The Courts and Contracts: Losing Patience With Unconscionable Agreements
5.19.2022
Contract law has changed relatively little over the decades, and many attorneys assume that so long as two or more parties reach an agreement, memorialize it in writing and execute it, it inevitably has the legal status of an enforceable contract. That is not an unreasonable conclusion, for as the Second Circuit held in Gold v. Deutsche Aktiengesellschaft,[1] “[a] party who signs and accepts a written contact . . . is conclusively presumed to know its contents and to assent to them.” What is often overlooked, however, is a substantial body of caselaw that addresses a fundamental dilemma in contract law, which is whether there is a point at which a contract arrived at between parties with disproportionate bargaining power or obtained by suspect means is so tainted that the courts should declare it unenforceable – notwithstanding the fact that the parties “agreed” to it. As discussed below, courts to an increasing extent appear to be losing patience with agreements that are patently one-sided.
Such borderline contracts traditionally have been called contracts of adhesion, defined as “a contract formed as a product of a gross inequality of bargaining power between parties.”[2] This term has fallen into disuse during the current century, however, and courts now largely prefer the term “unconscionable agreement.”
The seminal case on unconscionable contracts is Gillman v. Chase Manhattan Bank,[3] where in 1988 the New York Court of Appeals had one of its earlier encounters with this issue. The Gillman court reviewed a lower court decision that found a business agreement unconscionable and unenforceable. In its analysis, the court observed that the unconscionability concept “is rooted in equitable principles”[4] as well as in the Uniform Commercial Code. (Section 2-302 of the UCC states that if a court finds a contract to be unconscionable, it may refuse to enforce it.) Other origins of the unconscionability concept are the Restatement (Second) of Contracts[5] and the New York Executive Law’s definition of “fraudulent” conduct.[6] The purpose of “the unconscionability doctrine is to prevent unfair surprise and oppression”[7] and to “prevent sophisticated parties with grossly unequal bargaining power from taking advantage of less sophisticated parties.”[8]
Procedural and Substantive Unconscionability
Under New York law, the definition of unconscionability has not changed since Gillman: When “a contract is . . . [so] unconscionable in the light of the mores and business practices of the time and place as to be unenforceable,” and to show unconscionability “there must be a showing that such a contract is both procedurally and substantively unconscionable.”[9] Simply put, “[t]he procedural element of unconscionability concerns the contract formation process and the alleged lack of meaningful choice; the substantive element looks to the content of the contract.”[10]
In some instances, however, a party arguing unconscionability need not show that the contract in question was both procedurally and substantively unconscionable. In other words, “[w]hile determinations of unconscionability are ordinarily based on the court’s conclusion that both the procedural and substantive components are present . . . there have been exceptional cases where a provision of the contract is so outrageous as to warrant it unenforceable on the ground of substantive unconscionability alone.”[11] On the other hand, where there is a “lack of substantive unconscionability, the undisputed facts must describe an overwhelmingly procedurally unconscionable contract in order for the Court to render it unenforceable.”[12] As such, if a contract is extremely unconscionable in either a procedural or substantive sense, a court may declare it unenforceable on that basis alone if it is sufficiently flawed.
That courts continue to struggle with this issue is demonstrated by the lack of consensus on what exactly procedural unconscionability is. Some courts have held that agreements that are the product of “economic duress” are per se invalid. The court in Chanchani v. Salomon Smith Barney, Inc.[13] so found, concluding that a party to a signed arbitration agreement is not bound by it if she “can demonstrate special circumstances, such as duress or coercion.” Similarly, the court in Govindharajan v. Tata Consultancy Services[14] pointed out that an agreement “that is unconscionable or was the product of economic duress is invalid.” Although a situation where a party signed a contract under duress would seem to be one involving procedural unconscionability, a number of courts nonetheless appear to assess such agreements – at least in some circumstances – apart from the unconscionability analysis altogether.
The core question nonetheless remains this: when do the provisions of an otherwise valid contract or the process by which it was agreed to reach a point where courts are willing to break with the presumption of validity and declare it unenforceable? Although the caselaw reveals no bright line that, if crossed, renders a contract void because of lack of meaningful choice or one-sidedness, a close look provides a clearer picture of when agreements are viewed as sufficiently deficient to be held invalid.
