Contracts
Class Notes
More on frustration of
purpose
We
left off without talking about the modern
case of frustration. That case is…
This
is a lease of store premises with which to operate a new car dealership. They enter into the five-year lease in August
1941.
1. This is a lease! Check out Roberts
v. Lynn Ice Co. If something bad
happens to the premises during the tenancy, it’s at the tenant’s risk. A lease passes risk from the landlord to the
tenant. This is an old-fashioned strand
of thinking in the law that we’re moving away from somewhat. But it’s not completely devoid of
reason. In this case, this is not a
consumer lease, but rather a business lease between sophisticated
businessmen. There is a suggestion that
the lessee bought into a whole bunch of risks.
Traynor says that sometimes we would grant relief due to frustration of
purpose, but not here.
2. The coming of the war and
the curtailment of new car production was foreseeable! The war had begun between
3. The purpose of the tenant
wasn’t totally frustrated. The tenant could still do some other things
on the property. The tenant could sell
gas (though it was rationed). Cars could
be repaired on the premises, and this was a growing business because people had
to keep old cars longer. Also, you could
sell used cars, and that wasn’t a bad business during the war either. The landlord waived any restriction; the
tenant could have sold anything he wanted on a major thoroughfare. There was still the chance to get some
profit. Traynor says that in this case,
the purpose was not substantially
frustrated, such that there isn’t a ground for relief.
4. The event which causes the
frustration here is a catastrophic, world-wide event: World War II and our
participation in it. Courts will be
careful to grant relief due to such a widespread event, because if they grant
relief here they may have to grant relief on millions of agreements. That
might be something that they are unwilling or unable to do! That’s not to say that they won’t grant
relief ever. If a lease was made in 1935 instead of 1941,
they might be more willing to get the defendant slide. But generally, we won’t let too many deals be
unwound. We want promises to be reliable
in general. Traynor thinks that the
landlord ought to be able to rely on the tenant’s promise to pay rent for five
years. It’s hard on the tenant, but the
tenant could have and should have seen this coming. Plus, the tenant can actually get some value
out of the premises. It’s not a total loss. It’s not a total frustration of purpose.
Woollums
agrees to sell mineral rights to Horsley, but then he defaults on his
performance. Woollums gets excused from
performance! Horsley was trying to rip
him off!
There’s
no statute of frauds problem here.
Woollums signed a promise to sell the land. The remedy at law is inadequate in any land
contract situation (at least that’s what we say). It would be true here because we’re talking
about mineral rights to this particular tract of land, and we can’t know
exactly what they’re worth. The denial
of specific performance here is because “there’s something the matter with this
deal”. Is this a theft? No, because Woollums
did agree to this. His arm wasn’t
twisted. There wasn’t duress. He probably wasn’t defrauded. He probably wasn’t lied to. What’s the matter with this deal? One thing is that he gets paid $80 (at 40
cents an acre) for land that was worth $3000 only 18 months later. That’s about 35 times what he was paid for
the land. It looks almost certainly like
a huge imbalance in the exchange.
But
so what? Adequacy of consideration is
immaterial both at law and at equity.
Parties make bargains; courts don’t.
Normally, courts are going to enforce deals even though the buyer is
getting a very good deal. What is it
that causes this court to deny specific performance? Part of it is the imbalance in the
exchange. What else?
We
have a farmer up against a businessman.
You can’t go very far with that.
Farmers can and do make all kinds of contracts and they ought to be held
to the contracts they make. Note that if
we don’t hold someone to contracts, it means other people won’t deal with them
as easily as they would otherwise. So
this is a two-edged sword. For example,
infants get protection, but they are also excluded from a lot of the commerce
of the world. So we don’t want to be so
protective of farmers that we make it difficult for them to do business and
make contracts.
Also,
we don’t think there is anything wrong with being a businessman who makes money
from good information.
There
is a huge discrepancy in the exchange.
