Contracts Class Notes 3/2/04


There isn’t as much litigation on unconscionability than was anticipated when the UCC was passed.  More specific consumer protection statutes have been passed piecemeal by the state that apply very clearly and in well-defined situations.


Waters v. Min Ltd.


This is a miserable situation in many ways.  Waters sold an annuity contract which was paying her about $2300 a month for life and she sells it for $50,000, which is a terribly low price.  It was guaranteed to pay out about $690,000 and it was worth $189,000.  The solvent insurance company that the annuity was written on would have bought back the annuity for $189,000!  The bastards paid $50,000 for the policy, which is a little over a quarter of what they can get by immediately, safely cashing in the annuity.  On the terms here, this transaction makes zero economic sense and is rotten to the core.


What else is wrong here?  Just about everything you can think of.  Waters’s “boyfriend” purports to represent her in the negotiation of the deal with the “DeVito defendants”, but in fact, he’s representing them.  That’s fraud!  He lied when he said that he was representing her…he’s representing them, not to mention himself.  There is also undue influence!  He is urging his girlfriend into this transaction.  The transaction is made in an inappropriate place (the hood of a car).  Waters was on drugs!  If she was high at the time she made the deal, she has an incapacity claim to get out of this deal.


Unconscionability often overlaps with other older, more established doctrines that are easier to apply like actual fraud, constructive fraud, undue influence, or even lack of capacity.


This isn’t always the case.  You might ask yourself whether unconscionability is really doing all that much work.  If you represent someone like Waters, you want to have both a belt and suspenders and present your case on several different bases.  Sometimes lawyers will be surprised by just what theory wins!  The trial court might buy the theory that you thought was the weakest!  Then, if the other side appeals, you might have to defend the weakest theory because it succeed at the trial court.  So when you have strong theories, you don’t want to combine them with theories that are too weak to be believed.  Also, don’t be too sure about what any particular judge or group of judges are going to buy.  You usually want more than one shot.


This is a one-time situation of big-time fraud.  On the other hand…


Brower v. Gateway 2000, Inc.


This is a “form deal” that will come up a bunch of times.  The court must figure out if the parties actually made an agreement.  Inspired by ProCD v. Zeidenberg, the court finds that a contract was formed when Brower opened the box, found the “note to customer”, and failed to return the goods within 30 days.  Among the terms included in the note, there’s an arbitration clause.  Is that part of the deal?  Yes.  You don’t need to tell the customer beforehand about all these terms and conditions.  You can tell the buyer of the terms when the buyer receives the goods and it will still count for Gateway if and only if Gateway gives the customer the opportunity to return the goods within 30 days.  If you don’t do that, then you’re buying into the terms and conditions found in the box.  The court says that this will work, and does two things:


1.     This is the right way to decide the mechanics of agreement.  The agreement was made when the buyer failed to return the computer within the 30 day period.

2.     There’s nothing wrong with doing business that way.  There is no procedural unconscionability.  The conditions were written in English, they weren’t in tiny type, and they were reasonably understandable to a layman.  There is also an easy way to disagree: you can return the computer.


So we start with the idea that Brower is stuck with the arbitration provision.  That would mean that Brower must arbitrate, rather than litigate, his claim that Gateway isn’t providing the service they promised.  Also, they can’t maintain a class action against Gateway.


However, the terms said that the arbitration would have to be conducted under the rules of the International Chamber of Commerce, which is based in France.  In order to participate in such arbitration, the customer would have to pay a $4,000 nonrefundable fee.  That’s more than the computer cost!  That’s outrageously high!  This is substantively unconscionable!


As a remedy, the court will knock out the ICC arbitration provision primarily due to the outrageously high fee.  The court has a lot of discretion as to what it can do in a situation where it finds unconscionability.  The court could decide not to enforce the contract.  That wouldn’t work in this case.  Instead, the court seems to choose to enforce the rest of the contract except for the unconscionable clause.  The court seems to either insert a reasonable arbitration clause, or the court limits application of the clause to eliminate the unconscionable result.  Check out the second half of UCC § 2-302 (1).


The court sends the case back down to have an arbitrator selected by the court based on the Federal Arbitration Act.  The trial court might appoint an arbitrator from the AAA or AAF, or the judge could appoint Joe Dokes, his friend who may or may not be a professional arbitrator.  The court knocks out the unconscionability, and otherwise enforces the deal as it was made between the parties.


Gateway got a break with this court.  Some courts might say that because Gateway has been piggish and has inserted an unconscionable arbitration provision, the customers will be allowed to litigate, including in a class action.  This court is friendly to Gateway in that it cuts down the unconscionable arbitration provision to a conscionable arbitration provision.  Because these determinations are made as a matter of law, they can be appealed vigorously.


Suppose you represent a seller like Gateway and you want to prevent problems.  Clovis says: Don’t be a pig!  Don’t have an unreasonable arbitration clause!   Also, it makes sense for Gateway to offer to pay the costs of returning the computer if the customer doesn’t agree with the terms and conditions.


In some cases like this, the procedure may be okay, but what’s being asked for may be so one-sided or oppressive that the court won’t stand for it.  But can Gateway do anything to justify this provision?  The court is forced to hear from the allegedly “unconscionable” side and it must consider whether there’s another side to the story.


