Joseph G. Ballstaedt
801.365.1021
joe@snjlegal.com
Almost every contract in Utah is enforceable, but a contract or agreement that is unconscionable is unenforceable. The contract defense of unconscionability prevents oppression and unfair surprise. This article discusses the difficult task of overcoming the general presumption that contracts are enforceable, the elements needed to prove unconscionability, and other issues relevant to unconscionable contracts.
Unreasonable Contracts Versus Unconscionable Contracts
Utah law is clear that people are generally free to enter contracts as they see fit, and courts are usually not willing to intervene and relieve a party from the terms of a contract, even if that contract is a bad bargain. Courts do not like to assume a paternalistic role and protect a person from fulfilling contract obligations and suffering the consequences of a contract just because the contract terms are unfavorable. Under the principle of freedom of contract, people should usually be permitted to enter contracts that are unreasonable and that may cause real and great hardship. A party who has freely bound himself or herself to a contract must almost always deal with the results of that contract.
However, courts will not enforce flagrantly unjust agreements. The general principle of enforcing all freely entered contracts has limits, and a well-established exception is that if a contract is unconscionable, a court has the power to declare the contract unenforceable or refuse to enforce a particular provision to avoid an unconscionable result. But a party claiming unconscionability bears a heavy burden to overcome the general rule that contracts are enforceable. To be unconscionable, the contract term may need to shock the conscience or create a profound sense of injustice. At a minimum, unconscionability can be used to prevent oppression and unfair surprise.
Proving Unconscionability
To determine whether a contract is unconscionable, Utah courts use a two-pronged analysis. The first prong is “substantive unconscionability,” which considers the contents of the contract—the actual terms that the parties agreed to. The second prong is “procedural unconscionability,” which focuses on how the contract was formed—whether the process was fair. Although substantive unconscionability alone can support a conclusion that a contract is unconscionable, procedural unconscionability alone, without substantive unconscionability, is usually not enough.
When analyzing whether a contract is unconscionable and these two prongs, the facts and circumstances that existed at the time the contract was entered into are key. The circumstances that existed well after the contract was formed are usually irrelevant.
Below I discuss in more depth factors that contribute to substantive and procedural unconscionability.
Substantive Unconscionability
As suggested above, gross disparity in terms, even without any procedural unconscionability, can lead a court to declare that a contract is unconscionable and therefore unenforceable. The analysis of substantive unconscionability focuses on the contents of the parties’ contract and examines the relative fairness of the obligations the parties agreed to. Evidence of substantive unconscionability may include:
- Contract terms that are so one-sided that they oppress or unfairly surprise an innocent party
- An overall imbalance in the obligations and rights under the parties’ agreement
- A significant cost-price disparity
- Terms that are so extreme that they conflict with the business practices of the time and place
- Grossly inadequate consideration (i.e. what a party receives under the contract)
Again, circumstances that exist well after the contract is formed are generally irrelevant. So, if a contract appears fair and reasonable when the parties entered it, later events usually cannot make that contract unconscionable. For instance, if a party purchases a valuable parcel of land from a seller for a high price and a high interest rate, but then a few weeks later the real estate market crashes, the buyer will almost certainly be forced to pay the contract price, including the large amount of accrued interest.
Procedural Unconscionability
As stated above, procedural unconscionability focuses on how the contract was formed and whether the process was fair. It is possible that a contract could be unconscionable based solely on procedural unconscionability without any substantive imbalance in the parties’ obligations, but courts have explained that such circumstances would be rare, assuming they could exist at all. Usually, procedural unconscionability supports a finding of substantive unconscionability but is not sufficient on its own. Factors that support a finding of procedural unconscionability include:
- Printed form or boilerplate contracts carefully drafted by the party in the stronger economic position in a take-it-or-leave-it basis (e.g. a large company imposing a contract on a simple consumer)
- Using contract terms that are incomprehensible to normal people
- Using contract terms that distract a party from other important contract terms
- Using contract terms that hide rights given up
- Hiding important contract terms in a maze of fine print or an inconspicuous part of the contract document
- Minimizing key contractual provisions by using deceptive sales practices
- Not having an opportunity to meaningfully negotiate the contract
- Whether a party felt compelled to accept contract terms on the table
- Whether a party was exploited due to being underprivileged, unsophisticated, uneducated or illiterate
Help with Unconscionability Issues
This article does not address every issue related to unconscionability. It is best to talk with an attorney about the specific facts and circumstances surrounding your contract. If you are seeking to invalidate a contract based on unconscionability, or if another person is trying to avoid a contract obligation to you by claiming unconscionability, I am happy to help. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com.
