Unconscionability and the Contingent Assumptions of Contract Theory

Bowling Green State University Bowling Green State University

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Unconscionability and the Contingent Assumptions of Contract Unconscionability and the Contingent Assumptions of Contract

Theory Theory

M. Neil Browne

Bowling Green State University

, [email protected]

Lauren Biksacky

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UNCONSCIONABILITY AND THE CONTINGENT

ASSUMPTIONS OF CONTRACT THEORY

M. Neil Browne

∗

& Lauren Biksacky

∗∗

2013

MICH. ST. L. REV. 211

ABLE OF CONTENTS

NTRODUCTION ........................................................................................... 212

THE DOCTRINE OF UNCONSCIONABILITY ............................................ 216

A. Early Forms of Unconscionability ............................................... 216

B. The Uniform Commercial Code and Restatement

(Second) of Contracts .................................................................. 217

C. Substantive vs. Procedural Unconscionability ............................ 219

D. Problems with U.C.C. § 2-302 .................................................... 224

E. Remedies for Unconscionability ................................................. 225

II.

QUESTIONABLE ASSUMPTIONS OF CONTRACT THEORY ..................... 226

A. Addressing Those Opposed to Unconscionability ....................... 226

B. Contracting Parties Are Rational Actors? ................................... 228

1. Child or Adult? ..................................................................... 229

2. Consumer Behavior .............................................................. 232

3. Superstition ........................................................................... 233

4. Cognitive Biases .................................................................... 233

C. Contracting Parties Make Decisions Based on

Complete Information? ................................................................ 238

III.

COMPARATIVE APPROACHES TO UNCONSCIONABILITY ...................... 240

A. Australia ...................................................................................... 240

B. Canada ......................................................................................... 242

C. Germany ...................................................................................... 243

D. France .......................................................................................... 246

E. Commonalities in U.S., German, and French Law ......................

248

IV.

CASE LAW: THE UNCLEAR DOCTRINE OF UNCONSCIONABILITY ........ 249

A. Harris v. Green Tree Financial Corporation .............................. 250

B. Doctor’s Associates, Inc. v. Casarotto ........................................ 252

ONCLUSION .............................................................................................. 254

∗ Distinguished Teaching Professor of Economics, Bowling Green State Universi-

ty.

∗∗ Honors Scholars Research Associate, Bowling Green State University.

212 Michigan State Law Review Vol. 2013:1

Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tossed, to me,

I lift my lamp beside the golden door.

-Plaque on the Statue of Liberty

Unconscionability decisions mix radical rhetoric with conservative actions.

The courts often sound like they are doing something extreme, but their actions do

not bear this out. Parties remain free to determine with whom they will trade and

upon what terms. This is true no matter how unreasonable a given contract may

appear to an outside observer. Unconscionability maintains its relevance as a sup-

plement to traditional contract defense doctrines.

INTRODUCTION

In 1971, W. David Slawson estimated that 99% of all contracts do not

resemble the Platonic ideal of a document of jointly negotiated terms, but

rather are lists of terms presented by one party to the other on a pre-printed

form.

Although this estimate is forty years old, it underestimates our cur-

rent market exchange situation; the pervasiveness of form contracts stipulat-

ed by one party has increased.

Contract law generally provides for the enforcement of such contracts,

allowing the powerful party to essentially govern over consumers and

weaker parties.

Classical contract theory allows for this enforcement of

contracts based upon a number of assumptions about human nature and the

bargaining process.

For instance, it assumes that the parties freely enter into an agreement

or bargain as equals.

To see why the legal community believes parties can

freely bargain as equals, we must imagine a world in which the perfect con-

tract exists. A perfect contract is one in which all contingencies are account-

ed for and efficiently allocated between the parties, all relevant information

has been communicated, each resource is with the party who values it the

1. Daniel T. Ostas, Predicting Unconscionability Decisions: An Economic Model

and an Empirical Test, 29 A

M. BUS. L.J. 535, 583 (1992).

2. W. David Slawson, Standard Form Contracts and Democratic Control of Law-

making Power, 84 H

ARV. L. REV. 529, 529 (1971).

3. Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Uncon-

scionability, 70 U.

CHI. L. REV. 1203, 1203-04 (2003).

4. Slawson, supra note 2, at 536.

5. L

AURENCE KOFFMAN & ELIZABETH MACDONALD, THE LAW OF CONTRACT 4 (6th

ed. 2007).

Contingent Assumptions of Contract Theory 213

most, each risk is allocated to the least cost bearer, and no future gains from

exchange are possible.

Furthermore, classical contract theory assumes parties will be able to

bargain equally because they have similar resources

and all contracting

parties are rational adults.

In a world of perfect contracts and rational parties, the state should

regulate or intervene as little as possible. It is not the task of the law to en-

sure that a fair bargain is struck or to inquire whether the parties had in fact

met as equals.

Rather, it is the task of the individual bargainers of the con-

tract to ensure the terms of the contract are fair.

We live in a world where perfect contracts do not exist, and vulnerable

contracting parties such as consumers, tenants, the poverty-stricken,

and

employees often suffer as a result.

The law of contract is engaged in trying

to balance the upholding of traditional market liberalism with the need to

protect those who may be vulnerable.

One way of protecting the vulnera-

ble in contract law is through increasing the court’s usage of the doctrine of

unconscionability.

6. ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 186 (2d ed. 1997).

7. Classical contract theory thus assumes the existence of general competition. See

OFFMAN & MACDONALD, supra note 5, at 4. In the classical model of contracts, true equali-

ty is a prerequisite for freedom of contract. Id.

8. See Paula England, The Separative Self: Androcentric Bias in Neoclassical

Assumptions, in B

EYOND ECONOMIC MAN: FEMINIST THEORY AND ECONOMICS 37, 37-38

(Marianne A. Ferber & Julie A. Nelson eds., 1993).

9. “The notion of contract as a bargaining process arose concomitantly with the

doctrines of laissez-faire and of the free enterprise system. . . . In the laissez-faire market

place, economic agents, unfettered by government restrictions, interacted freely. Agents met,

conferred, and, acting in their own self-interest, contracted.” Lewis A. Kornhauser, Com-

ment, Unconscionability in Standard Forms, 64 C

ALIF. L. REV. 1151, 1152-53 (1976).

10. Schwartz states:

A contracting party’s poverty is commonly thought to militate in four ways against

enforcing an agreement. First, poverty may impede the buyer’s efforts to purchase

a “fair” contract. . . . Second, poverty is thought to correlate strongly with a buyer’s

lack of commercial sophistication. . . . Third, poverty may restrict the flow of

commercial information to poor consumers. . . . Fourth, poverty may exacerbate

the consequences of certain contract clauses. An acceleration clause, for example,

may bear more harshly upon a poor consumer than upon an affluent consumer.

Alan Schwartz, A Reexamination of Nonsubstantive Unconscionability, 63 V

A. L. REV. 1053,

1056-57 (1977).

11. See P.S.

ATIYAH, AN INTRODUCTION TO THE LAW OF CONTRACT 27-34 (5th ed.

1995). Atiyah argues that since the 1980s the United States has witnessed a renaissance of

classical principles of contract law. Id. at 27. The political emphasis on freedom of choice,

the value of a free market economy, and a less paternalistic role for the state created an at-

mosphere of classical contract theory. Id. The political and economic climate since the 1980s

has fostered a resurgence in the ideas of freedom of contract and emphasized less depend-

ence on a benevolent state. Id.

12. See K

OFFMAN & MACDONALD, supra note 5, at 4.

214 Michigan State Law Review Vol. 2013:1

Unconscionability is not intended to erase freedom of contract,

but to

assure that the agreement has resulted from real bargaining between parties

who had freedom of choice and understanding

and the ability to negotiate

in a meaningful fashion.

As Chief Justice Hughes said in Morehead v.

People of New York ex rel. Tipaldo:

13. In Rowe v. Great Atlantic & Pacific Tea Co., 385 N.E.2d 566 (N.Y. 1978), the

New York Court of Appeals highlights the opposition between freedom of contract and pro-

tecting the vulnerable through encouraging fair bargaining. The court asserts the need for the

doctrine of unconscionability and in doing so states:

It is . . . far too late in the day to seriously suggest that the law has not made sub-

stantial inroads into such freedom of private contracts. There exists an unavoidable

tension between the concept of freedom to contract, which has long been basic to

our socioeconomic system, and the equally fundamental belief that an enlightened

society must to some extent protect its members from the potentially harsh effects

of an unchecked free market system. . . . [L]aw has developed the concept of un-

conscionability so as to prevent the unjust enforcement of onerous contractual

terms which one party is able to impose under the other because of a significant

disparity in bargaining power.

Id. at 569.

14. It is for this reason that even the most stalwart Libertarians should be in favor of

invoking the doctrine of unconscionability when applicable. Classical and Libertarian con-

tract theory are both built around the foundational assumption of the existence of a meaning-

ful choice. If one party is defrauded by another and deceived into making an agreement

detrimental to them in some way, how can this be seen as a meaningful choice? See, e.g.,

URRAY N. ROTHBARD, THE ETHICS OF LIBERTY 133 (1982). Rothbard argues:

Unfortunately, many libertarians, devoted to the right to make contracts, hold the

contract itself to be an absolute, and therefore maintain that any voluntary contract

whatever must be legally enforceable in the free society. Their error is a failure to

realize that the right to contract is strictly derivable from the right of private prop-

erty, and therefore that the only enforceable contracts (i.e., those backed by the

sanction of legal coercion) should be those where the failure of one party to abide

by the contract implies the theft of property from the other party.

Id. (emphasis omitted). Implicit in Rothbard’s argument is the idea that any contract, which

when enforced legitimates a theft of private property by one party against another, is equally

as illegitimate as not enforcing the contract he describes. He defines theft as the taking of

one’s property without their consent. Id. So, what if a contract is negotiated with such vast

discrepancies in bargaining power between parties that one party is not, through no fault of

his own, privy to all that they have agreed to? Since the more powerful party is taking pos-

session of the other’s property without the party’s explicit consent, then is this act not theft as

well? It does seem to fit under, “Mr. Libertarian,” Murray Rothbard’s definition of theft, and

thus it appears even Libertarians should find such contracts unconscionable.

15. Robyn L. Meadows, Unconscionability as a Contract Policing Device for the

Elder Client: How Useful Is It?, 38 A

KRON L. REV. 741, 744 (2005). Meadows argues that the

doctrine of unconscionability should be adopted in many situations where the elderly are

unfairly taken advantage of. See generally id. Specifically, in many contracts with elderly

parties, the assumptions of classical contract theory do not hold true. See generally id. For

example:

There were a number of unconscionability cases involving elderly women and

dance studios, which frequently involved dance lessons for life at a cost of tens of

thousands of dollars . . . . In finding these contracts unconscionable, some courts

Contingent Assumptions of Contract Theory 215

We have had frequent occasion to consider the limitations of liberty of contract.

While it is highly important to preserve that liberty from arbitrary and capricious

interference, it is also necessary to prevent its abuse, as otherwise it could be used

to override all public interests and thus in the end destroy the very freedom of op-

portunity which it is designed to safeguard.

Likewise, this Article argues for the court’s increased invocation of

the doctrine of unconscionability in cases involving unfair contracts. Part I

explains the doctrine of unconscionability, its theoretical foundations, and

its legal precedents.

Part I also clarifies the distinction between the forms

of procedural and substantive unconscionability, and how the courts subse-

quently apply each form of the doctrine.

Part II argues that the reason why

courts should move away from classical contract theory and toward a juris-

prudence embracing the doctrine of unconscionability is because of the

many faulty assumptions of classical contract theory.

A summary of evi-

dence from psychological and behavioral sciences, as well as consumer

research, suggests that humans often behave irrationally and without com-

plete information.

In other words, because consumers are not fully rational

and informed, the assumptions of classical contract theory are incorrect, and

thus the theory crumbles under scrutiny. Part III provides alternative ap-

proaches to enforcing the unconscionability doctrine through a comparative

lens.

Specifically, the Article examines unconscionability law in Australia,

Canada, Germany, and France, and clarifies areas in which the United

States is both at the forefront and far behind in terms of unconscionability

standards. Part IV critically evaluates the policing of unconscionability by

the courts and points out the inherently contradictory approach to uncon-

considered the fact that the dance studio knew that it was unlikely that the elderly

customer would ever reap the full benefit of the contract given the customer’s age

and physical condition [and the lack of understanding on the part of the elderly

dancer].

Id. at 747. These dance contracts were a result of highly unequal bargaining power. See id. at

744-45; see, e.g., Bennett v. Bailey, 597 S.W.2d 532 (Tex. Civ. App. 1980). In this case, the

court determined there was evidence to support a jury’s finding of unconscionable conduct

because dance instructors used excessive pressure on a lonely, elderly widow. Bennett, 597

S.W.2d at 535. By exerting this pressure, the instructors were able to convince the woman to

purchase excessively expensive dance lessons. Id. As a result, the court held the dance studio

took advantage of the elderly customer’s vulnerability and the terms of the agreement were

unbalanced. Id.

16. Morehead v. New York ex rel. Tipaldo, 298 U.S. 587, 627 (1936) (Hughes, J.,

dissenting).

17. Id.

18. See infra Sections I.A-B.

19. See infra Section I.C.

20. See infra Part II.

21. See infra Sections II.B-C.

22. See infra Sections III.A-D.

216 Michigan State Law Review Vol. 2013:1

scionability since the inception of the doctrine.

If the courts were con-

cerned with upholding the standards of unconscionability adopted in the

Uniform Commercial Code and the Restatement (Second) of Contracts, far

more court decisions would rule unconscionable provisions and contracts

null and void.

THE DOCTRINE OF UNCONSCIONABILITY

A. Early Forms of Unconscionability

In its simplest terms, the doctrine of unconscionability permits a court

to intervene into the contractual relations of parties and modify or reject an

agreement because part of the contract is unfair.

The role of unconsciona-

bility in helping parties achieve fair bargains dates back to Roman law,

which allowed a contracting party to rescind a contract “if the disproportion

between the values exchanged was greater than two to one.”

In the United

States, prior to any uniform adoption of the official doctrine of unconscion-

ability, the eighteenth century courts acknowledged unconscionable agree-

ments.

As early as 1816, American courts had the equitable power “to set

aside a contract if ‘in conscience’ it should not be binding.”

Later in the

1800s, the courts elaborated on unconscionability and explained uncon-

scionable contracts as ones “such as no man in his senses and not under

delusion would make on the one hand, and as no honest and fair man would

accept on the other.”

23. See infra Part IV.

24. R

ESTATEMENT (SECOND) OF CONTRACTS § 208 (1981); U.C.C. § 2-302 (2011).

25. Frank P. Darr, Unconscionability and Price Fairness, 30 HOUS. L. REV. 1819,

1820 (1994). Darr explains the texts of both § 2-302 of the Uniform Commercial Code

(U.C.C.) and § 208 of the Restatement (Second) of Contracts recognize a court’s authority to

intervene on behalf of the injured party. Id. at 1828-29. Thus, the doctrine of unconscionabil-

ity is a tool courts use to help contracting parties create contracts with fair terms. See id.

26. C

HARLES L. KNAPP, NATHAN M. CRYSTAL & HARRY G. PRINCE, PROBLEMS IN

CONTRACT LAW: CASES AND MATERIALS 599 (7th ed. 2012).

27. See, e.g., Scott v. United States, 79 U.S. (12 Wall.) 443 (1870). In Scott, the

Court states that “[i]f a contract be unreasonable and unconscionable, but not void for fraud,

a court of law will give to the party who sues for its breach damages, not according to its

letter, but only such as he is equitably entitled to.” Id. at 445.

28. Donald R. Price, The Conscience of Judge and Jury: Statutory Unconscionabil-

ity as a Mixed Question of Law and Fact, 54 T

EMP. L.Q. 743, 744 n.3 (1981) (quoting Hep-

burn v. Dunlop & Co., 14 U.S. (1 Wheat.) 179, 197 (1816)).

