Unconscionability and public policy: bargains the court will not enforce

Washington, D.C., nineteen fifty seven to nineteen sixty two. A furniture store sells household goods on instalments. Each purchase is on a printed form that calls itself a lease. Title stays with the store until every payment is made. And there is a clause. All payments now and hereafter made by purchaser shall be credited pro rata on all outstanding leases, bills and accounts due the Company by purchaser at the time each such payment is made.
The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. Every new purchase was secured by everything bought before. In April nineteen sixty two a woman who had been buying since nineteen fifty seven owes one hundred and sixty four dollars on her account. She buys a stereo set for five hundred and fourteen dollars ninety five. The balance is now six hundred and seventy eight dollars.
The back of the stereo contract lists the name of her social worker and her income, a government stipend of two hundred and eighteen dollars a month, on which she supports herself and seven children. She defaults. The store sues to take back everything she has bought in five years. Over those years she has bought eighteen hundred dollars of goods and paid fourteen hundred.
The lower courts enforce the contract. The intermediate court says it cannot condemn too strongly the store's conduct, but finds no ground upon which this court can declare the contracts in question contrary to public policy, and invites Congress to legislate. So here is the question. The clause was in the contract. She signed. Is there anything a court can do? Think about it before I go on, because the court found a power it had never used.
And now the question I keep asking. What exactly did these people promise each other? Furniture on credit, secured by all the furniture, forever. Every defense so far has attacked consent, by incapacity, pressure or deceit. Today's two defenses attack the bargain itself. Unconscionability says some bargains are too one-sided to enforce. Public policy says some bargains the law will not touch, whoever consented.
Here is the first line for the board. Where the element of unconscionability is present at the time a contract is made, the contract should not be enforced. 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. Procedural and substantive. Both, usually, in some proportion.
Second line, the Code. Section two three oh two. 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.
A question for the judge, not the jury, decided as of the time of contracting.
Third line. A promise is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.
The court weighs the parties' justified expectations, the forfeiture, and any special interest in enforcement, against the strength of the policy, whether refusal will further it, and the seriousness and directness of the misconduct. And where only part of a term offends, the court may enforce the rest, but may not add to it.
Now the case. Williams against Walker-Thomas Furniture, Court of Appeals for the District of Columbia Circuit, nineteen sixty five, Judge Skelly Wright. We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. Congress had just enacted the Code for the District, after these contracts were made, and the court took its section two three oh two as persuasive authority for following the rationale of the cases from which the section is explicitly derived.
Then the test, which has been quoted in every unconscionability case since. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration.
Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain.
But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms.
In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.
The substantive test came from Corbin. Whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place. The court did not decide the case. No findings had been made, so it remanded for the trial court to apply the test. Judge Danaher dissented, warning of thousands upon thousands of installment credit transactions and the merchants who take long chances on buyers with little credit.
Notice what the majority did and did not say. It did not say a cross-collateral clause is always void, or that poor buyers cannot be held to contracts. It said the court has the power, and it gave the factors. Absence of meaningful choice, inequality of bargaining power, fine print, deceptive selling, and terms that are extreme by the standards of the trade. Most courts require some of each kind, and a great deal of one can make up for a little of the other.
Now public policy, with a corporation that made bongs. California, nineteen seventy eight. A man sells a corporation, American Horse Enterprises, taking promissory notes for the price. The corporation makes jewelry and drug paraphernalia, roach clips and bongs used to smoke marijuana. Making them is not, in nineteen seventy eight, a crime. Possessing and using marijuana is, and has been since nineteen twenty nine.
The buyer defaults. Years of litigation follow, a settlement, a judgment for one hundred and ninety four thousand dollars, vacated. At the third trial the seller testifies to what the company made, and the judge stops the case.
The Court of Appeal, in Bovard against American Horse Enterprises, nineteen eighty eight, Justice Puglia, affirmed the dismissal. It started with caution, quoting a century of California authority.
Public policy is an unruly horse, astride of which you are carried into unknown and uncertain paths. The power of the courts to declare a contract void for being in contravention of sound public policy is a very delicate and undefined power, and, like the power to declare a statute unconstitutional, should be exercised only in cases free from doubt.
Then it applied the Restatement's balance, section one seventy eight. On the side of enforcement, the court found little.
Neither party was reasonably justified in expecting the government would not eventually act to geld American Horse Enterprises, a business harnessed to the production of paraphernalia used to facilitate the use of an illegal drug. The seller's forfeiture was significantly mitigated if not negligible, because he had already taken back the machinery. And there was no special public interest in the enforcement of this contract, only the general interest in preventing a party to a contract from avoiding a debt.
On the other side, the policy was strong. The public policy against manufacturing paraphernalia to facilitate the use of marijuana is strongly implied in the statutory prohibition against the possession, use, et cetera, of marijuana. Refusing enforcement would further it, by serving notice on manufacturers of drug paraphernalia that they may not resort to the judicial system to protect or advance their business interests.