Unconscionability Challenges to Contracts
Challenges to agreements as unconscionable are commonplace, particularly in the areas of mandatory pre-dispute arbitration agreements and standard-form credit card agreements. A majority are unsuccessful, reflecting courts’ continuing (though perhaps diminishing) unease with upending longstanding contract law principles.
Few if any courts would take issue with the notion that a “bad bargain, even a terrible bargain, is not ipso facto substantively unconscionable.”[15]And, with respect to procedural unconscionability, “the presence of unequal bargaining power, by itself, is not enough to invalidate an arbitration provision within an employment contract.”[16] That a contract is presented to an individual on a “take it or leave it” basis is not sufficient to make it unconscionable,[17] nor is the fact that it is a “clickwrap” agreement, i.e., one where its terms are displayed on a screen and a viewer clicks a box to accept them.[18] Additionally, arbitration agreements are not unconscionable so long as they contain an opt-out provision.[19] Many cases where a court finds a contract to be not unconscionable involve plaintiffs who rely on one of the arguments noted above but little else.
Where Courts Find Contracts Unenforceable
Nevertheless, a look at the cases where agreements were found to be not enforceable due to unconscionability reveals a wide range of circumstances where parties, often employers, mistakenly took for granted the premise that any contract signed by both parties is a valid one. There are few better examples than Brennan v. Bally Total Fitness,[20] a frequently cited case where the court found both substantive and procedural unconscionability and held a dispute resolution agreement invalid.
The plaintiff in Brennan signed a mandatory arbitration agreement and thereafter challenged it as being unenforceable. In finding that the plaintiff lacked a meaningful choice when entering into the agreement and did so as a result of “high pressure” tactics, the court pointed to these indicia of an agreement marred by procedural unconscionability: (1) the human resources director gave plaintiff and her co-workers only 15 minutes to review a 16-page agreement; (2) the human resources director did not inform the employees that they had the right to consult with an attorney before signing the agreement or that they could review it at home; and (3) the employees were told that anyone who failed to sign the agreement would not be promoted. The plaintiff decided that she had no alternative but to sign the agreement or suffer adverse consequences, and the court thus determined that the above facts along with a “significant disparity in bargaining power”[21] amounted to procedural unconscionability. Notably, the court in Clinton v. Oppenheimer & Co. identified similar tactics as examples of procedural unconscionability: “pressuring the prospective employee to sign the agreement without reading it, refusing to let her review the agreement with an attorney, or deceiving her as to its content.”[22]
In concluding that the agreement was also substantively unconscionable, the court observed that the terms of the agreement allowed the employer to modify it at any time, imposed a cap on any damages awards an employee might receive in a lawsuit against the company, and established a shorter limitations period for bringing claims against the employer. The first element, in particular, because it could bind employees to a contract term they had never seen, was the dispositive fact for the court in reaching its decision.
Because the facts in Brennan are relatively egregious, it likely was not difficult for the court to decide that the agreement in that case was unconscionable and unenforceable. Another example of a case where the facts were sufficiently outrageous that the contract appeared to be indisputably unconscionable is Jones v. Star Credit Corp.[23] In Jones, an installment contract that required lower-income plaintiffs who were on welfare to pay $900 for a $300 refrigerator was held to be unconscionable on substantive grounds alone, an example of the “exceptional” cases discussed in Gillman where a finding of both substantive and procedural unconscionability is unnecessary for an agreement to be found unenforceable.