29. Hume v. United States, 132 U.S. 406, 411 (1889); see also J

OHN EDWARD

MURRAY, JR., MURRAY ON CONTRACTS § 96, at 486 (3d ed. 1990). Murray explains it is prac-

tically mandatory for unconscionability discussions to begin with this eighteenth century

quote, which primed the legal system for further unconscionability discussions. Id. The deci-

sion in Hume was heavily influenced by British case law, specifically the celebrated decision

in Earl of Chesterfield v. Janssen, (1751) 28 Eng. Rep. 82; 2 Ves. Sen. 125, 155. The Earl

Contingent Assumptions of Contract Theory 217

B. The Uniform Commercial Code and Restatement (Second) of Contracts

Despite some courts acknowledging the possible existence of a doc-

trine of unconscionability beginning in the 1800s, it was not until 1952

that the Uniform Commercial Code finally gave courts explicit authoriza-

tion to rule that a contract was unconscionable. Section 2-302

of the Uni-

form Commercial Code (U.C.C.) reads:

(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 en-

force 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.

The Official Comments to U.C.C. § 2-302 further clarify how a court

would test for unconscionability. They state:

The basic test is whether, in the light of the general commercial background and

the commercial needs of the particular trade or case, the clauses involved are so

one-sided as to be unconscionable under the circumstances existing at the time of

the making of the contract. . . . The principle is one of the prevention of oppression

and unfair surprise and not of disturbance of allocation of risks because of superior

bargaining power.

Despite its publication in the U.C.C., it took nearly a decade for the

courts to begin using § 2-302.

By 1968, fewer than twenty cases were de-

court defined unconscionability as a transaction “such as no man in his senses and not under

delusion would make on the one hand, and as no honest and fair man would accept on the

other; which are unequitable and unconscientious bargains; and of such even the common

law has taken notice.” Id. However, rulings such as in Hume were not common. Rather, the

common mentality of the courts regarding contracts was that the language of a contract sug-

gests it is a private affair and not a social institution. M

URRAY, JR., supra. The judicial sys-

tem, therefore, provides only for their interpretation and should not actively engage in regu-

lating or creating contracts for parties. See, e.g., Imperial Fire Ins. Co. v. Coos County, 151

U.S. 452, 469-70 (1894); Urian v. Scranton Life Ins. Co., 165 A. 21, 24 (Pa. 1933).

30. The Code was drafted in the 1940s and 1950s, but the first draft was not pub-

lished until 1952. S

INAI DEUTCH, UNFAIR CONTRACTS: THE DOCTRINE OF

UNCONSCIONABILITY 41 (1977).

31. Since its publication, perhaps more has been written about § 2-302 than any

other single provision of the Code. See 1 E.

ALLAN FARNSWORTH, FARNSWORTH ON

CONTRACTS 578 (3d ed. 2004).

32. U.C.C. § 2-302 (2011).

33. Id. § 2-302 cmt. 1 (citation omitted).

34. See Eugene M. Harrington, Unconscionability Under the Uniform Commercial

Code, 10 S. T

EX. L.J. 203, 205 (1968).

218 Michigan State Law Review Vol. 2013:1

cided on the basis of § 2-302.

But today, although U.S. contract law is

based largely on common law, the U.C.C., including § 2-302, has been

adopted by virtually all of the states.

Furthermore, the intention of § 2-302

was for the provision to be substantiated by court decisions. The very be-

ginning of the Official Comments to the section states, “[t]his section is

intended to make it possible for the courts to police explicitly against the

contracts or clauses which they find to be unconscionable.”

Technically, Article 2 of the U.C.C. applies only to the sale of goods.

However, the doctrine of unconscionability expands beyond the sale of

goods. Courts can find contracts unconscionable in secured transactions,

contracts between a customer and his bank,

commercial leases,

credit

card fees,

insurance policy provisions,

the termination of dealership fran-

chise agreements,

regulations for tenure and promotion of university facul-

ty,

and contracts for personal services.

Officially, the Restatement (Sec-

ond) of Contracts § 208, asserts unconscionability is accepted as a general

35. Id.

36. After the first publication of § 2-302 of the U.C.C., the ambiguity of the term

“unconscionability” induced the State of California to initially drop § 2-302 from their adop-

tion of the Code. See Simon Reznikoff, The Unconscionable Controversy, 17 A

M. BUS. L.J.

61, 61 (1979). See also CAL. COM. CODE § 2302 (West 2012) for an in-depth explanation as

to why the provision was not enacted in California. Also, until 1971, the state of North Caro-

lina also omitted this section from the Code. See N.C.

GEN. STAT. ANN. § 25-2-302 (1966)

for a discussion of why North Carolina did not initially adopt the provision.

37. § 2-302 cmt. 1.

38. Ostas, supra note 1, at 538.

Specifically, the U.C.C. provides that “this Article

applies to transactions in goods.” U.C.C. § 2-102 (2011). U.C.C. § 2-105 defines goods as

“all things (including specially manufactured goods) which are movable at the time of identi-

fication to the contract for sale other than the money in which the price is to be paid, invest-

ment securities (Article 8) and things in action.” Id. § 2-105.

39. Urdang v. Muse, 276 A.2d 397, 401 (N.J. Essex County Ct. 1971).

40. David v. Mfrs. Hanover Trust Co., 287 N.Y.S.2d 503 (Civ. Ct. 1968).

41. Earlman Oil Co. v. Burroughs Corp., 625 F.2d 1291, 1299 (5th Cir. 1980). Dec-

ades ago, M. Michael Cramer argued that the doctrine of unconscionability should also apply

to exculpatory lease contracts by analogy and since tenant–landlord lease contracts have also

subsequently been deemed unconscionable. M. Michael Cramer, Extension of the Uniform

Commercial Code’s Unconscionable Contract Provision to Exculpatory Lease Clauses, 5

M. BUS. L.J. 287 (1967).

42. Melso v. Texaco, Inc., 532 F. Supp. 1280, 1296 (E.D. Pa. 1982).

43. C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 181 (Iowa 1975).

44. Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370, 1375-77 (Mass. 1980).

45. Meehan v. New England Sch. of Law, 522 F. Supp. 484, 494 (D. Mass. 1981),

aff’d, 705 F.2d 439 (1st Cir. 1983).

46. Kaye v. Coughlin, 443 S.W.2d 612, 613-14 (Tex. Civ. App. 1969); Lazan v.

Huntington Town House, Inc., 332 N.Y.S.2d 270, 271-72 (Suffolk County Ct. 1969) (dealing

with a contract for the hire of a hall for a Bar Mitzvah party); Nu Dimensions Figure Salons

v. Becerra, 340 N.Y.S.2d 268, 272 (Civ. Ct. 1973) (concerning a contract for a weight-loss

program).

Contingent Assumptions of Contract Theory 219

concept of contracts.

Thus, the doctrine has been broadened to the point

where it serves as a protection for consumers in general and not just a provi-

sion in a commercial code designed for merchant-to-merchant transac-

tions.

C. Substantive vs. Procedural Unconscionability

In terms of consumer and merchant transactions, the doctrine of un-

conscionability traditionally can be divided into two forms of unfair bar-

gaining: substantive and procedural unconscionability.

Typically, uncon-

scionability cases involve both issues.

Both prongs of the doctrine are en-

47. The Restatement (Second) of Contracts states:

If a contract or term thereof is unconscionable at the time the contract is made a

court may refuse to enforce the contract, or may enforce the remainder of the con-

tract without the unconscionable term, or may so limit the application of any un-

conscionable term as to avoid any unconscionable result.

ESTATEMENT (SECOND) OF CONTRACTS § 208 (1981) (paraphrasing principally U.C.C. § 2-

302).

48. See D

EUTCH, supra note 30, at 115-16.

49. This framework for unconscionability apparently originated with Arthur Allen

Leff’s writings discussing unconscionability. See generally Arthur Allen Leff, Unconsciona-

bility and the Code—The Emperor’s New Clause, 115 U. P

A. L. REV. 485 (1967). Leff ex-

plains that regardless of whether contracts are procedurally or substantively unconscionable,

contracts obtained by these means should be avoided. Id. at 487-88. Although traditionally

unconscionability is defined by these two variables since Leff’s work, Daniel T. Ostas pro-

vides another classification of the types of unconscionability. See Ostas, supra note 1, at 541.

Ostas suggests there are three critical variables in determining if a contract is unconsciona-

ble. Id. First, unconscionability cases may have:

“[S]uspect clauses,” that have repeatedly generated litigation. Examples [of suspect

clauses] include warranty disclaimers, nominal price terms, and penalty clauses.

Although any express term can be a “suspect clause,” one would expect that only

those clauses which vary from custom would generate a claim of unconscionabil-

ity. The second variable, “relational context,” points to the relevance of both the

transaction−type and the social setting of an exchange. . . . Examples of relational

contexts include home−solicitation consumer sales, commercial leases, franchise

agreements, and physician−patient contracts. Both the fundamental purpose of the

transaction and the identity of the parties are relevant aspects of the relational con-

text. The [third] variable is the “negotiation process.” Contractual negotiations may

be tainted with fraud or undue influence, or the parties may have used a form con-

tract with confusing fine print. The means by which a contract is negotiated is al-

ways a critical variable in unconscionability litigation.

Id.

50. That is, the complaining party will allege that a particular clause is unfair and

that the exchange process through which that clause was derived was tainted. Most courts

also require some modicum of both procedural and substantive unconscionability to find in

favor of the vulnerable party. See J

AMES J. WHITE & ROBERT S. SUMMERS, HANDBOOK OF THE

LAW UNDER THE UNIFORM COMMERCIAL CODE 164 (2d ed. 1980); Harris v. Green Tree Fin.

Corp., 183 F.3d 173, 181 (3d Cir. 1999). In Harris, the court recognized the need for both

procedural and substantive unconscionability. Harris, 183 F.3d at 181; see also Leff, supra

220 Michigan State Law Review Vol. 2013:1

tirely judge made rather than specified by legislative statute, so courts can

legitimately modify unconscionability standards without legislative approv-

al.

First, substantive unconscionability refers to the unfair terms of the

contract and the unfair results arising from the transaction, such as overall

imbalance, unfair price,

unfair disclaimer, promoting default, waiver of

note 49, at 487. Leff further discusses the requirement of procedural and substantive uncon-

scionability for courts to find a contract unconscionable. Leff, supra note 49, at 489-528.

However, some courts have disregarded the traditional approach to the doctrine of uncon-

scionability that requires both substantive and procedural problems. For instance, the Arizo-

na Supreme Court concluded that “a claim of unconscionability can be established with a

showing of substantive unconscionability alone, especially in cases involving either

price−cost disparity or limitation of remedies.” Maxwell v. Fid. Fin. Servs., Inc., 907 P.2d

51, 59 (Ariz. 1995); see also East Ford Inc. v. Taylor, 2000-IA-01527-SCT (¶22) (Miss.

2002) (holding that when a term is found procedurally unconscionable, substantive uncon-

scionability is not required); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569, 574 (App.

Div. 1998) (“While it is true that, under New York law, unconscionability is generally predi-

cated on the presence of both the procedural and substantive elements, the substantive ele-

ment alone may be sufficient to render the terms of the provision at issue unenforceable.”);

Gillman v. Chase Manhattan Bank, 534 N.E.2d 824, 829 (N.Y. 1988) (suggesting that proce-

dural unconscionability may not be necessary if a term is already substantively “outra-

geous”).

51. See Korobkin, supra note 3, at 1279. Due to the judicial branch’s ability to mod-

ify unconscionability standards, Korobkin proposes an updated and improved approach to the

doctrine. Id. He suggests:

Modifying the unconscionability doctrine to create the closest possible fit between

the doctrine and either social welfare or buyer welfare requires adherence to four

principles: (1) Employ the screening device of “procedural unconscionability” to

sort contract terms into two groups: those highly likely to be efficient, and those

most likely to be inefficient. (2) Use “substantive unconscionability” analysis to

identify the terms in the latter category that actually are inefficient. (3) In order to

minimize “false positives”—decisions that terms are unconscionable when they

are, in fact, efficient—defer to terms included in form contracts in inconclusive

cases. (4) In order to provide sellers with an incentive to draft efficient terms even

when those terms are non-salient, provide substantial remedies to victims when

terms are found unconscionable by courts.

Id.

52. In unfair price unconscionability cases, one party asserts that the price to be paid

is grossly disproportionate to the value of the good or service received in exchange. See, e.g.,

Murphy v. McNamara, 416 A.2d 170, 176 (Conn. Super. Ct. 1979). In Murphy, the court

declared a contract was unconscionable because a buyer paid $1,268 for a television worth

$499. Id. at 173. Another case affirmed it was unconscionable for a seller to charge $4,322

for windows that only cost the seller $1,080.50. Sho-Pro of Ind., Inc. v. Brown, 585 N.E.2d

1357, 1361 (Ind. Ct. App. 1992). In another case, a contract was orally negotiated in Spanish,

but the contract was written in English. Frostifresh Corp. v. Reynoso, 274 N.Y.S.2d 757, 758

(Civ. Ct. 1966). The written contract charged the buyer three times the value of an appliance,

and the court subsequently invalidated the contract on unconscionability grounds. Id. at 759.

After an extensive empirical analysis of price unconscionability cases, Darr notes that high

price alone is only a necessary condition. Darr, supra note 25, at 1844. He explains:

Contingent Assumptions of Contract Theory 221

defenses, acceleration of payments, and the repossession of goods without

prior hearings.

In other words, substantive unconscionability prevents the

burdensome allocation of risk on the shoulders of one contracting party.

In general, for a contract to be considered substantively unconsciona-

ble, the terms of the contract must unreasonably favor the stronger party.

Section 2-302 implies that substantive unconscionability should be evaluat-

ed as of the time the contract was executed,

and against the general com-

mercial background of the specific case at hand.

Subsequently, if the con-

tract is so one-sided as to affront the “mores and business practices of the

time and place,”

then courts generally find the contract to be substantively

unconscionable.

On the other hand, procedural unconscionability examines how each

term became part of the contract and the actual process of bargaining.

Pro-

Neither process problems nor enforcement problems are sufficient in all cases to

find unconscionability when price is high. If the contract price is high compared to

the reference price the court selects, there is evidence of overreaching, and if mar-

ket mechanisms are unlikely to rectify the situation, the courts are likely to inter-

vene. Absent any one of these factors, the opposite result appears likely.

Id. DiMatteo and Rich explain unfair price contracts are often referred to as “‘per se uncon-

scionab[le]’” because the imbalance in consideration is so severe as to be considered uncon-

scionable on its face. Larry A. DiMatteo & Bruce Louis Rich, A Consent Theory of Uncon-

scionability: An Empirical Study of Law in Action, 33 F

LA. ST. U. L. REV. 1067, 1091 (2006)

(quoting M.P. Ellinghaus, In Defense of Unconscionability, 78 Y

ALE L.J. 757, 789 (1969)).

The authors further explain that many state legislatures also use the principles of uncon-

scionability to stop unfair price gouging in contracts and sales. Id. at 1091 & n.138. Specifi-

cally, eighteen states, including New York and Florida, have anti-price-gouging statutes with

sixteen triggered by a declaration of a state of emergency or natural disaster. Id. Under F

LA.

STAT. § 501.160 (2005), it is illegal to charge unconscionable prices for goods or services

following a declared state of emergency. Id. New York’s price gouging statute is also simi-

lar. Id. For example, in an intriguing recent court battle, claiming defense against an unfair

price under the doctrine of substantive unconscionability may have been a better route for

Britney Spears after she objected to the unfair terms in her perfume distribution and royalties

contract. Stephanie Rabiner, Britney Spears Sued for $10 Million over Perfume Deal,

INDLAW BLOG (Apr. 1, 2011, 5:50 AM),

http://blogs.findlaw.com/celebrity_justice/2011/04/britney-spears-sued-for-10-million-over-

perfume-deal.html?DCMP=NWL-cons_blg-celebrity. As part of the deal to sell her own line

of perfume, Spears agreed to let Elizabeth Arden market her line of fragrances, and also

agreed to pay Brand Sense Partners 35% of all royalties for brokering the deal. Id. After a

while, Spears decided 35% was too high and had all the royalties rerouted to her bank ac-

count. Id. Brand Sense Partners is now suing Spears for $10 million. Id.