And not only is Woollums a farmer, he is a hillbilly! Horsley is a city slicker! This court resolves doubts in favor of the
hillbilly against the city slicker.
What
else is going on? This is court sitting
in equity! The plaintiff seeks specific
performance! That means the court is
given the chance to think about what’s fair.
The judge has the change to say that “this deal stinks, and I refuse to
enforce it”. Horsley may have a better
chance of suing at law and getting in front of a jury. The judge doesn’t rescind the contract here,
but rather refuses performance in equity.
The judge forces a jury to do the dirty work in this dirty case.
Would
we advice Horsley to bring a suit for damages?
Probably not. You would have to
sue Woollums in
A
lesson of this case is the difference between the equitable remedy of specific
performance and the legal remedy of money damages. Compare this to the dissent of Chief Justice
Savage in Seymour v. Delancy. He urges that a jury trial is the proper
place for extralegal (fair) action.
These
types of facts often cause courts of equity to stay their hand and neither
rescind the contract nor order specific performance. There are a bunch of problems with this,
according to
Say
you represent Woollums in this suit. You
try to prove that his farm was actually worth $3000 and that the $80 agreed
price was a lousy, tiny price, which shows that there is something seriously wrong
with the agreement. But on the other
hand, at law, you would want to prove that the market price was closer to $80
which means that there should be very little in terms of damages.
The
court of equity could deny specific performance, then haul off and award huge
money damages on the basis of the proof.
This is the “cleanup principle”: the court of equity might retain
jurisdiction over the suit for the purposes of awarding damages. When the court of equity stays its hand in
one of these cases, it is likely to be a total victory or total defeat. Maybe the court of equity is kidding itself
when it says: “No relief in equity, but you can always sue at law” when as a
practical matter you can almost never sue successfully at law. Maybe it would be better if they just put the
contract to an end both at law and in equity.
But in the law, we often operate in terms of fictions and mysteries, and
that’s not all bad. But that’s what we
have in this situation.
What’s
the historical background of unconscionability?
A “hard” or unconscionable bargain will not be enforced. We started out with this idea on the equity
side and not on the law side.
Williams v.
Walker-Thomas Furniture Co.
This
is the modern landmark case on unconscionability. This is a frequently cited and quoted
case. There is a boilerplate form
contract of adhesion between a merchant and a poor consumer. The agreement has some harsh features. What’s the question here? What does the District of Columbia Court of
Appeals hold in this case? Who won the
case? Does the court hold that what
Walker-Thomas has done is unconscionable?
No, it doesn’t reach that question.
Who won the case? We don’t know
yet! The holding is that a contract
shouldn’t be enforced if unconscionability was present at the time the contract
was made. This case rules that a trial
court can consider unconscionability as part of the common law. The court didn’t decide whether this
particular case involved unconscionability or not.
Is
that important? Not very. Notice that Congress, which makes statutes
for the
So
why is the case famous? It has some good
dicta as to what unconscionability means!
The District of Columbia Court of Appeals didn’t know the parties would
settle, so it gave the trial court a guide of how to determine
unconscionability.
“Absence
of meaningful choice” is often referred to as procedural unconscionability.
“Unreasonably favorable terms” of one party is referred to as substantive unconscionability. We usually need both of these to get
unconscionability.
UCC § 2-302 on
unconscionability
At
the time the Code was promulgated, this provision was far and away the most
famous and the most controversial provision of the entire statute. It may have turned out to have been much ado
about not a lot, but it was highly controversial. Its presence delayed the enactment of the
code in some places, and in other places, the Code was enacted save for just
this provision.
So
what does this provision say, and how does it work? It applies only to the sale of goods, but
notice that Restatement Second § 208 does the same thing for contracts
generally.
The
third word is important: “If the court”.
Court means judge.