A number of more recent cases, however, have found contracts to be unconscionable under less clear-cut circumstances, at least suggesting that the unconscionability doctrine is being applied more broadly. Eisen v. Venulum Ltd.[24] is one example. The plaintiff in Eisen signed a wine purchase agreement with a corporation that contained a mandatory arbitration clause requiring any dispute between the parties to be arbitrated in the British Virgin Islands under BVI law. The court held that the arbitration clause forced the plaintiff to “forgo any application of . . . federal law protections provided to him”[25] by U.S. securities laws, which was enough to make the arbitration provision unconscionable and void. In People v. Northern Leasing Systems, Inc.,[26] several companies allegedly induced the plaintiffs into entering into predatory leasing agreements. The court denied the companies’ motion to dismiss and, primarily on procedural unconscionability grounds, found some of the contract provisions to be unenforceable on the grounds that “sales representatives targeted vulnerable individuals – the elderly, disabled and immigrants with limited proficiency in English – and employed deceptive tactics” to persuade them to sign the agreement.[27] This would seem to be a departure from prior cases that expressed skepticism about whether a party to a contract being a non-English speaker warranted declaring it unenforceable.[28]
An arbitration agreement was found to be unconscionable for other reasons in Frankel-Ross v. Congregation Ohr Hatalmud.[29] The plaintiff in Frankel-Ross was a member of a Jewish congregation who invested funds through several of the congregation’s leaders and, in doing so, signed an agreement providing that any disputes between the parties would be submitted to religious arbitration. The court invalidated the agreement on both procedural and substantive grounds, noting that the plaintiff was initially reluctant to sign it and did so only after being pressured to sign by both the congregation’s principal and her family rabbi. (The plaintiff, who was experiencing significant stress due to a number of personal problems, was called daily by the principal and rabbi, who repeatedly urged her to sign the agreement.) The court found this conduct sufficiently severe to meet the standard for procedural unconscionability and held that the agreement also was substantively unconscionable because it gave the congregation the exclusive power to select the arbitrators.
Spinelli v. NFL[30] presents yet another example of how the unconscionability doctrine has been applied to a variety of situations involving contract formation. Spinelli was an extremely complex case brought by professional football photographers that raised antitrust and intellectual property issues, among others. A key dispute between the photographers and defendants, Associated Press and Getty photography agencies, involved what are known as “contributor agreements” that provided the photographers shooting NFL games with much of their income. The plaintiff-photographers challenged the contributor agreements they had signed with the AP on the grounds of substantive and procedural unconscionability, and the court agreed. It provided three reasons for its finding of procedural unconscionability: the photographers had no other way of earning a livelihood in their field if they did not sign the agreements; there was a gross inequality in bargaining position; and, during negotiations concerning the agreement, the AP made material misrepresentations to the plaintiffs. Combined, these elements were enough for the agreements to be deemed unenforceable. (Substantive unconscionability was also found due to a provision in the agreement providing licenses for free to the NFL, a process that deprived the photographers of additional income.)
In sum, agreements are most likely to be held unconscionable where one party is seen as intimidating the other into signing; where the agreement gives disproportionate power, e.g., the sole right to select arbitrators or make key decisions during a hearing, to one party; where the non-dominant party is denied the ability to freely review the agreement or discuss it with counsel; or when one party misrepresents the contents or obligations set forth in the agreement. A common example of one or more of these tactics being used is the onboarding of new employees by some large companies, where the employee is given a stack of documents to promptly sign without a full explanation of what they are.
Conclusion
It is safe to say that no longer must a contract come into being through the use of overt threats or draconian provisions giving all key rights to one party for a court to find it unconscionable and unenforceable. As the relatively recent cases discussed above reveal, courts appear increasingly disposed to declare agreements unconscionable for a wider range of reasons. One common denominator among these decisions is a sense by the court that the contract in question is by its terms, or because of the way it was negotiated, fundamentally unjust to one party.
The key concept behind the unconscionability principle has not significantly changed in many years; it remains “the plaintiff must prove that the party with superior bargaining power used it to take unfair advantage of its weaker counterpart.”[31] What has changed is the courts’ willingness to at times construe “tak[ing] unfair advantage” in a broader and more flexible way that considers conduct not previously perceived as unconscionable.
It may be argued that this trend is a positive one, in that it may lead to a decrease in one-sided contracts – clickwrap agreements being a good example – which can significantly disadvantage one party because of a disparity in sophistication and power. Courts, in analyzing unconscionability cases, would be well advised to consider occasionally departing from traditional contract principles created in an earlier era and giving greater weight to the realities of the present time where, increasingly, due to the information technology revolution and other factors, consumers and employees are more frequently signing contracts that contain provisions that are not in their interest and which they do not even fully understand.