53. D

EUTCH, supra note 30, at 121.

54. A & M Produce Co. v. FMC Corp., 186 Cal. Rptr. 114, 122 (Ct. App. 1982).

55. R

ESTATEMENT (SECOND) OF CONTRACTS § 208 cmt. d (1981).

56. U.C.C. § 2-302(1) (2011).

57. Id. § 2-302 cmt. 1.

58. Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 450 (D.C. Cir. 1965).

59. Harry G. Prince, Unconscionability in California: A Need for Restraint and

Consistency, 46 H

ASTINGS L.J. 459, 472 (1995). Institutional economics also provides some

insight into the notion of bargaining power. See J

OHN R. COMMONS, LEGAL FOUNDATIONS OF

222 Michigan State Law Review Vol. 2013:1

cedural unconscionability is often referred to as “‘bargaining naughti-

ness.’”

Procedural unconscionability can result from any of the following

elements: (1) absence of meaningful choice;

(2) superiority of bargaining

power;

(3) the fact that the contract is an adhesion contract;

(4) unfair

surprise;

or (5) sharp practices and deception.

Additionally, in Johnson v.

CAPITALISM 54 (1924). Commons creates a taxonomy of three types of bargaining power:

political, economic, and personal. Id. at 51-52, 54, 56. Political power, held uniquely by the

sovereign, is the right to compel by force. Id. at 51-52. Economic power, the province of

private property, is the right to withhold property from others. Id. at 54. Personal power is

derived from the customary expectations generated by role-playing. Id. at 56. He suggests

that the doctrine of unconscionability is particularly concerned with the abuse of personal

power. Id. at 58.

60. Evelyn L. Brown, The Uncertainty of U.C.C. Section 2-302: Why Unconsciona-

bility Has Become a Relic, 105 C

OM. L.J. 287, 297 (2000) (quoting Leff, supra note 49, at

487).

61. Williams, 350 F.2d at 449. In Williams, the court explained that procedural un-

conscionability “generally [is] 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.” Id.; see also Telecom Int’l Am., Ltd. v. AT&T Corp., 280 F.3d 175, 194 (2d

Cir. 2001); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003). A lack of

meaningful choice has also been used to regulate the terms contained in standard form or

adhesion contracts. Such contracts may indicate a lack of meaningful agreement. W. David

Slawson, Mass Contracts: Lawful Fraud in California, 48 S. C

AL. L. REV. 1, 11 (1974). For

a detailed discussion of the problems associated with standard form agreements and uncon-

scionability, see Id.

62. A & M Produce Co. v. FMC Corp., 186 Cal. Rptr. 114, 121-22 (Ct. App. 1982).

The California Supreme Court opined that an inequality of bargaining power constitutes

“oppressive unconscionability.” Id. The opinion states: “Inequality of bargaining power . . .

results in no real negotiation and ‘an absence of meaningful choice.’” Id. at 122 (quoting

Williams, 350 F.2d at 449); see also Am. Home Improvement, Inc. v. MacIver, 201 A.2d 886

(N.H. 1964).

63. See, e.g., Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (Ct. App. 1976).

In Wheeler, the court found that an admission form requiring a patient to arbitrate claims

with the hospital was an adhesion contract and was unconscionable. Id. at 793. The court

stated: “Enforceability depends upon whether the terms of which the adherent was unaware

are beyond the reasonable expectations of an ordinary person or are oppressive or uncon-

scionable.” Id. at 783.

64. Surprise occurs most frequently when sellers hide supposedly agreed-upon con-

tract terms from the consumer. See A & M Produce, 186 Cal. Rptr. at 122. “[F]or instance,

unfair surprise can arise from the use of fine print (illegible wording) or from incomprehen-

sible wording (legal terminology) . . . .” D

EUTCH, supra note 30, at 121. Unfair surprise can

also result “because the limited warranty was delivered to the customer only after the trans-

action had already been concluded.” Id.; see also Leff, supra note 49, at 499-500. Leff ex-

plains unfair surprise arises when there is the presence of misleading bargaining conduct. Id.

A court looking for unfair surprise then considers such factors as “hidden provisions, unintel-

ligible language, and surreptitious attempts to contract out key provisions.” Omar Anorga,

Music Contracts Have Musicians Playing in the Key of Unconscionability, 24 W

HITTIER L.

REV. 739, 745 (2003).

65. 8

SAMUEL WILLISTON, A TREATISE ON THE LAW OF CONTRACTS § 18:10 (Richard

A. Lord ed., 4th ed. 2010).

Contingent Assumptions of Contract Theory 223

Mobil Oil Corp., the court provided a typical listing of factors to consider

when evaluating procedural unconscionability.

Falling under the proce-

dural prong of unconscionability are factors bearing upon the “‘real and

voluntary meeting of the minds’ of the contracting parties: age, education,

intelligence, business acumen and experience, relative bargaining power,

who drafted the contract, whether the terms were explained to the weaker

party, [and] whether alterations in the printed terms were possible.”

Unequal bargaining power is not merely a form of procedural uncon-

scionability, but one of the most common forms of unconscionability em-

ployed by the courts.

Courts sometimes find unequal bargaining power on

the basis of evidence that the seller is a large company and the buyer is a

small company or individual.

Additionally, unequal bargaining can be the

result of a “situation-specific monopoly.”

Situation-specific monopolies

occur when a seller publicizes a product’s price and encourages a potential

buyer to make an investment in time or money in preparing to purchase the

product.

“Then, after the buyer’s investment . . . has been made, the seller

presents a set of adhesive form terms that the buyer must sign or [else] for-

feit his initial investment.”

In these ways, courts have the means to find

contractual provisions procedurally unconscionable due to unequal bargain-

ing power.

66. 415 F. Supp. 264, 268 (E.D. Mich. 1976).

67. Id. (quoting Weaver v. Am. Oil Co., 276 N.E.2d 144, 148 (Ind. 1971)). Further-

more, the court in Nasco, Inc. v. Public Storage, Inc. affirmed these considerations of uncon-

scionability. No. 92-12731-RCL, 1995 WL 337072, *4 (D. Mass. May 20, 1995). The deci-

sion also explains courts may take into account whether the party claiming unconscionability

was represented by counsel and whether the questionable clause was obscure or buried in

fine print. Id.

68. See Korobkin, supra note 3, at 1279.

69. See, e.g., Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 861 (W. Va.

1998) (quoting Art’s Flower Shop, Inc. v. Chesapeake & Potomac Tel. Co., 413 S.E.2d 670,

675 (W. Va. 1991) (footnote omitted)) (stating “[t]he relative positions of the parties, a na-

tional corporate lender on one side and elderly, unsophisticated consumers on the other, were

‘grossly unequal’”). However, some courts have held that size of contracting parties is not a

relevant factor in determining unconscionability. See, e.g., Mayflower Transit, Inc. v. Ann

Arbor Warehouse Co., 892 F. Supp. 1134, 1140 (S.D. Ind. 1995).

70. Korobkin, supra note 3, at 1264; see, e.g., Shell Oil Co. v. Marinello, 307 A.2d

598, 601 (N.J. 1973). In this case, a service station dealer who invested in building his busi-

ness and clientele had little choice but to agree to Shell’s terms when it was time to renew his

lease with the oil company. Id.; see also Sun Trust Bank v. Sun Int’l Hotels Ltd., 184 F.

Supp. 2d 1246, 1259-62 (S.D. Fla. 2001); Powertel, Inc v. Bexley, 743 So. 2d 570, 574-76

(Fla. Dist. Ct. App. 1999).

71. See Korobkin, supra note 3, at 1264.

72. Id.

224 Michigan State Law Review Vol. 2013:1

D. Problems with U.C.C. § 2-302

Controversial since its inception,

much of the debate surrounding the

doctrine of unconscionability in contract law results from a lack of clear

meaning of the term.

That is, the Code never provides an exact definition

of “unconscionability.”

Section 2-302 allows the courts the option of not

enforcing a clause or a contract or to limit its application when they find as

a matter of law that a contract or clause is unconscionable.

However, the

Code’s clarification of what deems a contract “unconscionable” is circular

and vague.

Section 2-302’s Official Comments provide no more guidance

for courts.

73. In fact, considerable controversy arose concerning § 2-302 even before the pub-

lication of the first official text in 1952. See H.L. Douglass, A Discussion on SALES as Pro-

posed in the Uniform Commercial Code, 21 J

OURNAL 808, 810 (1950); Alfred T. Goodwin,

How the Adoption of the Uniform Commercial Code Would Affect the Law of Sales in Ore-

gon, 30 O

R. L. REV. 139, 213-15 (1951). Goodwin opposed the doctrine of unconscionability

due to its lack of workable procedures for enforcing the doctrine. Goodwin, supra, at 213-15.

74. See, e.g., J. Francis Ireton, The Commercial Code, 22 M

ISS. L.J. 273, 280 (1951).

Ireton argued unconscionability suffered from a lack of a clear definition. Id.

75. This lack of a clear definition caused many to believe that unconscionability

would be completely ineffectual. See Leff, supra note 49, at 558-59.

76. See K

ARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS

369 (1960).

77. Some legal scholars have attempted to defend the lack of definition for uncon-

scionability in the Code. See, e.g., Ellinghaus, supra note 52, at 759. Professor Ellinghaus

suggests the doctrine of unconscionability is not a rule, but a standard. Id. Naturally, stand-

ards create definitional problems associated with their application and use. Id. He compares

the lack of a strict definition to the discussion of the standard of good faith in the law. Id. at

800. Standards, such as unconscionability, provide a continuum that gives the courts the

needed flexibility to apply the law to a diverse set of cases. Id. at 759-60. Without this flexi-

bility, courts could not adequately employ the doctrine of unconscionability. See Timothy

Endicott, Law Is Necessarily Vague, 7 L

EGAL THEORY 379, 380-85 (2001) (arguing vague

laws are an important part of every legal system); H.L.A.

HART, THE CONCEPT OF LAW 272-

76 (2d ed. 1994) (responding to the problem of vagueness in laws by claiming that the law

gives judges discretion to decide issues that the law does not determine). Thus, we would

deem unconscionability cases as an area of the law allowing discretion of the courts to clarify

the vagueness of the law.

78. U.C.C. § 2-302 cmt. 1 (2011). Although the comments to the U.C.C. are “offi-

cial,” often state legislatures do not enact them when adopting the Code. The Code’s drafters

provided comments “to promote uniformity” and “to safeguard against misconstruction.”

U.C.C. Article 1: Official Comments,

http://www.law.cornell.edu/ucc/1/general_comment.bak, (last visited May 31, 2013). How-

ever, at least in the area of unconscionability, this uniformity has not been achieved. See E.

LLAN FARNSWORTH, CONTRACTS § 1.9, at 34-35 (3d ed. 1999). Many in the legal communi-

ty think the distinction between “rules” and “standards” undermines the law. See Daniel T.

Ostas, Postmodern Economic Analysis of Law: Extending the Pragmatic Visions of Richard

A. Posner, 36 A

M. BUS. L.J. 193, 206-07 (1998) (citing MARK KELMAN, A GUIDE TO

CRITICAL LEGAL STUDIES 3-5 (1987)). Professor Kelman explains “the law is replete with a

host of ‘fundamental contradictions.’ For example, in one context the law will hold that

Contingent Assumptions of Contract Theory 225

Much of the controversy and disagreement regarding the doctrine of

unconscionability stems from an underlying disagreement about two con-

cepts of liberty.

One concept of liberty, often termed “positive freedom,”

aims to allow people “‘to do what they would do if they knew enough, or

were always at their best, instead of yielding to irrational motives.’”

The

second concept of liberty, often called “[n]egative freedom,” attempts to

preserve a sphere of individual autonomy within which an individual can

make his own decisions without assistance.

Classical contract theory is

based on a concept of individual liberty that is consistent with the concept

of negative freedom, whereas the doctrine of unconscionability is more con-

sistent with positive freedom.

E. Remedies for Unconscionability

In terms of what happens after a court rules a contract is unconsciona-

ble, the unconscionability doctrine “operates as a shield and not as a

sword.”

In other words, parties can protect themselves against enforce-

ment of an unconscionable provision in a contract, but cannot obtain dam-

ages for having been subject to an unconscionable offer.

Furthermore, a

party cannot seek restitution for compliance with an unconscionable con-

tract.

Although the doctrine of unconscionability has established a better de-

fense against unfair contracts than the pre-Code doctrines, the lack of clear

guidelines for applying the actual doctrine prevents its widespread use and

acceptance.

We now look to the courts for developing guidelines to create

fair contracts and invoke the doctrine of unconscionability and positive

freedom. The doctrine of unconscionability allows courts to either deny

enforceability of such contracts or to modify the terms of a contract to alle-

viate unconscionable portions.

‘rules’ are to be preferred to ‘standards’; yet, in other contexts one finds an equally potent set

of precedents that holds that standards are to be preferred to rules.” Id. (emphasis added)

(footnote omitted).

79. See Philip Bridwell, The Philosophical Dimensions of the Doctrine of Uncon-

scionability, 70 U.

CHI. L. REV. 1513, 1514-15 & n.9 (2003).

80. Id. at 1514-15 (quoting T

HE OXFORD COMPANION TO PHILOSOPHY 486 (Ted

Honderich ed., 1995)).

81. Id. at 1515.

82. Id. at 1519-22.

83. Seana Valentine Shiffrin, Paternalism, Unconscionability Doctrine, and Ac-

commodation, 29 P

HIL. & PUB. AFF. 205, 229 (2000).

84. Id.

85. Id.

86. See D

EUTCH, supra note 30, at 77.

87. This distinction is similar to the distinction between protection of entitlements

by a property rule and a liability rule. See Guido Calabresi & A. Douglas Melamed, Property

226 Michigan State Law Review Vol. 2013:1

II.

QUESTIONABLE ASSUMPTIONS OF CONTRACT THEORY

A. Addressing Those Opposed to Unconscionability

The most prominent opposition against unconscionability revolves

around the idea that classical contract theory is desirable because of a con-

tract’s reliance on market transactions.

A fundamental tenant of contract

law is that parties can contract on whatever terms they choose because the

market depends on such transactions.

But opponents of unconscionability

must be reminded that freedom of contract in the United States is not unlim-

ited. Courts have historically employed a number of traditional theories—

such as duress, fraud, and lack of capacity—to police contracting parties

and to alleviate the harshness of the “buyer beware” attitude of the law.

employing these theories, we see courts acknowledging the need to protect

the vulnerable by avoiding free market liberalism.

Some opponents of unconscionability also argue the doctrine is a form

of paternalism.

But consider the following manner in which unconsciona-

bility cases arise: the party who invokes the unconscionability doctrine ac-

tively opposes the enforcement of the contract. Therefore, how could rescis-

Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV.

1089, 1092 (1972). Furthermore, Richard Craswell has applied this distinction to the entitle-

ments established by the doctrine of unconscionability. See Richard Craswell, Property Rules

and Liability Rules in Unconscionability and Related Doctrines, 60 U.

CHI. L. REV. 1, 44-63

(1993).

88. See, e.g., Harry R. Levy, A Study of the Uniform Commercial Code—Sales, 58

OM. L.J. 329, 331 (1953). Levy describes § 2-302 and the doctrine of unconscionability as

troublesome because of the possible conflict between the court’s sense of conscience and

freedom of contract. Id.

89. See Richard A. Epstein, Unconscionability: A Critical Reappraisal, 18 J.L.

ECON. 293, 315 (1975). Epstein explains that public policy requires men of full age and

competent understanding to have the utmost liberty of contracting, and that their contracts

when entered into freely and voluntarily shall be held sacred and enforced by the courts. Id.

(citing Printing & Numerical Registering Co. v. Sampson, (1875) 19 L.R.Eq. 462 at 465).

90. Craig Horowitz, Reviving the Law of Substantive Unconscionability: Applying

the Implied Covenant of Good Faith and Fair Dealing to Excessively Priced Consumer

Credit Contracts, 33 UCLA

L. REV. 940, 941 (1986).

91. See, e.g., David L. Shapiro, Courts, Legislatures, and Paternalism, 74 V

A. L.

REV. 519, 535-37 (1988) (characterizing unconscionability as a paternalist doctrine and

further noting judicial reluctance to employ it effectively); Paul Burrows, Analyzing Legal

Paternalism, 15 I

NT’L REV. L. & ECON. 489, 501 (1995); Robin L. West, Taking Preferences

Seriously, 64 T

UL. L. REV. 659, 695 (1990); Eric A. Posner, Contract Law in the Welfare

State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on

the Freedom to Contract, 24 J.