Both parties knew what the products were for. The contract was illegal and void, and the parties, being equally at fault, were left where the court found them. The buyer kept the company and paid nothing.
Now the most common public policy case in practice, the covenant not to compete. Laramie, Wyoming. A young veterinarian, fresh from school, joins a small animal clinic. Her written contract says that on leaving she will not practise small animal medicine for three years within five miles of the city limits.
A year later, on a rumour that she is buying a competing practice, the clinic's owner offers to release her for forty thousand dollars. She tells him the agreement is not worth the paper it was written on. He fires her.
She buys a clinic in town and opens in July nineteen ninety one. Her client list grows from three hundred and sixty eight to nine hundred and fifty, and one hundred and eighty seven of them are her old employer's clients.
The trial court enforced the covenant as written. The Supreme Court of Wyoming, in Hopper against All Pet Animal Clinic, nineteen ninety three, Justice Taylor, started with the policy. The common law policy against contracts in restraint of trade is one of the oldest and most firmly established. Covenants not to compete are construed against the party seeking to enforce them, and the initial burden is on the employer to prove the covenant is reasonable.
The test. A restraint is reasonable only if it is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public. And the key distinction. While an employer may seek protection from improper and unfair competition of a former employee, the employer is not entitled to protection against ordinary competition. What the clinic could protect was its client relationships, files, pricing and practice methods, which she had learned there.
The activity limit was reasonable. She could still practise large animal medicine, a significant area of practice in this state, without moving. Five miles was reasonable. The clients came from across the county. The public was not hurt. Several other clinics served small animals in Laramie.
But three years was not reasonable. A replacement veterinarian would meet virtually all the clients within a year, prices changed yearly, and the owner himself admitted that influence over a client disappears in a short period of time. We are unable to find a reasonable relationship between the three year durational requirement and the protection of the clinics' special interests.
Under the old rule, an unreasonable term killed the whole covenant. The court abandoned it and adopted the Restatement's partial enforcement, section one eighty four. A court may treat only part of a term as unenforceable if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing. One year was enforced.
But the court's power in such a case is not a power of reformation, and it will not add to the scope of the term in any way. The court can cut. It cannot draft.
Put the three cases side by side. Walker-Thomas, a bargain so one-sided and so unfairly obtained that the court may refuse it, on the buyer's behalf. Bovard, a bargain the court will not enforce for anyone, because the public interest against it outweighs the interest in enforcement, and both parties knew. Hopper, a bargain enforced as far as it is reasonable and no further. Three answers to the same question. Consent is necessary. It is not always sufficient.
Now let's change one fact. The stereo buyer was a lawyer with a good income who had read the pro rata clause and signed because the store's prices were the lowest in the city. Choose an answer before I go on.
The clause is enforced. Both halves of the Walker-Thomas test have gone. Meaningful choice, education, opportunity to understand, and no deceptive selling. A term that is unusual and harsh is not unconscionable when a capable party chose it with open eyes for a price. Unconscionability protects against the absence of real consent to an oppressive term. It does not rewrite the deals of people who could look after themselves.
Change one fact again. American Horse Enterprises had made jewelry and, as a sideline, ordinary tobacco pipes, and the buyer had used the machinery to make bongs only after the sale. Choose.
Now the seller's contract is enforced. The Restatement asks about the directness of the connection between the misconduct and the term, and the seriousness of the misconduct, and the court in Bovard leaned on the fact that both parties knew the corporation's products would be used primarily for purposes which were expressly illegal.
A lawful business, turned to unlawful use by the buyer alone after the sale, gives the seller justified expectations and no misconduct. The balance tips to enforcement, and the buyer cannot plead his own later wrong.
Change one fact a third time. The veterinarian's covenant had said no veterinary practice of any kind, anywhere in Wyoming, for ten years. Choose.
Now the court has to decide how far its blue pencil reaches, and this is where the states divide. Under the Restatement rule Wyoming adopted, the court may enforce a narrower part of a term, but it will not add to the scope of the term in any way, and it will only cut for an employer who obtained the term in good faith.
A covenant that overreaching invites the finding that the employer drafted it to intimidate, and many courts refuse to save it at all. Draft what you can justify, because a court may give you nothing if you ask for everything.
Here is what people get wrong here, and why it is tempting. The first mistake is treating unconscionability as a general fairness power. It is not. It needs a defect in the bargaining process and a term that is extreme by the standards of the trade, and it is decided as of the day of contracting.
The second mistake is thinking public policy voids any contract touching an illegal activity. The horse is unruly. The court weighs, and enforces unless the case is free from doubt.
The third mistake is in drafting covenants. An employer who asks for more than he needs risks the whole clause in a strict state, and gets only what is reasonable in a lenient one. The court cuts. It does not draft.
Here is the rule, in one breath. A court may refuse to enforce a contract or a clause that was unconscionable when made, meaning an absence of meaningful choice together with terms unreasonably favourable to the other party, and will refuse to enforce a promise where the public policy against it clearly outweighs the interest in enforcement. Where only part of a term offends, a court may enforce the reasonable part, but may not add to it. Now, five questions.