Contracts
Class Notes
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.
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…
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
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.
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
Conditions
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?
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.
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.