LEGAL STUD. 283, 296-97 (1995) (stating there is a “wide-

spread feeling among contract law scholars that paternalistic attitudes account for some

judges’ use of the unconscionability doctrine” and defending the unconscionability doctrine

as promoting the welfare system’s goals).

Contingent Assumptions of Contract Theory 227

sion be paternalistic since that is what the party wills?

Unlike many of the

commonly cited examples of paternalism, such as drug prohibitions or seat-

belt laws, the protected party does not resist or oppose the result or the pro-

cedure and therefore unconscionability is not a form of paternalism.

unconscionability cases, the relevant agent actively endorses the supposedly

paternalistic conduct.

Further, it is important to note that many areas of law aim to provide

paternalistic protection for buyers or weaker parties. For example,

“[p]roducts liability law determines a seller’s responsibility for physical

injury caused by its products.”

Landlord–tenant law defines the landlord’s

liability for unsafe or inadequate housing and limits the landlord’s powers

“vis-à-vis tenants who damage the premises or are delinquent in paying the

rent.”

Additionally, “[d]ebtor-creditor law limits the analogous powers

exercised by creditors outside the rental housing market” and protects debt-

ors from gross inequalities of bargaining power.

The doctrine of unconscionability, like the theories of duress, fraud, or

products liability law, does not erase a party’s ability to contract freely. Ra-

ther, the unconscionability doctrine ensures that parties can actually contract

freely and fairly. At least since John Stuart Mill, social theorists have

acknowledged that some forms of paternalism can be reconciled with the

principles of freedom of choice and contract.

That is, some types of gov-

ernment interference with an individual’s free choices protect the individu-

al’s well-being without being detrimental to individual liberty.

One such

92. See Shiffrin, supra note 83, at 229.

93. Id.

94. Id.

95. Richard Craswell, Passing on the Costs of Legal Rules: Efficiency and Distribu-

tion in Buyer

−

Seller Relationships, 43 STAN. L. REV. 361, 361 (1991).

96. Id.

97. Id.

98. See generally D

ONALD VANDEVEER, PATERNALISTIC INTERVENTION: THE

MORAL BOUNDS OF BENEVOLENCE (1986); Gerald Dworkin, Paternalism, 56 MONIST 64, 64-

84 (1972). Dworkin’s argument is focused on the compatibility of paternalism and liberty.

Dworkin, supra. He treats it as altogether obvious that if your head is screwed on straight,

liberty and paternalism are compatible when not being paternalistic would be harmful to

yourself. Id. Then the article argues that there are also grounds (warrants) for paternalism to

make a person happier, more wise or more right. Id.; see also Christine Pierce, Hart on Pa-

ternalism 35 A

NALYSIS 205, 205-07 (1975) (explaining how Hart uses a version of Mill’s

harm principle to argue against those readings of Mill that are totally anti-paternalistic).

99. J

OHN STUART MILL, PRINCIPLES OF POLITICAL ECONOMY WITH SOME OF THEIR

APPLICATIONS TO SOCIAL PHILOSOPHY bk. V, at 966-67 (W.J. Ashley ed., 1909) (1848). For

example, Mill suggests maximum hour regulations are such an example. Id. at 963. These

measures are “required, not to overrule the judgment of individuals respecting their own

interest, but to give effect to that judgment: they being unable to give effect to it except by

concert, which concert again cannot be effectual unless it receives validity and sanction from

the law.” Id.

228 Michigan State Law Review Vol. 2013:1

type of government interference that is not detrimental to individual liberty

is the doctrine of unconscionability.

Additionally, opponents of unconscionability suggest that in finding

contracts unfair, courts essentially alter the overall meaning of specific con-

tracts.

100

However, it is important to note that of the remedial options gener-

ally considered appropriate by courts, reformation of the single offending

term in a contract is the least disruptive method of correction.

101

In other

words, “[a] court seeking to reform an unconscionable term effectively re-

writes that term, but the contractual relationship between the buyer and sell-

er otherwise proceeds as the contract provides.”

102

Therefore, the amending

of unconscionable contracts is not overbearing, but often narrowly tailored

to specific unfair provisions.

The biggest problem with the opposition to the doctrine of uncon-

scionability is that the argument rests on many of the assumptions of classi-

cal contract theory discussed in the introduction of this Article. That is, con-

tract theory assumes: (1) people are rational actors; and (2) have access to

perfect information.

103

B. Contracting Parties Are Rational Actors?

The basic ideology of the market economy presumes that contracts are

made by rational and informed parties.

104

Only if this prerequisite of our

thought processes is fulfilled may one argue that the provisions of our cur-

rent system of contract law will lead to balanced contracts and therefore the

doctrine of unconscionability is unnecessary.

105

As the Nobel prize-winning

psychologist Daniel Kahneman explains, there are two types of thought

processes affecting our ability to be rational: “System 1” and “System 2.”

106

100. Brown, supra note 60, at 288 (citing 2 HAWK LAND UCC SERIES § 2-302:1 (1997-

1999)).

101. See Korobkin, supra note 3, at 1286.

102. Id.

103. See infra Sections II.B-C.

104. See Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Re-

moving the Rationality Assumption from Law and Economics, 88 C

ALIF. L. REV. 1053, 1053

(2000).

105. Granted, there are some contracts that will not be enforced no matter how volun-

tary, rational, and informed the parties’ choices may have been. For example, a contract to

become another’s slave is unenforceable. So is a contract to sell one’s babies. Often these

absolute prohibitions are difficult to reconcile with a general principle of freedom of con-

tract. See, e.g., Randy E. Barnett, Contract Remedies and Inalienable Rights, S

OC. PHIL. &

POL’Y, Sept. 1986, at 179; Richard A. Epstein, Why Restrain Alienation?, 85 COLUM. L. REV.

970, 970 (1985); Margaret Jane Radin, Market−Inalienability, 100 HARV. L. REV. 1849,

1850-51 (1987).

106. Daniel Kahneman, A Perspective on Judgment and Choice: Mapping Bounded

Rationality, 58

AM. PSYCHOLOGIST 697, 698 (2003). Similarly, other scholars have used

Contingent Assumptions of Contract Theory 229

System 1 processes create actions that are automatic, associative, implicit

(not available to introspection), emotionally charged, governed by habit,

and difficult to control or modify.

107

Conversely, System 2 processes are

slow, effortful, rule governed, relatively flexible, and more likely to be con-

sciously monitored and deliberately controlled.

108

As rational adults, we

might assume our judgments result from System 2 processes. However, a

plethora of knowledge and recent publications by influential legal scholars

suggest we should alter our current system of legal analysis in lieu of find-

ings about human irrationality from the fields of biology

109

and cognitive

psychology.

110

1. Child or Adult?

Classical contract theory equates being a rational contracting party

with being a rational adult.

111

In other words, adults are ipso facto assumed

to be rational because of their age and experience. Most areas of law, eco-

nomics, and government provide special safety and regulations for any

transactions involving children because they lack age and experience.

112

That is, children are considered a protected class and not expected to be

rational parties.

113

For example, we do not permit children to sign contracts

terms like “experiential” and “rational” in place of System 1 and System 2. See, e.g., Paul

Slovic et al., Rational Actors or Rational Fools: Implications of the Affect Heuristic for

Behavioral Economics, 31 J. S

OCIO-ECON. 329, 330 (2002) (citing Seymour Epstein, Integra-

tion of the Cognitive and the Psychodynamic Unconscious, 49 A

M. PSYCHOLOGIST 709, 710

(1994)).

107. See Kahneman, supra note 106, at 698.

108. Id.

109. See, e.g., Margaret Gruter, Law in Sociobiological Perspective, 5 F

LA. ST. U. L.

REV. 181 (1977); E. Donald Elliott, Law and Biology: The New Synthesis?, 41 ST. LOUIS U.

L.J. 595 (1997); Richard A. Epstein, A Taste for Privacy? Evolution and the Emergence of a

Naturalistic Ethic, 9 J. LEGAL STUD. 665 (1980); Bailey Kuklin, Evolution, Politics and Law,

38 V

AL. U. L. REV. 1129 (2004); J.B. Ruhl, The Fitness of Law: Using Complexity Theory to

Describe the Evolution of Law and Society and Its Practical Meaning for Democracy, 49

AND. L. REV. 1407 (1996).

110. See, e.g., Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Ap-

proach to Law and Economics, 50 S

TAN. L. REV. 1471 (1998); Korobkin & Ulen, supra note

104; Jeffrey J. Rachlinski, Gains, Losses, and the Psychology of Litigation, 70 S. C

AL. L.

REV. 113 (1996).

111. See Korobkin & Ulen, supra note 104, at 1053.

112. “Children” is sometimes used, but it is more common to find the terms “infancy”

or “minority” used to describe people under twenty-one or eighteen. Hillary Rodham, Chil-

dren Under the Law, 43 H

ARV. EDUC. REV. 487, 488-94 (1973); see also Victoria Slade, The

Infancy Defense in the Modern Contract Age: A Useful Vestige, 34 S

EATTLE U. L. REV. 613,

616-19 (2011).

113. Slade, supra note 112, at 619-20. Slade explains: “Many areas of law recognize

that minors do not have the same capacity for decision making as adults. For instance, in

230 Michigan State Law Review Vol. 2013:1

because they lack the capacity to engage in bargaining, and the contract is

skewed in favor of the more powerful agent.

114

In tort law, the attractive

nuisance doctrine protects children from hazardous land through the child-

proofing of property.

115

Furthermore, the government places age restrictions

on the purchasing of alcohol, cigarettes, and pornography.

116

The assump-

tion behind all of these regulations is that children are among the most vul-

nerable and irrational in society, thus requiring our protection.

117

While the law generally creates age thresholds for when a child be-

comes an adult, psychological and behavioral research suggests that perhaps

the distinction between child and adult is not so clear because adults are not

as rational as they might believe.

118

In other words, just because someone

can legally be deemed an adult does not mean that person automatically

possesses the level of rationality required to be a contracting party.

119

For

instance, one factor suggesting many adults are closer to children than once

supposed is the fact that many adults lack emotional control.

120

To have a

complete picture of human rationality, we have to unravel the role emotions

play.

121

We expect children to act out rashly when they do not get what they

desire and to have outbursts of rage or sadness in public places. Conversely,

adults have disciplined themselves not to act on these emotions.

122

Yet in-

creasing instances of road rage behaviors such as tailgating, obscene ges-

criminal law, a minor’s consent to sexual contact does not absolve that minor’s sexual part-

ner. . . . In tort law, the reasonable person standard is altered for children.” Id.

114. See Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract,

47 S

TAN. L. REV. 211, 212-13 (1995). Eisenberg explains: “Lack of capacity exists when a

party is not competent to understand the nature and consequences of his acts. . . . [H]e cannot

make adequate judgments concerning his utility.” Id. at 212.

115. See Peters v. Bowman, 47 P. 113, 114 (Cal. 1896).

116. For example, states impose a smoking age for tobacco products. Some advocate

for raising the smoking age in states to twenty-one, as is the case with alcohol. See Sajjad

Ahmad & John Billimek, Limiting Youth Access to Tobacco: Comparing the Long-Term

Health Impacts of Increasing Cigarette Excise Taxes and Raising the Legal Smoking Age to

21 in the United States, 80 H

EALTH POL’Y 378, 378 (2007).

117. See Tamar Schapiro, What Is a Child?, 109 E

THICS 715, 715-16 (1999). Schapiro

explains that society places special regulations on children to protect, nurture, and educate

them, regardless of whether they want such protections. Id. at 716. The author argues that

perhaps we should extend some of those protections to adults as well, as they may not be as

drastically different from children as we presume. Id.

118. See generally D

ANIEL KAHNEMAN, THINKING, FAST AND SLOW (2011).

119. Id.

120. See David Kennedy, Reconstructing Childhood, 14 T

HINKING: J. PHIL. CHILD. 29

(1998).

121. The number of researchers exploring the roles of emotions in decision processes

has increased in recent years. See, e.g., A

NTONIO R. DAMASIO, DESCARTES’ ERROR: EMOTION,

REASON, AND THE HUMAN BRAIN (1994); George Loewenstein & Jennifer S. Lerner, The Role

of Affect in Decision Making, in HANDBOOK OF AFFECTIVE SCIENCES 619, 619 (Richard J.

Davidson, Klaus R. Scherer & H. Hill Goldsmith eds., 2002).

122. Loewenstein & Lerner, supra note 121, at 619.

Contingent Assumptions of Contract Theory 231

tures, and cutting off other drivers indicate that even some adults cannot

control their emotions in all situations.

123

Another example of adults inap-

propriately acting on emotions includes violent acts of aggression in sport-

ing-event fights and bar brawls.

124

Although one indicator of an adult psyche

is the ability to repress emotional outbursts, we see that in some situations

the rationality of adults breaks down and emotions guide behavior in a

child-like fashion.

Another distinction society draws between a child and an adult re-

volves around happiness. That is, children do not know what is good for

them or what will make them happy, but adults do. However, interdiscipli-

nary evidence suggests that even adults do not understand how to achieve

the happiness they desire. For instance, economic and marketing data sug-

gest “that as national income grows, people do not spend their extra money

in ways that yield significant and lasting increases in measured satisfac-

tion.”

125

That is, the subjective well-being of society will be higher with a

greater balance of inconspicuous consumption, such as time with family and

friends, less traffic congestion, more vacation time, and favorable job char-

acteristics.

126

Yet, the spending pattern of consumers does not create these

situations that would lead to greater happiness.

127

Rather, many adults be-

lieve money can buy happiness and thus engage in conspicuous consump-

tion, which can negatively affect a person’s overall happiness.

128

123. See Bruce S. Sharkin, Road Rage: Risk Factors, Assessment, and Intervention

Strategies, 82 J.

COUNSELING & DEV. 191 (2004). Sharkin discusses The American Automo-

bile Association Foundation for Traffic Safety’s report citing that aggressive incidents of

drivers behind the wheel increased roughly 50% between the years of 1990 to 1996. Id. at

191. This lack of emotional control on the part of adults suggests that certain situations alter

one’s ability to behave normally or rationally. Id. at 191-98.

124. See, e.g., Kit R. Roane, 2 Jets and Ex-Teammate Are Arrested,

N.Y. TIMES (July

11, 1999), http://www.nytimes.com/1999/07/11/nyregion/2-jets-and-ex-teammate-are-

arrested.html; Howard Bath, Wiring Pathways to Replace Aggression, 14 R

ECLAIMING

CHILD. & YOUTH 249, 250 (2006). Bath, a psychologist, explains there are two types of hu-

man aggression: (1) reactive, characterized by strong and immediate emotions; and (2) pro-

active, characterized by planning and intent. Bath, supra, at 250. Whereas with proactive

aggression, “the person’s behaviours are more goal directed and suggest more thinking brain

processing,” people experiencing reactive aggression cannot relate to logic or reason until a

person’s thinking brain “resumes control.” Id.

125. See R

OBERT H. FRANK, LUXURY FEVER: WHY MONEY FAILS TO SATISFY IN AN

ERA OF EXCESS 72, 77 (1999) (summarizing scientific evidence suggesting that the correla-

tion between income and happiness is extremely weak).

126. Id. at 90.

127. Id. at 78.

128. Id. at 77; see also Richard A. Easterlin, Does Economic Growth Improve the

Human Lot? Some Empirical Evidence, in N

ATIONS AND HOUSEHOLDS IN ECONOMIC

GROWTH: ESSAYS IN HONOR OF MOSES ABRAMOVITZ 89, 118 (Paul A. David & Melvin W.

Reder eds., 1974) (demonstrating that higher income in the United States is not systematical-

ly accompanied by greater happiness and concluding that economic growth does not improve

the human condition); Richard A. Easterlin, Does Money Buy Happiness?, 30 P

UB. INT. 3, 4

232 Michigan State Law Review Vol. 2013:1

Much of an adult’s inability to procure happiness is a result of poor

forecasting about the future. Unfortunately, research indicates people are

generally poor predictors of their future states.