Geoffrey Mort is of counsel to Kraus & Zuchlewski, where he focuses on employment discrimination litigation as well as separation and employment agreements. He is a fellow in the College of Labor & Employment Lawyers and co-chair of the ABA Employment Rights and Responsibilities Committee Subcommittee on Employment-at-Will. Mort co-chairs the Workplace Rights and Responsibilities Committee of NYSBA’s Labor and Employment Law Section and is on the Executive Committees for the Labor and Employment Law and Cannabis Law sections.
[1] 365 F.3d 144, 149 (2d Cir. 2004).
[2] Klos v. Lotnicze, 133 F.3d 164, 168 (2d Cir. 1997).
[3] 72 N.Y.2d 1 (1988).
[4] Id. at 10.
[5] Restatement (Second) of Contracts § 208 (1981).
[6] N.Y. Executive Law § 63, subd. 12.
[7] Clinton v. Oppenheimer & Co., 824 F. Supp. 2d 476, 483 (S.D.N.Y. 2011).
[8] Chen-Oster v. Goldman, Sachs & Co., 449 F. Supp. 3d 216, 246 (S.D.N.Y. 2020), quoting Spinelli v. National Football League, 903 F.3d 185, 208 (2d Cir. 2018).
[9] DeJesus v. Gregory’s Coffee Mgmt., LLC, 2021 U.S. Dist. LEXIS 228026 (E.D.N.Y. Nov. 29, 2021), quoting Ragone v. Atl. Video at Manhattan Ctr, 595 F.3d 115, 121 (2d Cir. 2010).
[10] Nayal v. HIP Network Services IPA, Inc., 620 F. Supp. 2d 566, 571 (S.D.N.Y. 2009).
[11] Gilman v. Chase Manhattan Bank, supra note 3, at 25 (emphasis added).
[12] Catz v. Precision Global Consulting, 2021 U.S. Dist. LEXIS 78626 (S.D.N.Y. April 23, 2021).
[13] 2001 U.S. Dist. LEXIS 2036, at *2 (S.D.N.Y. March 1, 2001).
[14] 2020 U.S. Dist. LEXIS 125358, at *14 (S.D.N.Y. July 16, 2020).
[15] Ortiz v. Dept. of Education of N.Y.C., 2015 U.S. Dist. LEXIS 123669, at *43 (S.D.N.Y. Sept. 16, 2015), quoting VoiceAge Corp. v. RealNetworks, Inc., 926 F. Supp. 2d 524, 532 (S.D.N.Y. 2013).
[16] Ciago v. Ameriquest Mortgage Co., 295 F. Supp. 2d 324 (S.D.N.Y. 2003).
[17] Catz, 2021 U.S. Dist. LEXIS 78626, at *18–19; Finkel and Ross v. A.G. Becker Paribas, Inc., 622 F. Supp. 1505, 1511–12 (S.D.N.Y. 1985).
[18] Chen-Oster v. Goldman, Sachs & Co., 449 F. Supp. 3d 216, 250 (S.D.N.Y. 2020).
[19] Saizhang Guan v. Uber Techs., Inc., 236 F. Supp. 3d 711, 731 (E.D.N.Y. 2017).
[20] 198 F. Supp. 2d 377 (S.D.N.Y. 2002).
[21] Id. at 383.
[22] Clinton v. Oppenheimer & Co., 824 F. Supp. 2d 476, 483 (S.D.N.Y. 2011).
[23] 59 Misc. 2d 189 (Sup. Ct., Nassau Co. 1969).
[24] 244 F. Supp. 3d 324 (W.D.N.Y. 2017).
[25] Id. at 344–45.
[26] 169 A.D.3d 527 (1st Dep’t 2019).
[27] Id. at 530.
[28] See, e.g., Molina v. Coca-Cola Enters., Inc., 2009 U.S. Dist. LEXIS 47828 (W.D.N.Y. June 8, 2009).
[29] 2017 U.S. Dist. LEXIS 102568 (S.D.N.Y. June 28, 2017).
[30] 2016 U.S. Dist. LEXS 92996 (S.D.N.Y. July 15, 2016).
[31] Grand Income Tax, Inc. v. HSBC Taxpayer Financial, Inc., 2008 U.S. Dist. LEXIS 96011, at *7 (E.D.N.Y. 2008).