Could you make a § 2-207 argument?  Do the terms and conditions become part of the deal?  What would happen if this argument succeeded?  Gateway and other merchants would have to flag the terms and conditions at the time of the deal instead of later on.  That would be time-consuming and troublesome!  That’s the argument in favor of Gateway and Easterbrook’s approach in ProCD.  If § 2-207 does apply, we might say that it’s not that burdensome to have the seller say that “this deal is subject to our standard terms and conditions that we’re going to send you”.  Some people think that this ought to be said whenever a deal is made on the phone.


We are passing over the rare cases where unconscionability doesn’t count for something when you have sophisticated business parties on both sides.  The usual result is that one side raises unconscionability as a last resort and the court doesn’t pay much attention to it.  When cases are decided on this basis, usually one of the merchants is a mom-and-pop operation and the other merchant is a huge operation.


The maturing and breach of contract duties




Here’s an example: “Service station promises supermarket to plow their parking lot every time it snows during the 2003-2004 winter.  The supermarket promises to pay $500 per plowing.”  But what is snowing?  Let’s say I’m a lawyer.  What does it mean for it to be snowing?  What legal vocabulary do I want to use to describe snowing in this situation?


Clovis wants us to say “condition Pree-CEE-dent” not “PREH-ceh-dent”.  If you pronounce it wrong, you’ll flunk.  Also, don’t misspell “parol” in the parol evidence rule.  “PREH-ceh-dent” means a case upon which another is based.  But “pree-CEE-dent” is the adjective we use with the word “condition”.


The thing to ask here is whether the snow falling is a condition or a promise.  So:  “A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.”  Restatement Second § 224.  A condition is like a “switch” in an “electric circuit”.  A condition switches on a promise.  The occurrence of a condition triggers the duty to perform a promise.  If the condition doesn’t occur, then there may be a promise “out there”, but there won’t be a duty to perform it.  Some promises are subject to one condition and some promises are subject to numerous conditions.


In this case, snowing is a condition.  (It turns out to be a condition precedent, but we don’t need to worry about that right now.)


Some things in a contract are conditions only, like snowing in this situation.  No one has promised that it would snow.  Neither of these parties has made this promise.  Snowing is a condition, but it certainly hasn’t been promised.  Other things are promised only and aren’t conditions.  There aren’t too many of them in the actual world of contracts.  A lot of things are both a promise and a condition.  Once it snows, it triggers the service station’s duty to plow the lot.  What triggers the supermarket’s duty to pay $500?  Both the snowing and the actual plowing of the lot.  The promise of the service station to plow the lot is both a promise (of which they could be found in breach) and a condition (which triggers the supermarket’s promise to pay).


Learn this vocabulary and learn the consequences of deciding that something is a condition, a promise, or a combination of both.  These tools will help you build a contract that will do what your party wants accomplished.


Howard v. Federal Crop Ins. Corp.


The Howards are tobacco farmers who buy an insurance policy against water damage from the Federal Crop Insurance Corporation.  The Howards claim that their crop was damaged by rain and that they should recover $35,000.  What’s the problem?  They “disked” the tobacco stalks under the ground before the federal inspector had a chance to take a look at them.  Because of that, the insurer doesn’t want to pay them.  The trial court says that they don’t have to!


What did the trial court do with respect to plowing or disking the stalks under?  One paragraph says that the tobacco stalks must not be plowed under before the insurance company can look at them.  The trial court says that the condition precedent is that the stalks must not be destroyed before they are inspected.  This condition triggers the promise of the insurer to pay the claim.  If the condition is not met, the insured gets nothing.  That’s the trial court’s view.


The appellate court doesn’t like that!  What do they do?  They declare the paragraph to be a promise and not a condition.  So what we have here, in the appellate court’s view, is a broken promise rather than a condition that wasn’t met.  The appellate court finds that this is a promise only that is not a condition.  The appellate court interprets the provision this way because otherwise a forfeiture will be imposed on the Howards, and that’s harsh.  The Howards paid the premium and planted their crop.  It was destroyed, and they ought to be able to recover.


We resolve ambiguities in two ways: (1) against forfeitures, and (2) against drafters who are unclear.


But what’s the biggest weakness in the appellate court’s decision?  What can the insurance company do?  The promise to plow the stalks under has been broken.  How can the insurance company turn that into damages?  What would they have to prove to recover damages?  They probably have a virtually impossible burden of proof here.  They would have to prove that if the stalks hadn’t been plowed under that there would have been a case of fraud.  But how can they prove what they could have shown if the world were different and the stalks hadn’t been plowed under?  They can’t!


What the court really seems to do is read 5(f) out of the deal.  By declaring 5(f) a promise only, you’re basically taking away any effect it might have.  Clovis thus finds the result in this case questionable.  But you might argue that it’s fair that the risk and burden falls on the stronger party, which is the federal government.


One result of this case is to show us how a condition works versus how a promise works.  Sometimes a condition will do the work you want, but a promise won’t help.  Sometimes a promise will do the work you want, but a condition won’t help.  Also notice that it’s rare for a provision to be found to be a condition only.


Tomorrow we will start on conditions precedent and subsequent in a big way.


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