129

This poor predicting abil-

ity about their future happiness leads to a dissonance between what is antic-

ipated and what is experienced.

130

The high divorce rates of adults are just

one example of evidence suggesting we cannot so easily attain the happi-

ness we desire.

131

The implication of the evidence is that although adults,

unlike children, are supposed to know the means to their ends of happiness,

even adults may not actually behave in a manner conducive to achieving

those goals.

2. Consumer Behavior

Another dimension in which adults may not act completely rationally

concerns consumer behavior patterns.

132

There is a large body of research

indicating the irrationality of consumers in purchasing goods and services.

133

For instance, does food taste better when served on fine china rather than

paper plates? Rationally speaking, what the food is served on should not

affect the actual taste or quality of the food.

134

Unfortunately, packaging still

does affect a person’s perception of the food’s taste.

135

Research also sug-

gests that the color of a food is empirically effective in influencing percep-

tions of flavor intensity, despite the fact it should not rationally affect fla-

vor.

136

Color is manipulated by firms to signal freshness and taste, and a

(1973); Otis Dudley Duncan, Does Money Buy Satisfaction?, 2 SOC. INDICATORS RES. 267,

267-68 (1975) (studying the influence of income on happiness in Detroit, Michigan). Specif-

ically, although the real median household income in the Detroit area increased by 40%

between 1955 and 1971, there was no change in the satisfaction with the standard of living

among wives. Duncan, supra, at 268.

129. See, e.g., Vanessa M. Patrick, Deborah J. MacInnis & C. Whan Park, Not as

Happy as I Thought I’d Be? Affective Misforecasting and Product Evaluations, 33 J.

CONSUMER RES. 479, 479 (2007).

130. Id.

131. Id. at 480 (“Marriage, for instance, involves making a forecast of how happy one

is likely to feel about one’s spouse ‘till death do you part.’”).

132. See Aradhna Krishna & Maureen Morrin, Does Touch Affect Taste? The Percep-

tual Transfer of Product Container Haptic Cues, 34 J.

CONSUMER RES. 807, 807 (2008).

133. Id. (analyzing the ways in which buyers often equate the packaging or delivery

of a product with judgments about the products themselves).

134. Id.

135. Id.

136. JoAndrea Hoegg & Joseph W. Alba, Taste Perception: More than Meets the

Tongue, 33 J.

CONSUMER RES. 490, 490 (2007). Specifically, Hoegg and Alba found the tint

of orange juice had a huge effect on the taster’s perceptions of taste demonstrating that color

dominates taste. Id. at 491. In the experiment, the subjects were given two cups of the same

Tropicana orange juice, with one cup darkened with food coloring. Id. at 492. The members

of the researcher’s sample group perceived differences in taste that in actuality did not exist;

Contingent Assumptions of Contract Theory 233

consumer’s perceptions of quality are influenced by this color manipulation

rather than actual indicators of quality.

137

These studies indicate that alt-

hough consumers are expected to be rational actors, a body of evidence

suggests their behavior indicates otherwise.

3. Superstition

Furthermore, the high frequency of superstitious beliefs in society is

also evidence of irrational consumer behavior.

138

For example, market deci-

sions are governed by everything from lucky numbers to feng shui.

139

Simi-

larly, nearly a billion dollars is lost in the U.S. business world on each Fri-

day the thirteenth due to superstition.

140

A perfectly informed actor would

not spend his money on products offering to do things they cannot possibly

do, like increase luck or cast positive energy based on the arrangement of a

room. This evidence furthers the idea that we should not unquestioningly

assume adults are rational actors.

4. Cognitive Biases

In addition to a lack of emotional control, behavioral research suggests

an adult’s capacity to reason is also subject to many of the predictable cog-

nitive biases

141

that children engage in.

142

For instance, instead of reasoning

logically, adults have the tendency to commit confirmation bias, or believe

evidence as confirming their own previously established views.

143

The pri-

however, when the subjects were given two cups of orange juice that were the same color but

with one cup sweetened with sugar, the same people failed to perceive taste differences. Id.

at 493. A rational consumer would undoubtedly notice a change in taste and not be affected

by color, but Hoegg and Alba’s research suggests that consumers do not always behave

rationally. Id.

137. Id.

138. See Thomas Kramer & Lauren Block, Conscious and Nonconscious Components

of Superstitious Beliefs in Judgment and Decision Making, 34 J.

CONSUMER RES. 783, 783

(2008).

139. Id.

140. Id.

141. For a business law perspective of cognitive biases, see Ramona L. Paetzold &

Steven L. Willborn, Employer (Ir)rationally and the Demise of Employment References, 30

M. BUS. L.J. 123 (1992).

142. See Tamara R. Piety, “Merchants of Discontent”: An Exploration of the Psy-

chology of Advertising, Addiction, and the Implications for Commercial Speech, 25 S

EATTLE

U. L. REV. 377, 402-03 (2001).

143. Id. at 402; see also Carole Hill, Amina Memon & Peter McGeorge, The Role of

Confirmation Bias in Suspect Interviews: A Systematic Evaluation, 13 L

EGAL &

CRIMINOLOGICAL PSYCHOL. 357, 358 (2008) (examining the extent to which police officers

presume suspects to be guilty prior to interviewing them). When police officers engage in

confirmation bias, they may conduct their interviews by seeking information that confirms

234 Michigan State Law Review Vol. 2013:1

macy and recency biases also cause people to place a greater importance on

events that happen at the beginning or end of a sequence.

144

Furthermore,

the marketing of products to adults relies heavily on availability and repre-

sentativeness biases.

145

In other words, even adults (1) have the tendency to

calculate probabilities on the basis of the most available information; and

(2) often rely on the most vivid facts and attribute a greater weight to known

occurrences than is representatively appropriate.

146

Another widespread

cognitive bias adults regularly engage in is known as the denomination ef-

fect. Specifically, the denomination effect refers to the tendency to spend

more money when it is denominated in small amounts (e.g. coins) rather

than large amounts.

147

These cognitive biases demonstrate only a small frac-

tion of the biases in which humans engage during decision-making. The

chart below illustrates more examples of adults engaging in irrational be-

havior due to cognitive biases.

the guilty hypothesis and avoid information disconfirming the alternative hypothesis. Hill,

Memon & McGeorge, supra, at 358. This confirmation bias in interrogation may prove to be

detrimental to the entirety of the legal system if suspects are in essence “guilty until proven

innocent.” See also Raymond S. Nickerson, Confirmation Bias: A Ubiquitous Phenomenon

in Many Guises, 2 R

EV. GEN. PSYCHOL. 175, 175 (1998). Nickerson describes the confirma-

tion bias of adults as “the seeking or interpreting of evidence in ways that are partial to exist-

ing beliefs, expectations, or a hypothesis in hand.” Id.

144. See Dirk D. Steiner & Jeffrey S. Rain, Immediate and Delayed Primacy and

Recency Effects in Performance Evaluation, 74

J. APPLIED PSYCHOL. 136 (1989). In their

study, 333 undergraduate students viewed four videotaped lectures in one session. Id. at 136.

“Overall performance ratings showed a recency effect when good performance occurred

last.” Id.

145. See Piety, supra note 142, at 403. This bias infiltrates commercials through the

concept of “brand identification.” Id.

146. Id.

147. See Chana Joffe-Walt, Why We Spend Coins Faster than Bills, NPR (May 12,

2009, 3:20 PM), http://www.npr.org/templates/story/story.php?storyId=104063298. Joffe-

Walt summarizes the recent studies conducted by economists Priya Raghubir and Joydeep

Srivastava, who did a series of experiments in the United States and China regarding the

denomination effect. Id. Results confirmed the denomination bias hypothesis, and “showed

people were much more willing to spend the same sum of money if they had smaller denom-

inations instead of one large bill.” Id.; see also Alex Mindlin, A Reluctance to Break the

Large Bills, N.Y.

TIMES (Mar. 29, 2009),

http://www.nytimes.com/2009/03/30/business/30drill.html?_r=0. Mindlin’s article also dis-

cusses Srivastava’s paper, which is soon to be published in The Journal of Consumer Re-

search and investigates the denomination effect. Mindlin, supra.

In one study, college students who had been given four quarters were more likely

to buy proffered candy—and bought more of it—than students given a single dollar

bill. In another, 20 percent of Chinese women given a single 100-yuan note

($14.66) chose not to spend the money on an array of shampoo, bedding and other

household goods—but the rate of abstention was only 9.3 percent among women

given the same amount of money in smaller notes.

Id.

Contingent Assumptions of Contract Theory 235

Table 1: Irrational Behavior of Adults

Cognitive Bias

Irrational Behavior

Base-Rate Fallacy

148

The tendency of people to be influenced more

by salient, individual cases rather than by

base rates drawn from larger samples.

149

Contrast Effect

150

The enhancement or diminishing effect of a

judgment when compared with a recently ob-

served contrasting object.

151

Endowment

Effect

152

The tendency of people to demand more to

give up something that they own than they

148. See Daniel Kahneman & Amos Tversky, On the Psychology of Prediction, 80

SYCHOL. REV. 237, 237 (1973); Jonathan J. Koehler, The Base Rate Fallacy Reconsidered:

Descriptive, Normative, and Methodological Challenges, 19 BEHAV. & BRAIN SCI. 1, 1

(1996).

149. See Brian H. Bornstein, The Impact of Different Types of Expert Scientific Tes-

timony on Mock Jurors’ Liability Verdicts, 10 P

SYCHOL. CRIME & L. 429, 442-43 (2004).

Bornstein discusses how juries tend to give inappropriate weight to anecdotal evidence and

ignore the most statistically significant data and examines how an expert’s anecdotal testi-

mony that is virtually worthless with respect to its probative value exerts a greater effect than

the scientifically more probative experimental evidence. Id. at 442; see also Brad E. Bell &

Elizabeth F. Loftus, Vivid Persuasion in the Courtroom, 49 J.

PERSONALITY ASSESSMENT

659, 659 (1985). Belle and Loftus discuss why vivid information presented at trial may re-

ceive more weight than relatively pallid information. Bell & Loftus, supra, at 659. The rea-

sons why juries give inappropriate weight to anecdotal evidence may be due to greater atten-

tion or memorability. Id. at 661-62.

150. See Albert Pepitone & Mark DiNubile, Contrast Effects in Judgments of Crime

Severity and the Punishment of Criminal Violators, 33 J.

PERSONALITY & SOC. PSYCHOL.

448, 457-58 (1976) (discussing the influence of the contrast effect on judgments about the

severity of different crimes).

151. See Dennis M. O’Reilly et al., The Effects of Immediate Context on Auditors’

Judgments of Loan Quality, 23 A

UDITING 89, 89, 102 (2004) (examining “whether auditors,

when making a series of similar, independent judgments [about loans] are non-normatively

influenced by their earlier judgments,” and finding that auditors “conclude very different

outcomes, [are] subject to considerable bias [and contrast effect], and exhibit poor calibration

given different immediate contexts”).

152. See Owen D. Jones & Sarah F. Brosnan, Law, Biology, and Property: A New

Theory of the Endowment Effect, 49 W

M. & MARY L. REV. 1935, 1935, 1939 (2008). Jones

and Brosnan discuss “[r]ecent work at the intersection of law and behavioral biology [that

suggests] numerous contexts in which legal thinking could benefit by integrating knowledge

from behavioral biology.” Id. at 1935. The authors define the endowment effect as a “phe-

nomenon that appears to underlie some seemingly irrational pricing of property and to there-

by impede efficient exchange.” Id. at 1939. “Because the effect seems inconsistent with

standard neoclassical, rational actor, [and] expected-utility theory economy,” it is questiona-

ble whether we should ascribe to the law doctrines relying on these assumptions. Id.

236 Michigan State Law Review Vol. 2013:1

would be willing to pay for that same good if

they did not own it.

153

Loss Aversion

The tendency to prefer avoiding losses above

acquiring gains.

154

Optimism Bias

155

The tendency of people to believe that their

own probability of facing a bad outcome is

lower than it actually is.

156

153. See David Millon, Default Rules, Wealth Distribution, and Corporate Law Re-

form: Employment at Will Versus Job Security, 146 U.

PA. L. REV. 975, 1006 (1998). Millon

draws on recent economic research to advance the claim that the endowment effect alters the

distribution of gains from trade in employment contracting. Id. at 1005-10; see also Daniel

Kahneman, Jack L. Knetsch & Richard H. Thaler, Experimental Tests of the Endowment

Effect and the Coase Theorem, 98 J.

POL. ECON. 1325, 1326-29 (1990). The authors discuss

the endowment effect’s impact on market efficiency. Kahneman, Knetsch & Thaler, supra, at

1325. Specifically, because owners of entitlements place a higher value on them than do

prospective buyers, the endowment effect can lead to fewer trades of such entitlements than

would occur if valuation were independent of ownership. Id. at 1326-28. As the gap between

buyers’ and sellers’ valuations widens, the possibility of a mutually advantageous trade di-

minishes. Id. Supreme Court Justice Oliver Wendell Holmes put the principle this way:

It is in the nature of man’s mind. A thing which you have enjoyed and used as your

own for a long time, whether property or an opinion, takes root in your being and

cannot be torn away without your resenting the act and trying to defend yourself,

however you came by it.

O.W. Holmes, The Path of the Law, 10 H

ARV. L. REV, 457, 477 (1897).

154. Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler, Anomalies: The En-

dowment Effect, Loss Aversion, and Status Quo Bias, 5 J.

ECON. PERSP. 193, 199-203 (1991)

(providing evidence supporting the endowment effect and status quo biases and discussing

their relation to the bias of loss aversion). The discussion of “loss aversion” was first coined

by Kahneman and Tversky in the 1980s. See Daniel Kahneman & Amos Tversky, Choices,

Values, and Frames, 39 A

M. PSYCHOLOGIST 341, 342 (1984). Furthermore, the bias of loss

aversion is embodied in the old expression that “possession is nine-tenths of the law” and is

subsequently reflected in many judicial opinions and areas of law. See David Cohen & Jack

Knetsch, Judicial Choice and Disparities Between Measures of Economic Values, 30

SGOODE HALL L.J. 737, 749-69 (1992). The authors explain, for example, in tort law, judges

make the distinction between “loss by way of expenditure and failure to make gain.” Id. at

753. A similar distinction is made in contract law; a party that breaches a contract is more

likely to be held to the original terms if the action is taken to make an unforeseen gain than if

it is taken to avoid a loss. Id. at 761.

155. See Christine Jolls & Cass R. Sunstein, Debiasing Through Law, 35 J.

LEGAL

STUD. 199, 199, 204 (2006). The authors “focus on scenarios in which optimism bias is

thought to produce an overall underestimation by consumers of the risk associated with a

given product” in consumer safety law. Id. at 208. They suggest possible ways to debias

human behavior. Id. Specifically, “[i]n the consumer safety context, debiasing . . . would

focus on putting at consumers’ cognitive disposal the prospect of negative outcomes from

use, or at least unsafe use, of a particular product.” Id. at 212. For instance, the authors state:

“[T]he law could require firms—on pain of administrative penalties or tort liability—to

provide a truthful account of consequences that resulted from a particular harm-producing

use of the product, rather than simply providing a generalized warning or statement that fails

to harness availability.” Id.

Contingent Assumptions of Contract Theory 237

Outcome Effect

The tendency of a person who has knowledge

of the eventual outcome of a decision to as-

sess the quality of the judgment of that deci-

sion with the other decision in mind.

157

Planning Fallacy

The tendency to underestimate task-

completion times and to procrastinate.

158

Status Quo Bias

159

The tendency for people to desire things to

stay relatively the same.

160

Thus, when adults are acting in accordance with cognitive biases and

childlike behavior, it is unclear whether they are the rational consumers

contract theory expects them to be when engaging in market transactions. In

combination, all of the evidence regarding child-like behavior of adults,

superstition, consumer behavior patterns, and cognitive biases attacks as-

sumptions of classical contract theory.

