Contracts Class Notes 3/1/04


More on frustration of purpose


We left off without talking about the modern case of frustration.  That case is…


Lloyd v. Murphy


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.  Pearl Harbor happens in December of 1941.  In January 1942, new car production (sales?) is almost completely abolished.  The car manufacturers are to make war stuff instead of civilian cars.  The tenant wants relief from the lease and doesn’t get any.  Why not?  Why no relief?  Traynor offers three or four ideas as to why the lessee doesn’t get relief.


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 China and Japan in 1936; the war in Europe started in 1939.  We had done various things to suggest that we might get involved in the war.  No businessperson slightly aware of the state of affairs of the world would be surprised that civilian production was about to be stopped.  When a risk is foreshadowed and you don’t expressly provide for it in the agreement, especially when you’re a sophisticated businessperson, it’s not unreasonable to read your promise to say: “I’m going to perform, even if war comes and the government stops production of new cars.”

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 v. Horsley


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 Bell County, Kentucky, where you would probably have an all-hillbilly jury.  They would give Horsley very little in damages.  You can’t bet on much success if you sue at law.


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 Clovis.


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.


Clovis believes that if the court has said: “We’re not precluding a suit at law” then there shouldn’t be res judicata.  But in reality, the court or a jury will find out a way to “do justice” by ignoring the law of damages and fixing things so that, for example, a plaintiff like Horsley will not do well if he sues for damages at law.


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 District of Columbia, had recently enacted the UCC.  The UCC says that courts must think about unconscionability in cases like this one.  Does it make a difference what the common law is once we have a statute?  It only makes a difference for sales of goods that occurred before the enactment of the UCC in that jurisdiction.  So a decision that was effective for Williams became unnecessary upon the passage of the UCC.  This case might have an effect on non-sale-of-goods situations, though.


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.


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