Unconscionability is a question for the judge and not the jury. The provision deals with whether the
provision was unconscionable at the time
of contract formation. If bad things
happen later, we may give some relief, but we will give it under some other
doctrine. Unconscionablility is about contract formation. Under certain circumstances, the court will
disregard what the parties did and either say they made no contract or the
court will fix up the agreement in some way that the judge thinks is conscionable.
The court is given a lot of flexibility.
The court can refuse to enforce the whole contract, or can decide to cut
out a “cancer of unconscionability” and leave the rest of it. Or the court can limit the application of
particular clauses in order to avoid an unconscionable result.
The
parties get to present evidence to the court as to whether the contract really
was unconscionable at formation. There
is both a visceral and an intellectual element. The court may not like the contract, but you have to let the other side come in,
often with economic evidence, that tends to show that a certain provision is necessary for some reason. The proponent of the provision as written
will often come forward with a lot of testimony like this. Litigation on this matter is likely to be complicated, difficult, and expensive because
of the need to introduce all kinds of evidence to try to put the agreement in
an economic context.
Where’s
the definition of unconscionability?
It’s not there! This is deliberate. In the comments, they talk a little bit about
it. What’s the difference between a
basic test and a principle? First off,
we get a circular definition. The basic
test of unconscionability is whether or not a provision is unconscionable. But what it does tell us is that
one-sidedness may be related to unconscionability. However, the fact that a bargain is one-sided
doesn’t make an agreement unconscionable.
However, there is a threshold of “one-sidedness” that will make an agreement unconscionable.
The
principle is the avoidance of “oppression” and “unfair surprise”. Notice that we don’t want to disturb the
allocation of risks due to superior bargaining power. If you have superior bargaining power, you
can use it to allocate risks to the party with inferior bargaining power. You can do that unless you’re “too piggish” about it. It’s permissible to use your bargaining power
up to a certain limit, but not beyond that limit.
The
other comments are also useful. The
court makes the decisions, and the court can choose to enforce a different deal
than the one that the parties made.
So
something that is unconscionable is something that would shock the conscience
of a law-trained judge. But that’s only
the first step toward determining that something is unconscionable. The opposing party will have a chance to show
that this provision isn’t really that bad of an idea.
So
what was unconscionable in the deal that Williams made with Walker-Thomas? She was poor and on welfare. She made a lot of purchases on credit. Before the deal that led to this case, a lot
of the purchases were paid for on installments.
All of the purchases except for $164 worth had been paid off. Then she bought a $515 stereo (would have
cost $3150 today) and ran her credit way up.
Then she defaulted, and they repossessed everything. Part of what could be found unconscionable
was the part of the contract that said that she didn’t pay off anything until
she had paid off everything.
Is
it unconscionable that they sold a luxury to a poor person? Is that bad?
The reality is that they probably bait-and-switched her in order to make
a buck off of her. A lot turns on what
the particular facts are. It would be
difficult and expensive to find out the particular facts.
Sometimes
the unconscionability comes in because the price is way too high. Some decisions have held a contract
unconscionable simply due to an excessively high price, especially to poor
people. But at what price does a
contract become unconscionable?
Why
would Walker-Thomas repossess “consumer soft goods” that had pretty much no
resale value? That just seemed
vindictive! It was simply an arm-twister
to get her to pay. They took away
everything she had! Hanging on to the
stuff was important to her! When you
have the ability to threaten to repossess, that tends to make the consumer
debtor pay. That may be unpleasant, but
is it so unpleasant that we ought to outlaw it?
There would be costs of outlawing it.
It would be harder for poor people to get credit, which may be good or
bad. It may cost more for poor people to
get credit.
The
kind of add-on provision in this case has been outlawed by this point in all 50
states. Unconscionability litigation
under § 2-302 is complicated and expensive.
We have many consumer protection statutes that have mechanically
outlawed certain practices. Once you
have such statutes, it makes handling related matters relatively easy. While § 2-302 and similar decisions are going
down, one reason they are going down is that we have statutes cropping up that
deal with these practices directly.