161

Therefore, if we assume human

beings may not be rational actors, the desire to protect vulnerable contract-

156. See Piety, supra note 142, at 403. Piety explains the tobacco industry relies

heavily on the optimism bias to entice customers to purchase cigarettes. Id. If adults were not

behaving irrationally and engaging in the optimistic bias, tobacco sales and cigarette-related

deaths would undoubtedly plummet.

157. Peter M. Clarkson, Craig Emby & Vanessa W-S Watt, Debiasing the Outcome

Effect: The Role of Instructions in an Audit Litigation Setting, A

UDITING, Sept. 2002, at 7, 7.

The authors examine the outcome effect when an evaluator has knowledge of the outcome of

a judge’s decision. Id. “If the evaluator has knowledge of a negative outcome, then that

knowledge negatively influences [the] assessment of the ex ante judgment.” Id. (emphasis

added). The findings of their study suggest the “use of relatively nonintrusive instructions to

evaluators [warning them of the outcome effect] may effectively counteract the potential for

the outcome bias.” Id. (emphasis added). However, in real life, humans do not always receive

such instructions about the outcome effect, and thus engage in behavior not befitting a ra-

tional actor.

158. See Andrew J. Wistrich, Procrastination, Deadlines, and Statutes of Limitation,

50 W

M. & MARY L. REV. 607, 621 (2008). Wistrich argues statutes of limitation are dead-

lines. Id. at 609. He discusses how “psychologists have discovered a great deal about how

people respond to deadlines during the past thirty years, [but] the basic structure of statutes

of limitation has not changed since at least 1623.” Id. at 607, 614. Wistrich concludes we

need a more modern approach to the statute of limitations given our tendency to procrastinate

and engage in the planning fallacy. Id. at 666-67.

159. See, e.g., Shane Frederick,

Automated Choice Heuristics, in HEURISTICS AND

BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT 555 (Thomas Gilovich, Dale Griffin &

Daniel Kahneman eds., 2002).

160. See Nick Bostrom & Toby Ord, The Reversal Test: Eliminating Status Quo Bias

in Applied Ethics, 116 E

THICS 656-79 (2006). Bostrom and Ord focus on consequentialist

ethical judgments and how a genuine status quo bias can be characterized as a cognitive error

in these situations. Id. at 658-72. They examine instances where one option is incorrectly

judged to be better than another because it represents the status quo. Id. at 658-62.

161. See infra Section II.B.

238 Michigan State Law Review Vol. 2013:1

ing parties increases. Increasing the usage of the doctrine of unconscionabil-

ity is one way in which the legal system can further shield susceptible par-

ties from unfair contracts. Without genuine rationality, assent, bargaining

power, and economic equality, freedom of contract merely becomes a recipe

for exploitation and injustice.

C. Contracting Parties Make Decisions Based on Complete Information?

In addition to assuming contracting parties are rational actors, the

rhetoric of classical contract theory also tends to leave out the neoclassical

economic assumption that unrestricted economic activity produces efficient

results only under conditions of perfect information.

162

For argument’s sake,

even if all adults are rational actors, they still do not obtain sufficient infor-

mation to make intelligent decisions in contracts. The expression of “con-

tract failure” can be used to describe the absence of full understanding and

information in contracts.

163

Contract failure due to a lack of complete information often occurs

because buyers fail to read the terms in standard form contracts.

164

Further-

more, even if consumers do read a form contract, it is often inefficient for

consumers to bear the “search and deliberation” costs necessary to under-

stand the complex contractual legal language of the contract.

165

One expla-

nation as to why contracting individuals do not read form contracts and thus

fail to gain complete information is that buyers are boundedly rational.

166

That is, the rationality of individuals to attain information is affected by the

162. See David Bear, Comment, Establishing A Moral Duty to Obey the Law

Through a Jurisprudence of Law and Economics, 34 F

LA. ST. U. L. REV. 491, 527 (2007).

163. Michael J. Trebilcock & Steven Elliott, The Scope and Limit of Legal Paternal-

ism: Altruism and Coercion in Family Financial Arrangements, in T

HE THEORY OF

CONTRACT LAW: NEW ESSAYS 45, 54 (Peter Benson ed., 2001). Trebilcock and Elliott explain

that even if a contracting party has mental capacity, a contract could still not reflect the per-

son’s underlying preferences. Id. at 59-62. This failure to reflect a party’s underlying prefer-

ences can be a result of coercion or information failure. Id. at 59. Specifically, information

failure may be the result of misrepresentation by the other party or simply a lack of adequate

information. Id. at 62.

164. See, e.g., John J.A. Burke, Contract as Commodity: A Nonfiction Approach, 24

ETON HALL LEGIS. J. 285, 299 (2000) (“Courts know that parties sign or manifest assent to

standard form contracts that they have not read, understood or negotiated.”); Todd D. Rakoff,

Contracts of Adhesion: An Essay in Reconstruction, 96 H

ARV. L. REV. 1173, 1179 (1983)

(stating “[v]irtually every scholar who has written about contracts of adhesion” accepts the

claim that “the adhering party is in practice unlikely to have read the standard terms”). Also,

Rakoff explains that an additional factor to consider when evaluating whether form contracts

are unconscionable is that many form contracts are offered on a take-it-or-leave-it basis

where no negotiating occurs. Rakoff, supra, at 1225. This is because the buyer usually lacks

access to an employee who has the authority to alter the terms of the contract. Id.

165. See Eisenberg, supra note 114, at 243-44.

166. See Korobkin, supra note 3, at 1218.

Contingent Assumptions of Contract Theory 239

cognitive limitations of their minds, such as the biases discussed previously

in this Article

167

and the finite amount of time they have to make deci-

sions.

168

Therefore, it is unreasonable to expect consumers to be able to read

and comprehend the information provided in complex contracts.

The relational context of contracts also can create an absence of com-

plete information for contracting parties.

169

In other words, modern com-

merce is interdependent—multiple parties are all working together to buy

and sell products and services. The result of this interdependence is that

each party engages in specialization and relies on the information of other

parties with whom they conduct business.

170

In reference to the interdepend-

ence among contracting parties, John R. Commons, a founding father of

Institutionalism, states, “As this interdependence enlarges with commerce,

the ignorance of each individual enlarges, and each depends more and more

on confidence in the honesty, diligence, promptness and good management

of others.”

171

That is, parties become more ignorant about the information

required for informed transactions because they can place confidence in

other contracting parties.

172

Thus, before specialization and interdependence

in market transactions, parties were better informed on the individual lev-

el.

173

Advertising also makes it difficult for consumers to receive perfect in-

formation because by their nature, marketing and commercials are designed

to shield consumers from some information about a product.

174

In most situ-

ations, the sellers have more knowledge than the buyer because they have

the expertise about a particular product and understand the costs and bene-

fits of the product. The sellers have much more information than the con-

sumers; therefore, an exchange of information diminishes with advertis-

ing.

175

Furthermore, the prevalence of advertising affects a person’s ability to

make decisions with relevant and full information. In terms of television

advertising, the estimation that the average television stays turned on almost

167. See supra Section II.B.

168. See Korobkin, supra note 3, at 1209.

169. See Ostas, supra note 1, at 541.

170. See C

OMMONS, supra note 59, at 204.

171. Id.

172. See id. The economic significance of confidence is also found in tort law. Id.

Since 1580, courts have used tort law “to protect the reputation of a manufacturer who had

built up a business on the confidence that he had inspired in customers.” Id.

173. Id.

174. One study found that 70% of advertisement viewers knew very little about a

discussed health condition and side effects of a product even after seeing drug advertise-

ments about the health condition and product. See T

HE HENRY J. KAISER FAMILY FOUND.,

UNDERSTANDING THE EFFECTS OF DIRECT-TO-CONSUMER PRESCRIPTION DRUG ADVERTISING

7-8 (2001).

175. See J

AMES W. HENDERSON, HEALTH ECONOMICS AND POLICY 300 (5th ed. 2012).

240 Michigan State Law Review Vol. 2013:1

six hours a day creates a hugely influential source of information for most

consumers.

176

Instead of providing a detailed explanation of product details

or attributes, most advertisements give consumers catchy one-liners deliv-

ered through violence or sex appeal.

177

The conclusion from this information

is that advertisers entice consumers to purchase their products not through

informing them fully, but rather through psychological conditioning.

178

Be-

cause the television is such a common source of product information, con-

sumers are encouraged vigorously to base their consumption decisions on

incomplete information they receive through conditioning. This “condition-

ing effect is not based on rational [or informed] economic considera-

tions,”

179

and thus the foundations of contract theory further disintegrate.

III.

COMPARATIVE APPROACHES TO UNCONSCIONABILITY

Our vision and legal reasoning extends only as far as our experience

permits. If all we know is American law, we limit ourselves from fully ex-

ploring the ways in which other legal systems help ensure fairness in con-

tracts. Throughout history, other nations have looked to the United States as

a leader in legal reasoning and public policy.

180

However, in terms of ensur-

ing fairness in contract law, some nations are beginning to surpass their

unconscionability predecessor, the United States.

A. Australia

Australia has followed the American lead in recognizing unconsciona-

ble contracts, but has since taken a greater interest in ensuring fair contracts

176. See Omar Lee Reed, The Psychological Impact of TV Advertising and the Need

for FTC Regulation, 13 A

M. BUS. L.J. 171, 171 (1975) (summarizing statistics from the Re-

port on the Twentieth Century Fund Commission on Campaign Costs in the Election Era).

177. Id. at 176-77. Reed explains how ad campaigns become successful not due to

their ability to provide complete information, but rather from catch phrases. Id. For example,

National Airlines had an ad campaign in which a seductive flight attendance used the slogans

“Fly Me” or “I’m going to fly you like you’ve never been flown before.” Id. at 177 (empha-

sis omitted). As a result of this campaign, National Airlines reported a 23% increase that

year, which was nearly twice that of the industry as a whole. Id. at 176.

178. Id. at 177. Reed further contends that advertisers have shown themselves attuned

to conditioning theory by their reduction of commercial time slots from sixty seconds to

thirty seconds or shorter. Id. Conditioning theory predicts that two thirty-second time slots

would condition the audience to purchase a product better than one sixty-second advertise-

ment. Id.

179. Id. at 180.

180. For example, in 1987, on the Constitution’s bicentennial, of the 170 countries

that existed, more than 160 wrote charters modeled directly or indirectly on the U.S. version.

Adam Liptak, ‘We the People’ Loses Appeal with People Around the World, N.Y.

TIMES

(Feb. 6. 2012), http://www.nytimes.com/2012/02/07/us/we-the-people-loses-appeal-with-

people-around-the-world.html.

Contingent Assumptions of Contract Theory 241

and bargaining.

181

Now, Australia is at the forefront of unconscionability

law.

182

Australia’s statutory regulation of unconscionable contracts can be

found in the Trade Practices Act of 1974.

183

Part IV.A includes three provi-

sions for unconscionability, sections 51AA (enacted in 1992), 51AB (1986),

and 51AC (1998).

184

These provisions recognize unconscionability in con-

sumer transactions, small business dealings, and everything else, respective-

ly.

185

Specifically, 51AB(2) lists factors relevant to determining whether

conduct is unconscionable, such as:

(a) [T]he relative strengths of the bargaining positions of the corporation and the

consumer;

(b) [W]hether . . . the consumer was required to comply with conditions that were

not reasonably necessary for the protection of the legitimate interests of the

corporation;

supply . . . of the goods or services;

(d) [W]hether any undue influence or pressure was exerted on, or any unfair tactics

were used against, the consumer . . . ; and

(e) [T]he amount for which, and the circumstances under which, the consumer

could have acquired identical or equivalent goods or services from [another]

person [or firm].

186

Similar to the United States, a plaintiff may sue for remedies if a party

is in breach of the aforementioned provisions of the law.

187

However, in

addition to private remedies, in Australia public law remedies are also a

common response to unconscionable contracts.

188

In short, section 51AA

adds a public law component to the policing of unconscionable conduct in a

commercial setting.

189

“On the public law front, the Australia Competition

and Consumer Commission (ACCC), the designated statutory watchdog,

can sue for injunctions or declarations.”

190

Furthermore, “[t]he ACCC may

also bring representative actions claiming relief on behalf of the defendant’s

victims.”

191

This state-regulated protection for the fairness of contracts in

181. See Anthony J. Duggan, The Trumping of Mateship: Unconscionability in the

High Court of Australia, 39 C

AN. BUS. L.J. 275, 275 (2003).

182. See id.

183. Trade Practices Act 1974 (Cth) (Austl.).

184. Id. at ss 51AA-AC; Duggan, supra note 181, at 276.

185. See Duggan, supra note 181, at 275.

186. s 51AB(2).

187. Duggan, supra note 181, at 277.

188. Id.

189. Id.

190. Id.

191. Id.

242 Michigan State Law Review Vol. 2013:1

Australia should act as an example to countries like the United States

192

that

are currently struggling to put the principles of their unconscionability doc-

trines into practice.

193

B. Canada

Despite the fact the United States falls behind Australia in terms of

regulating unconscionability, the United States does remain influential in

helping other developed nations develop their own canons of unconsciona-

bility law.

194

Specifically, our neighbors to the north in Canada have yet to

192. Perhaps the United States has the doctrine of unconscionability as codified in the

U.C.C. because we lack the regulatory attention to power differences that other countries like

Australia have.

193. Although some states in the United States have legislative acts preventing un-

conscionability, there is no uniform statutory provision like Australia’s. See, e.g., O

HIO REV.

CODE ANN. § 1345.03 (LexisNexis 2004). For example, consumer protection statutes, such as

the Ohio consumer protection statute, generally list factors, similar to those considered by the

courts under the U.C.C. or common law, to be weighed in making a determination of uncon-

scionability under the statute. Id. § 1345.03(B). Ohio’s statute takes into consideration many

of the factors of Australia’s. Id. The statute seeks to determine:

(1) Whether the supplier has knowingly taken advantage of the inability of the con-

sumer reasonably to protect consumer’s interests because of the consumer’s

physical or mental infirmities, ignorance, illiteracy, or inability to understand

the language of an agreement;

(2) Whether the supplier knew at the time the consumer transaction was entered in-

to that the price was substantially in excess of the price at which similar proper-

ty or services were readily obtainable in similar consumer transactions by like

consumers;

(3) Whether the supplier knew at the time the consumer transaction was entered in-

to of the inability of the consumer to receive a substantial benefit from the sub-

ject of the consumer transaction;

(4) Whether the supplier knew at the time the consumer transaction was entered in-

to that there was no reasonable probability of payment of the obligation in full

by the consumer;

(5) Whether the supplier required the consumer to enter into a consumer transac-

tion on terms the supplier knew were substantially one-sided in favor of the

supplier;

(6) Whether the supplier knowingly made a misleading statement of opinion on

which the consumer was likely to rely to the consumer’s detriment;

(7) Whether the supplier has, without justification, refused to make a refund in

cash or by check for a returned item that was purchased with cash or by check,

unless the supplier had conspicuously posted in the establishment at the time of

the sale a sign stating the supplier’s refund policy.

Id.

194. Both the French and German legal systems also treat contracts that are “unbar-

gained for” with broad, flexible provisions similar to the U.C.C. See James H. Agger, Un-

conscionable Contracts Under the Uniform Commercial Code, 4 A

M. BUS. L.J. 127, 144

(1966). Article 138 of the German Civil Code takes both a general and specific approach to

harsh contracts that are against “good morals (gegen die guten Sitten).” Id. Furthermore,

Contingent Assumptions of Contract Theory 243

fully embrace a doctrine of unconscionability as broad as outlined in § 2-

302 of the U.C.C. or the Restatement (Second) of Contracts. Currently in

Canada, unlike in the United States, unconscionability is a basis for a rescis-

sion of a contract as a whole, but not necessarily for the non-enforcement of

a particular term that would cause an unfair or unreasonable result.

195

Fur-

thermore, the doctrine of unconscionability in Canada rests more heavily on

finding “inequality of bargaining power,”

196

and “this phrase may stand in

the way of adapting to a marketplace in which the vast majority of contracts

do not involv[e] bargaining.”

197

In reality, most contracts are between a

business and a consumer, and as such, the consumer is not able to bargain at

all.

