dayAdd Scott 74-84 on conditions75Slide76
76
Fairness in the two-person bargaining gameThe Edgeworth Box Function provided a bargaining model based on ordinal utility (indifference curves)
76Slide77
77
77
Mary
Bess
A
B
C
D
E
F
G
Recall the Contract Curve
Indifference curve in commodity spaceSlide78
78
The two-person bargaining gameThe Edgeworth Box Function teaches us that bargaining is a non-zero sum game
78Slide79
79
The two-person bargaining gameThe Edgeworth Box Function teaches us that bargaining is a non-zero sum gameBut at the heart of the bargaining game is a zero-sum game
79Slide80
80
80
Mary
Bess
A
B
C
D
E
F
G
Recall the Contract Curve
Indifference curve in commodity spaceSlide81
81
81
•
•
•
A
B
C
•
•
F
G
A is the endowment point
Blowing up the bargaining lensSlide82
82
82
•
•
•
A
B
C
•
•
F
G
Does unconscionability have anything to do with how bargaining gains are divided?
Is your intuition that
G is in some sense
fairer than B or C?Slide83
83
83
•
•
•
A
B
C
•
•
F
G
Does unconscionability have anything to do with how bargaining gains are divided?
But as we are talking
about ordinal utility, it is not
meaningful to speak of how
much better off someone is
at G relative to B or CSlide84
84
84
•
•
•
A
B
C
•
•
F
G
Does unconscionability have anything to do with how bargaining gains are divided?
To do so, we would need
to move from ordinal
to cardinal utilitySlide85
85
Ordinal and Cardinal UtilityOrdinal numbers: First, second, third…Cardinal numbers: 1, 2, 3 …
85Slide86
86
Are you a cardinalist?Yes, if you think interpersonal utility comparisons are meaningful
86Slide87
87
Are you a cardinalist?You are charged with designing a country’s welfare policy. Should wealth transfers be from rich to poor or the other way around?
87Slide88
88
88
A
G
C
We move from commodity to
utility space
Cardinalists assume
we can measure utility levelsSlide89
89
89
A
G
C
The units of measurement are now in
“
utils,
”
not commodities
Cardinalists assume
we can measure utility levelsSlide90
90
90
A
G
C
Utility space
Let
’
s suppose we can
measure Mary
’
s utility levelsSlide91
91
91
A
G
C
G
'
B
Mary
’
s utility
Bess
’
s utility
Utility Space
And suppose we can
do the same for BessSlide92
92
92
0
1.0
1.0
Mary
Bess
To simplify we normalize the
utility functions of both from 0 to 1.0Slide93
93
93
A
C
B
BC is concave (bends outward) because we assume that joint utility is maximized when gains are shared
Mary
Bess
We can then represent the contract curve in utility spaceSlide94
94
94
0
1.0
1.0
Mary
Bess
•
Mary
insists
on a payoff
of .95
.95
The hard
bargainerSlide95
95
95
0
1.0
1.0
Mary
Bess
•
Mary
insists
on a payoff
of .95
.95
Do we have fairness intuitions which think this unfair?Slide96
96
96
We have $1,000 to divide between us.
I first decide how the money is to divided.
The ultimatum gameSlide97
97
97
We have $1,000 to divide between us.
I first decide how the money is to divided.
In the second stage you decide whether or not to accept the split I propose.
The ultimatum gameSlide98
98
98
We have $1,000 to divide between us.
I first decide how the money is to divided.
In the second stage you decide whether or not to accept the split I propose.
If you accept the split we both take our respective shares.
If you reject the split neither of us get anything.
The ultimatum gameSlide99
99
99
In the first round I choose $950, leaving you $50
Take it or leave it?
The ultimatum gameSlide100
100
100
You see that Safeway refuses to charge a premium for a shovel during a snow storm
Is it being irrational?
Do we have built-in fairness constraints?