198

As Canada moves forward with adopting a more pervasive uncon-

scionability doctrine, some provinces have enacted unconscionability laws

for consumer transactions.

199

Furthermore, the Ontario Law Reform Com-

mission recommended the enactment of a general unconscionability provi-

sion first for sales contracts

200

and then for general contracts at large.

201

The

inspiration for these initiatives has been § 2-302 of the U.C.C. In Canada’s

acceptance of the U.C.C.’s provisions for unconscionability, the importance

of U.S. regulations regarding unfair contracts becomes clear. Now if only

U.S. courts could reflect the sentiments of the Code in their decisions, the

United States could once again be at the forefront of protecting the vulnera-

ble through contract law.

C. Germany

Germany introduced the main components of its unconscionability law

in the German Civil Code of 1900.

202

The Code has three main provisions

relating to unconscionability.

203

Article 138 reads:

(1) A transaction that offends good morals (guten Sitten) is void.

“[t]he French doctrine of abus des droits . . . has been used both as a shield and a sword”

against unconscionability. Id.

195. See J

OHN D. MCCAMUS, THE LAW OF CONTRACTS 420 (2005).

196. Id. at 407, 409-11.

197. Jean Braucher, Unconscionability in the Age of Sophisticated Mass-Market

Framing Strategies and the Modern Administrative State, 45 C

AN. BUS. L.J. 382, 385 (2007).

198. Id. at 386 (citing M

CCAMUS, supra note 195, at 191).

199. See J

ACOB S. ZIEGEL & ANTHONY J. DUGGAN, COMMERCIAL AND CONSUMER

SALES TRANSACTIONS: CASES, TEXT AND MATERIALS 122-23 (2002).

200. O

NT. LAW REFORM COMM’N, REPORT ON SALE OF GOODS 156 (1979).

201. O

NT. LAW REFORM COMM’N, REPORT ON AMENDMENT OF THE LAW OF CONTRACT

136-37 (1987).

202. John P. Dawson, Unconscionable Coercion: The German Version, 89 HARV. L.

REV. 1041, 1044-45 (1976).

203. See id. at 1053.

244 Michigan State Law Review Vol. 2013:1

(2) Void in particular is a transaction whereby one person, with exploitation of the

necessity, thoughtlessness or inexperience of another, is promised or acquires,

for himself or for a third party, economic advantages whose value exceeds the

value of his own performance to such a degree that, under the circumstances,

there is a striking disproportion between them.

204

Scholars have noted several differences between Article 138 and § 2-

302 of the U.C.C. First, Article 138 appears in the General Part of the Ger-

man Civil Code, meaning that it applies to all contract law.

205

Second, Arti-

cle 138 provides a more blunt remedy for unconscionable contracts, giving

judges only the option to discard entire contracts, rather than reopening the

contract, modifying terms, or pursuing other options American judges

have.

206

Third, Article 138 describes specific instances when a contract is

“unconscionable.”

207

Alternatively, § 2-302 is much more general and

leaves unconscionable undefined.

208

In theory, this generality gives U.S.

judges much more discretion, but in practice, when German judges combine

Article 138 with the other two articles discussed below, they have similar

discretion.

209

Article 242 of the German Civil Code states, “Obligations shall be

performed in the manner required by good faith, with regard to commercial

usage.”

210

Courts began to use this Article often during the period of high

inflation post-WWI for contracts dealing with repayment of debt, but since

then, the Article has made inroads throughout German contract law.

211

A brief review of three broad classes of cases applying Article 242

will help distinguish it from Article 138. The first group of cases involves

instances where the party who was given a promise by another misuses its

contractual rights.

212

An example is when an insurance company cancels a

policy after a late premium payment, which courts have ruled violates good

faith.

213

A second group involves cases where one party seeks a harsh rem-

edy for a contractual breach by the other party when a less burdensome al-

204. Id. at 1052 (translating Article 138 of the German Civil Code).

205. Id. at 1046; A.H. Angelo & E.P. Ellinger, Unconscionable Contracts: A Com-

parative Study of the Approaches in England, France, Germany, and the United States, 14

OY. L.A. INT’L & COMP. L.J. 455, 495 (1992).

206. See Angelo & Ellinger, supra note 205, at 495-96.

207. Id. at 496.

208. Id. at 497.

209. Id. at 498.

210. See Dawson, supra note 202, at 1044 (translating Article 242 of the German

Civil Code).

211. Id. at 1045. Reflecting its influence, Dawson notes that a standard commentary

on the Civil Code devotes 1,388 pages to analyzing court decisions invoking Article 242. Id.

at 1045 n.5.

212. See Angelo & Ellinger, supra note 205, at 491.

213. Id.

Contingent Assumptions of Contract Theory 245

ternative exists.

214

For example, if one party receives damaged goods, that

party should seek repairs before exiting the contract entirely.

215

The third

group contains cases where one party tells the other certain provisions of a

contract need not be followed, only later to enforce them, such as when

deadlines are said to be lax, only later to be stringently enforced by an in-

surance company.

216

Generalizing from these cases, we can see that Article 242 is invoked

primarily for cases involving the unconscionable exercise of contractual

rights, whereas Article 138 applies to unconscionable contractual terms.

Thus, under this Article 242, “the courts are able to combat the unfair use of

contractual rights, even where the clause conferring these rights is not un-

conscionable per se.”

217

American courts have not attempted to rule against

the unconscionable exercise of contractual terms, despite similarity in lan-

guage between Article 242 and § 1-203 of the U.C.C.

218

Finally, Article 826 of the German Civil Code reads, “One who inten-

tionally injures another by conduct offending good morals must make repa-

ration.”

219

Under this article, German courts have developed a body of tort

law that seeks to combat the harmful actions of groups with “overriding,

economic power.”

220

So it became an offense to good morals to interfere intentionally with present and

prospective contracts or advantageous relations, when the motive was destructive,

when disapproved means such as violence or fraud were threatened or used, or

where harm inflicted was out of proportion to the interests being served. . . . As

early as 1920, there had emerged a network of court-created rules providing dam-

ages or preventative relief over a wide and steadily expanding range of intentional-

ly harmful conduct.

221

Overall, Germany can learn from U.S. unconscionability law in the

way § 2-302 gives U.S. judges more flexibility to alter or delete specific

terms of an unconscionable contract, rather than provide a blunt tool of de-

ciding whether to let a contract stand or discard it in its entirety.

222

However,

the United States can learn from German law in the way Article 242 pro-

vides extra protection against the unfair exercise of contractual rights.

223

214. Id. at 492.

215. Id.

216. Id.

217. Id. at 506.

218. Id.

219. Dawson, supra note 202, at 1045 (translating Article 826 of the German Civil

Code).

220. Id. at 1045-46.

221. Id. at 1046.

222. See Angelo & Ellinger, supra note 205, at 505.

223. Id. at 505-06.

246 Michigan State Law Review Vol. 2013:1

D. France

Unlike Germany, Australia, and the United States, France does not

have a general unconscionability doctrine.

224

However, a patchwork of pro-

visions throughout French law provides contracting parties protection

against contractual unfairness in similar ways as other countries do under

the scope of their unconscionability law.

225

This protection is weighed

against the important place freedom of contract has in the French Civil

Code.

226

Article 1134 states, “‘An agreement legally entered into is law for

those who made it.’”

227

Contracting parties find some protection against unfairness in the

French Civil Code. First, several articles outline some basic requirements of

equality and fairness for contracts. Article 1108 of the Civil Code stipulates,

“‘In order that a contract should be valid, it must comply with four condi-

tions. There must be consent by the party bound; the person must be capable

of contracting; the subject matter of the contract must be certain; [and] the

“cause” of the contract must be lawful.’”

228

Articles 1109 through 1133 con-

tinue by declaring a contract void if a party consents as a result of mistake

(erreur), duress (violence), or fraud (dol).

229

Second, using la lesion (Article 1118), courts are able to annul a con-

tract that, through an imbalance between the parties, has caused one party to

be disadvantaged and incur an undue loss.

230

The applicability of lesion is

limited however because it applies only to certain types of contracts and

under specific definitions of the size of the loss.

231

A third source for contractual fairness is the concept of cause. Article

1131 reads, “An obligation without cause, or one based on a false or illicit

cause, can have no effect.”

232

Article 1133 specifies, “A cause is illicit when

it is prohibited by law or when it is contrary to good morals or the public

order.”

233

Cause has been used to rescind contractual unfairness in cases

224. See Séverine Saintier, Loyalty as a Tool to Combat Contractual Unfairness: A

French Perspective, in U

NCONSCIONABILITY IN EUROPEAN PRIVATE FINANCIAL

TRANSACTIONS: PROTECTING THE VULNERABLE 62, 62-63 (Mel Kenny, James Devenney &

Lorna Fox O’Mahony eds., 2010).

225. Id. at 62-73.

226. See id. at 73-78.

227. Angelo & Ellinger, supra note 205, at 472 (quoting T

HE FRENCH CIVIL CODE AS

AMENDED TO 1976 (John H. Crabb trans., 1977)).

228. Id. at 473 n.84 (translating Article 1108 of the French Civil Code).

229. Id. at 473-74 & n.85.

230. See id. at 475.

231. See Saintier, supra note 224, at 64.

232. Dando B. Cellini & Barry L. Wertz, Unconscionable Contract Provisions: A

History of Unenforceability from Roman Law to the UCC, 42 T

UL. L. REV. 193, 195 n.12

(1967) (translating Article 1131 of the French Civil Code).

233. Id. at 195 n.13 (translating Article 1133 of the French Civil Code).

Contingent Assumptions of Contract Theory 247

where continued adherence to a contract lacks a cause.

234

For example,

French courts declared void a contract in a case involving a video rental

shop, which contracted to get the videos from larger companies, only to

argue its contracts with the distributors lacked cause when the rental shop

went out of business.

235

French courts have also used cause as a basis for

annulling a contract when the contracting parties lack proportional obliga-

tions.

236

A fourth legal source for combating contractual unfairness is the

clauses abusives in Article L 132-1 of the 1978 Consumer Code.

237

It states,

“[I]n contracts concluded between a business and a non-business or con-

sumers, clauses which aim to create or result in the creation, to the detri-

ment of the non-professional or the consumer, of a significant imbalance

between the rights and obligations of the parties to the contract, are un-

fair.”

238

The Article continues with a non-exhaustive list of unfair contractual

clauses; for example, restricting a party “from establishing irrefutably the

consumer’s adherence to clauses that the latter has not actually had the op-

portunity to become aware of prior to conclusion of the contract;”

239

“from

authorising the business to terminate a contract of indeterminate duration

without giving reasonable advance notice, without just cause;”

240

or “from

obliging the consumer who has failed to perform his/her obligations to pay

compensation in a disproportionately high amount.”

241

A 1991 ruling by the Court of Cassation nullified a contract containing

a clause it found abusive, even though the clause was not explicitly listed in

any specific law.

242

The court thereby generalized the notion of offering

general protection against unfair contractual clauses.

243

Lastly, similar to

Germany, French courts employ the concept of loyalty or good faith to en-

sure contractual fairness.

244

One area where courts have used loyalty or good

faith in their decisions is in cases of contractual fraud. The courts have

linked loyalty and good faith to the obligation of disclosure for contracting

parties.

245

This link may be weakening, however, since the 1970s, because

234. See id. at 195.

235. See Saintier, supra note 224, at 65.

236. Id. at 66.

237. Id. at 64.

238. Id. at 64 n.13 (translating Article L 132-1 of the French Consumer Code).

239. C

ONSUMER CODE, LEGISLATIVE PART, ARTICLE L132-1 (2005), available at

www.legifrance.gouv.fr/content/download/1960/13727/.../Code_29.pdf (translating the

French Consumer Code 2005).

240. Id.

241. Id.

242. See Angelo & Ellinger, supra note 205, at 482.

243. Id.

244. Id. at 472.

245. See Saintier, supra note 224, at 69.

248 Michigan State Law Review Vol. 2013:1

in more recent cases the Court of Cassation has held that silence about per-

tinent information is not punishable and has not mentioned loyalty or good

faith in the decisions.

246

Thus, the major difference between France and other legal systems is

that France does not have a general unconscionability provision. However,

there is evidence that France is moving toward more generality, as dis-

cussed above with the general provision courts are beginning to provide

against unfair clauses.

247

Additionally, like the United States, but unlike

Germany, French judges do revise provisions of unconscionable con-

tracts.

248

E. Commonalities in U.S., German, and French Law

Despite different provisions and approaches, these three legal systems

are in agreement in many broad principles, as Alphonse M. Squillante out-

lines:

1. Commonality of Language: Even though the language is not exactly the same,

the meaning of public order, good morals and unconscionability is the same in

all three systems, and the same are recurrent themes in the three Codes;

2. Overreaching: The courts of all three systems will react adversely to any con-

tract that is overreaching, oppressive or so unfair as to shock the courts’ con-

sciences;

3. Bad Bargains: None of the systems will protect the person who makes a bad

bargain. A bad bargain is not a basis for invoking the doctrine of unconsciona-

bility in the Codes;

4. Total Transaction: All three courts will look to the subjective and objective facts

of the total transaction before reaching a decision of whether to enforce the con-

tract;

5. Specific Contracts: Each system specifically scrutinizes certain types of con-

tracts because by their very nature they are subject to possible abuse by one par-

ty of the other. Contracts involving labor, insurance, concessionaires of public

services (called regulated monopolies in the United States) and standard form

contracts are carefully policed to make sure that no unfair advantage is taken by

one party over another;

6. Unbargained for Contracts: Broad provisions in all three Codes deal with unbar-

gained for contracts to protect against unconscionability. Such contracts are

governed by article 138 of the German Burgerliches Gesetzbuch, article 1382 of

the French Civil Code, and section 2-302 of the Uniform Commercial Code;

246. Id. at 71.

247. See supra Section II.D and accompanying text.

248. See generally Pierre Legrand Jr., Judicial Revision of Contracts in French Law:

A Case-Study, 62 T

UL. L. REV. 963 (1988).

Contingent Assumptions of Contract Theory 249

7. Grounds for Use: Factors that are considered relevant to granting or denying re-

scission or reformation of contract are uniquely similar; they include one-

sidedness of the bargain, form and disclaimer of liability;

8. Use of the Doctrine: None of the courts base their decisions on the unconsciona-

bility doctrine merely because it can resolve a number of ills. Rather, uncon-

scionability has taken on a distinct application revolving about notions of fair

play.

249

IV. CASE LAW: THE UNCLEAR DOCTRINE OF UNCONSCIONABILITY

Due to the uncertain criteria of the doctrine of unconscionability,

many in the American legal community hoped courts would establish the

necessary definitions, rules, and procedures for application.

250

In using § 2-

302 of the U.C.C. to rule contracts unconscionable, American courts ques-

tion whether the traditional common law concept of freedom of contract is

capable of adequately protecting the consumer and further clarify what

makes a contract unconscionable.

251

The courts have not succeeded in establishing a general formula or

clear guidelines for applying the vague concept of unconscionability.

252

The

result is that court decisions have conflicted, and the doctrine’s rules have

been applied inconsistently.

253

Courts therefore have applied the doctrine of

unconscionability on a case-by-case basis using a totality of the circum-

stances test.

254

Also, uncertainty remains as to whether both procedural and

substantive unconscionability must be present, further muddying the waters

of unconscionability. Additionally, case law does not indicate the weight to

be given to the different factors involving unconscionable contracts and

whether all forms of unconscionability are equally damaging to a con-

249. Alphonse M. Squillante, Unconscionability: French, German, Anglo-American

Application, 34 A

LB. L. REV. 297, 298 (1970) (footnotes omitted).

250. See DEUTCH, supra note 30, at 111.

251. See, e.g., Henningsen v. Bloomfield Motors, Inc., 161 A.2d 69, 84, 86 (N.J.

1960). The Henningsen court stated: “[T]he basic tenet of freedom of competent parties to

contract is a factor of importance[, but] . . . such rules cannot be applied on a strict, doctrinal

basis,” because “in present-day commercial life the standardized mass contract has appeared

. . . [and] is used primarily by enterprises with strong bargaining power and position.” Id.

252. Some states have created tests for unconscionability, but these tests suffer from

the same problems the doctrine of unconscionability and case law precedent suffer from

vague or ambiguous standards or tests. See, e.g., Am. Gen. Fin., Inc. v. Branch, 793 So. 2d

738, 748 (Ala. 2000). The Alabama courts use a two-part test to assess unconscionability. A

contract is unconscionable if: (1) Its terms are grossly favorable (2) to a party with over-

whelming bargaining power. Id. However, the problems of systematically defining “grossly

favorable” and “overwhelming bargaining power” still exist.

253. See D

EUTCH, supra note 30, at xv.

254. See Arthur Allen Leff, Unconscionability and the Crowd—Consumers and the

Common Law Tradition, 31 U.

PITT. L. REV. 349, 354-55 (1970).

250 Michigan State Law Review Vol. 2013:1

tract.

255

As a result, courts are free to pick and choose among a range of

factors in order to achieve a fair result and ensure unconscionable contracts

are not enforced.

256

However, in cases where factors suggest unconscionability, judges

still rule against unconscionability and implicitly evoke Adam Smith’s lais-

sez-faire statement: “Every man, [so] long as he does not violate the laws of

justice, is left perfectly free to pursue his own interest [in] his own way,”

257

or John Stuart Mill’s anti-paternalistic statement: “[T]he only purpose for

which power can be rightfully exercised over any member of a civilised

community, against his will, is to prevent harm to others. His own good,

either physical or moral, is not a sufficient warrant.”

258

Thus, it is surprising that so important a question as whether a contract

must meet a general requirement of fairness has not been dealt with more

authoritatively by the courts.

259

One would expect that as research under-

mines the traditional assumptions of contract theory, judges would begin

finding more contracts unconscionable. However, the number of cases in

which the courts found unconscionability has not significantly increased

over time.

260

The following are two of the many cases in which the courts

should have found contracts unconscionable but did not do so based on

questionable assumptions about human rationality and information. These

cases are merely illustrations of the countless cases warranting, but not rely-

ing on, the equitable arguments provided by the unconscionability doctrine.

A. Harris v. Green Tree Financial Corporation

Harris v. Green Tree Financial Corp.

261

is one of many cases in which

companies have taken advantage of elderly customers.

262

In Harris, the U.S.

255. See Lary Lawrence, Toward a More Efficient and Just Economy: An Argument

for Limited Enforcement of Consumer Promises, 48 O

HIO ST. L.J. 815, 816 (1987).

256. See Gerald T. McLaughlin, Unconscionability and Impracticability: Reflections

on Two U.C.C. Indeterminacy Principles, 14 L

OY. L.A. INT’L & COMP. L.J. 439, 446 (1992).

257. A

DAM SMITH, THE WEALTH OF NATIONS 745 (Edwin Cannan ed., Modern Li-

brary 2000)

(1776). In other words, people should have the freedom to act and contract at

their own discretion. Courts conform to the hands-off approach by refusing to regulate unfair

contracts in unconscionability cases.

258. J

OHN STUART MILL, UTILITARIANISM, ON LIBERTY, ESSAY ON BENTHAM 135

(Mary Warnock ed., 1962) (1861).

259. See K

OFFMAN & MACDONALD, supra note 5, at 446.

260. See DiMatteo & Rich, supra note 52, at 1100. Dimatteo and Rich conducted an

empirical evaluation of unconscionability cases. Their cases were drawn from two time peri-

ods: 1968–1980 and 1991–2003. Id. Results of this analysis revealed that for the period from

1968 to 1980, 34% of unconscionability claims were successful while 41% of unconsciona-

bility claims were successful for the time period from 1991 to 2003. Id. Although there was a

slight increase (7%) in the percentage of cases where unconscionability was found between

the two periods, this increase was not statistically significant. Id. at 1100-01.

261. 183 F.3d 173 (3d Cir. 1999).

Contingent Assumptions of Contract Theory 251

Court of Appeals for the Third Circuit found an arbitration provision in a

home improvement contract enforceable against the homeowners’ challeng-

es that the provision was unconscionable.

263

However, the court should have

found the contractual provisions void pursuant to the doctrine of uncon-

scionability. In Harris, Green Tree Financial Corporation recruited building

contractors to sell home improvements to homeowners to be financed by

high interest, secondary mortgage contracts, which were in turn sold to ei-

ther Green Tree.

264

The contractors they selected were instructed to target

“relatively unsophisticated, low- to middle-income, senior citizens.”

265

The

plaintiffs claimed that Green Tree instructed the contractors to use high-

pressure sales tactics, such as in-home sales and telemarketing, and to as-

sure the customer that the cost of the improvements would be reasonable

and that they did not have to pay until they were satisfied with the im-

provements.

266

Furthermore, the contracts also potentially had misleading and fraudu-

lent provisions, according to the plaintiffs.

267

Also, some of the work was

not completed as promised by the contractors and other work was unsatis-

factory.

268

Nothing was done by Green Tree to fix the unsatisfactory work,

despite numerous complaints.

269

As a result, some of the homeowners chal-

lenged the contract on the grounds that it was unconscionable, and Green

Tree moved to compel arbitration.

270

Many of the terms in the contract should have been considered uncon-

scionable. First and foremost, the targeting of a vulnerable group triggers

consideration that perhaps the contracts were not created in good faith or

262. For another case involving pressuring an elderly woman to engage in an uncon-

scionable contract, see Bennett v. Bailey, 597 S.W.2d 532, 533 (Tex. Civ. App. 1980). See

also Brooke Overby, Contract, in the Age of Sustainable Consumption, 27 J.

CORP. L. 603,

616 (2002) (noting elderly targets have become the target of fraud and predatory lending

practices).

263. Harris, 183 F.3d at 176, 184.

264. Id. at 176.

265. Id.

266. Id.

267. Id. at 177. For a summarized discussion of some of the more salient provisions,

see also Meadows, supra note 15. Meadows explains:

One such provision . . . [challenged] high premiums for collateral protection insur-

ance. Another . . . was an arbitration provision which required the homeowners to

arbitrate all disputes but permitted the lender to use judicial proceedings to enforce

the loan or the mortgage. Because collection of the debt and enforcement of the

mortgage would be the only actions commenced by the lender, essentially the

homeowners waived their right to a jury trial and were compelled to arbitrate all

disputes, while the lender waived none of its comparable rights.

Id. at 750-51 n.76 (citations omitted) (citing Harris, 183 F.3d at 176, 177-78).

268. Harris, 183 F.3d at 177.

269. Id.

270. Id.

252 Michigan State Law Review Vol. 2013:1

under fair terms. The inequality of bargaining power was aggravated with

the high-pressure sales tactics used against the senior citizens.

271

Additional-

ly, the arbitration agreement was highly inconspicuous and hidden on the

back of a page in small print.

272

Small, inconspicuous fine print is one sign

of procedural unconscionability. Furthermore, the lack of reciprocal obliga-

tions to arbitrate also created inequality of bargaining power.

273

Pursuant to

the contract, Green Tree was able to litigate some claims while the borrow-

ers had to arbitrate all claims.

274

However, this is unreasonably favorable to

Green Tree, and thus substantively unconscionable. For all these reasons,

the court should have found the contract Green Tree entered into with the

elderly homeowners unconscionable. However, this court, like many that do

not rule in favor of unconscionability, instead relied on the questionable

assumptions underlying freedom of contract and rationality.

275

B. Doctor’s Associates, Inc. v. Casarotto

One type of contract with the potential to be held unconscionable is

one containing arbitration agreements. Doctor’s Associates, Inc. v. Casarot-

276

concerns a standard form franchise agreement for the operation of a

Subway sandwich shop in Montana.

277

Doctors Associates, Inc. is a Con-

necticut corporation that owns Subway sandwich shop franchises, and a

man by the name of Mr. Lombardi was its development agent in Montana.

278

The Casarottos were franchisees, entering into an agreement to operate a

Subway franchise in Great Falls, Montana.

279

However, they were told by

Mr. Lombardi, the development agent, that their first choice for a location

was unavailable.

280

As a result, the franchisees agreed instead to open a

Subway sandwich shop in another location with the caveat that if their pre-

271. Id. at 176.

272. Id. at 182.

273. The Court held that “inequality in bargaining power, alone, is not a valid basis

upon which to invalidate an arbitration agreement.” Id. at 183.

274. Id.

275. Id. at 184.

276. 517 U.S. 681 (1996).

277. Id. at 682.

278. Casarotto v. Lombardi, 886 P.2d 931, 932 (Mont. 1994), vacated, Doctor’s

Assocs., Inc., 517 U.S. 681. The judgment of this case was vacated and remanded for further

consideration in light of Allied-Bruce Terminex Companies, Inc. v. Dobson, 513 U.S. 265

(1995). However, Allied-Bruce was decided not in relation to unconscionability law, but

rather to a provision of the Federal Arbitration Act. Id. at 272. The Court held that the Act’s

interstate commerce language should be read broadly to extend the Act’s reach to the limits

of Congress’ Commerce Clause power. Id. Therefore, this case can still be instructive as a

tool for discourse about the doctrine of unconscionability.

279. Casarotto, 886 P.2d at 932.

280. Id.

Contingent Assumptions of Contract Theory 253

ferred location became available one day, they would have the exclusive

right to open a Subway there.

281

However, the preferred location in Great

Falls was instead awarded to another franchisee.

282

As a result, the Casarot-

tos argue they lost business ultimately losing the collateral on their loan.

283

Furthermore, the contract contained a provision for mandatory arbitra-

tion somewhere within the lengthy document.

284

Pursuant to Montana law at

the time, if a contract contains an arbitration clause, it must state so clearly

on the first page of the contract so that contracting parties understand arbi-

tration will occur.

285

However, the Subway contract was not created in Mon-

tana, and therefore did not follow the regulations of Montana law.

286

There-

fore, whether the Casarottos had reasonable knowledge, understanding, or

bargaining power given the fact the arbitration clause was not mentioned on

the first page as in all other contracts they negotiated is also questionable.

As such, the arbitration agreement was inconspicuous, and the Casarottos

did not reasonably expect there to be an arbitration clause because it was not

mentioned on the first page as required by law in Montana.

The Montana Supreme Court ruled against the arbitration agreement

based on a Montana statute.

287

Subsequently, the U.S. Supreme Court ruled

that the Federal Arbitration Act preempted the Montana statute in ques-

tion.

288

However, if the Montana Supreme Court made its ruling based on

unconscionability grounds, the U.S. Supreme Court would not have ruled

the way it did because the unconscionability ruling would not be at odds

with the Federal Arbitration Act.

289

On this subject of unconscionability, the

Supreme Court stated:

Repeating our observation in Perry, the text of § 2 [of the Federal Arbitration Act]

declares that state law may be applied “if that law arose to govern issues concern-

ing the validity, revocability, and enforceability of contracts generally.” Thus, gen-

281. Id.

282. Id. at 933.

283. Id.

284. Id.

285. Id. at 942 (Trieweiler, J., concurring).

286. Id.

287. Id. at 939 (majority opinion).

288. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 683 (1996) (“We hold

that Montana’s first-page notice requirement, which governs not ‘any contract,’ but specifi-

cally and solely contracts ‘subject to arbitration,’ conflicts with the FAA and is therefore

displaced by the federal measure.”).

289. See Susan Randall, Judicial Attitudes Toward Arbitration and the Resurgence of

Unconscionability, 52 B

UFF. L. REV. 185, 193 (2004). In fact, a number of recent cases in

California using the doctrine of unconscionability have attempted to circumvent the Federal

Arbitration Act. Id. at 194-95. For a specific discussion of arbitration agreements being held

unconscionable in a state other than California, see O’Donoghue v. Smythe, Cramer Co., No.

80453, 2002 WL 1454074 (Ohio Ct. App. July 3, 2002). In this case, the court ruled a home

inspector’s limitation of liability in an arbitration agreement unconscionable since it preclud-

ed any meaningful remedy. Id. ¶ 31.

254 Michigan State Law Review Vol. 2013:1

erally applicable contract defenses, such as fraud, duress, or unconscionability,

may be applied to invalidate arbitration agreements without contravening § 2.

290

Therefore, the Montana Supreme Court should have held the arbitra-

tion agreement unconscionable because it was inconspicuous,

291

did not

provide adequate notice of its contents, and ran counter to the reasonable

expectations of average consumers.

292

Further adding to the U.S. Supreme

Court’s comment about arbitration and unconscionability, federal or state

courts in California,

293

Hawaii,

294

Missouri,

295

Ohio,

296

and Illinois

297

have

ruled that certain clauses in arbitration agreements can be unenforceable

under the Federal Arbitration Act because they are unconscionable.

ONCLUSION

Since the codification of the doctrine of unconscionability in the Uni-

form Commercial Code and the Restatement (Second) of Contracts, ques-

tions have persisted as to the meaning and the rationality of its applica-

tion.

298

However, the uncertainty surrounding the definition of the doctrine

should lead to its flexibility and adaptability to a variety of situations in

future court decisions. The doctrine, while well intentioned, has not ade-

290. Doctor’s Assocs., Inc., 517 U.S. at 686-87 (second emphasis added) (citations

omitted).

291. Under the Federal Arbitration Act, the agreement could not be found to be one-

sided, oppressive, and unfair simply because it is an arbitration agreement. Rather, more

evidence of specific misconduct is needed. However, the underlying foundations of arbitra-

tion do suggest some superiority of bargaining power as well. For example, the large compa-

nies or drafters of arbitration agreements are likely repeat participants in arbitrations, and

therefore have an advantage in arbitrator selection and case presentation. The inferior party

has no hope of matching these advantages because information about past arbitrations is

often kept secret. See Randall, supra note 289, at 219.

292. Id. at 193.

293. See, e.g., Bolter v. Superior Court, 104 Cal. Rptr. 2d 888, 894 (Ct. App. 2001);

Comb v. PayPal, Inc., 218 F. Supp. 2d 1165, 1177 (N.D. Cal. 2002); GMAC Commercial

Fin. LLC v. Superior Court, No. B166070, 2003 WL 21398319, at *4 (Cal. Ct. App. June 18,

2003); Stone v. Memberworks Inc., No. G030740, 2003 WL 21246771, at *6 (Cal. Ct. App.

May 30, 2003).

294. See, e.g., Domingo v. Ameriquest Mortg. Co., 70 F. App’x 919, 920 (9th Cir.

2003).

295. See Swain v. Auto Servs., Inc., 128 S.W.3d 103, 108 (Mo. Ct. App. 2003).

296. See, e.g., Hagedorn v. Veritas Software Corp., 250 F. Supp. 2d 857, 862 (S.D.

Ohio 2002) (holding a forum selection clause requiring a life-long Ohio resident to travel to

San Francisco for arbitration was unconscionable).

297. See Plattner v. Edge Solutions, Inc., No. 03 C 2646, 2003 WL 22859532 (N.D.

Ill. Dec. 2, 2003) (holding a portion of the arbitration agreement was unconscionable solely

based on substantive grounds), order rejected in part by 2004 WL 1575557 (N.D. Ill. Apr. 1,

2004).

298. See supra Section I.B-D.

Contingent Assumptions of Contract Theory 255

quately protected the needs of vulnerable members of society because

courts have not used the doctrine to its fullest potential.

299

There will always be some imbalance between contracting parties in

terms of power, wealth, understanding, experience, and information. If

lawmakers and judges insisted on absolute equality, we would have no more

contracts. However, the law needs to adapt its philosophy of contracts to the

recent research suggesting contracting parties may not be fully rational or

informed. The antiquated assumptions of contract law prevent the courts

from helping vulnerable parties prove unconscionability.

300

Legislatures too have institutional advantages in promulgating con-

tract terms relative to courts.

301

If the goal is to create fairer contracts for the

greatest percentage of parties possible, legislatures are likely to be more

institutionally effective. However, ultimately it is the job of the courts to

police contracts for unconscionability. Until they begin to employ the doc-

trine of unconscionability more frequently, the doctrine will remain an un-

derutilized tool in the court’s arsenal.

299. See supra text accompanying note 162.

300. See supra Part II.

301. See Korobkin, supra note 3, at 1249.