Contracts
Contracts Rules of Law
The following contains the Rules of Law you'll need for the Contracts Practice Exam. These rules are presented in outline form only for purposes of the practice exam.
NOTE: Some rules are stated with elements that must be proven. Other rules are just stated without being broken into elements. In the latter case, you should figure out what the elements of the crime are yourself and incorporate that into your answer.
Uniform Commercial Code (UCC) 2-102
Uniform Commercial Code (UCC) 2-302
Unconscionability
Procedural Unconscionability
Substantive Unconscionability
Uniform Commercial Code (UCC) 2-102
Contracts for the sale of goods should be interpreted by the UCC.
Uniform Commercial Code (UCC) 2-302
If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract....
Unconscionable Contracts
Courts that find any contract or clause to be unconscionable at the time it was made can refuse to enforce the contract or limit the application of an unconscionable clause to avoid an unconscionable result.
Unconscionability requires two elements, both of which must be present in order to make a contract invalid - procedural unconscionability and substantive unconscionability. In applying element, a sliding scale allows for a greater degree of one factor and a lesser degree of another to result in a finding of unconscionability.
Procedural unconscionability may be shown by either:
Inequality in Bargaining Power
Evidence of inequality in bargaining power can be shown by 1) terms unreasonably favorable to other party, 2) terms that are hidden in the contract, and 3) a plaintiff with a lower education.
OR Unfair Surprise
Evidence of unfair surprise is shown by hidden terms in a prolix document.
Defense: Although procedural unconscionability may be present, this element can be defeated if the complaining party had other sources of supply at a price, which was not unconscionable.
Substantive unconscionability may be shown by:
Overly harsh allocation of risks or costs not justified by the circumstances.
Great price disparity
Three to four times the fair market value is considered to be a great price disparity.
Contracts Practice Exam
Instructions:
Read the following fact pattern, and answer the question. Give yourself 30 minutes to complete this exam. Do not go over the time limit.
We recommend that you take this exam only after you have completed your study of unconscionable contracts. If necessary, review the Contracts Rules of Law before starting this exam.
Once you have completed the practice exam in the time allotted, then compare your answer with this Contracts Sample Answer.
Contracts Fact Pattern
Fast Eddie is the only car dealer in the west end of Anytown. The west end is in the slums and has a high crime rate. Eddie sells junkers with a high mark up -- typically twice what a similar car would cost in the north end where there are three car dealers.
Fast Eddie has just bought a brand new electrified fence at a substantial cost and hired several security people with attack dogs to patrol his lot at night. Up until the new security measures, one out of three cars had been stolen off of his lot. "The security cost me a bundle," Eddie says, "but I bet I'll only lose one out of six of these junkers now."
Only one bus drives through the west end and makes only two circuits. It picks people up at 10 am and drops them off in the north end at 11 am. It starts from the north end at 3 PM and drops them off in the west end at 4 PM. There are no other buses. There is no way to reasonably walk out of the west end. You either take the bus or have a car.
Laura is a welfare mom. She dropped out of high school to have her baby. Laura is about to lose her welfare money as part of the new welfare-to-work program. She has secured a job in the north end which pays her $1000 a month after taxes. She must report to work by 9 am each day and stay until 4 PM or she will lose the job. There are no taxis willing to go to the west end.
Laura goes to Fast Eddie to buy a car. He offers her any car on the lot for $2400, which is approximately twice the cost of the same vehicle if you bought it in the north end. She tries to negotiate with Eddie, but he brushes her off by saying, "It's part of my 'No Haggle Policy'. One price for everything -- $2400. Take it or leave it. Here's the contract."
The terms are that Laura can pay off the $2400 over the course of a year in 12 equal installments, or $200 a month. If Laura defaults on any payment then Eddie gets to repossess the car and keep all of the payments. Laura's expenses are $750 a month, which Eddie is aware of. The interest rate on a good loan in this city would be 20%.
Laura reads the contract, but doesn't understand the part about keeping all of the payments and repossession. She's desperate for a car, however, so she signs an agreement to these terms and buys the car. She starts work and everything goes well until the 11th month when her baby gets sick. Laura has to pay the doctor and misses a payment on the car. Eddie repossesses. Laura loses her job, gets evicted from her apartment and ends up in a homeless shelter where her baby gets even more sick because of the drafty conditions. Laura's boss says that if she can get the car for transportation, then she gets her job back.
Question: Does Laura have a remedy under a theory of unconscionable contracts?
Once you have completed the practice exam in the time allotted, then compare your answer with this Contracts Sample Answer.
Contracts Sample Answer
The following is a sample answer to the Contracts Practice Exam. If you have not already done so, take the exam and then compare your answer to this sample. If necessary, you can also review the Contracts Rules of Law for this exam. Since law school professors vary in what they consider excellent work, this answer is only presented as a sample.
This problem raises the issue of whether the agreement between fast Eddie (Ed) and Laura (L) should be enforced or instead should either be modified or rendered void because it was unconscionable.
This agreement should be interpreted by the relevant provisions of the UCC because it involves the sale of goods. (UCC 2-102). Normally, bargains are enforced according to their terms. However, courts may choose not to enforce contracts, which they deem unconscionable. (UCC 2-302). The case law states that unconscionable contracts have two major elements -- procedural and substantive -- and that both elements must be established to prevail on this defense. Traditionally courts have applied a "sliding scale" analysis to unconscionability claims: the greater the procedural unconscionability, the less the plaintiff must show substantive unconscionability and vice versa.
L could prove procedural unconscionability in one of two ways. She could demonstrate that there was unfair surprise in the bargaining process or she could show that there was an inequality of bargaining power, which left her no meaningful choice. Per the former, L's argument would be that she didn't understand the contract provisions regarding what would happen should she default. Her argument is bolstered if we assume, as the facts suggest, that she has little formal education and that Ed didn't explain the default provision (he only said "Here's the contract."). Courts often consider the plaintiff's lack of education, the technical wording of the default clause and the fact that the clause was buried in fine print in holding that there was procedural unconscionability.
Ed's best argument would be that L read the contract and should reasonably have known what she was agreeing to. Ed could bolster his case by showing that the default clause was written in plain English and was prominently located in the contract. A court armed with these facts could well find for Ed. However, the facts we have lead me to conclude that L could likely establish unfair surprise.
L has a strong case that she had no meaningful choice in this decision. Ed was the only car dealer in the West End, L needed a car to get to work, and L had to work in order to survive. Ed's response would be that L didn't have to accept employment, which required a car and that she could have gone to the North End to buy a car. This is a situation where more facts would be helpful in establishing the merits of each side's arguments. If we assume, however, that L did job-hunt and that this job best fit her needs and qualifications, she would have a strong case.. Here, L could establish that she tried to find other work before settling on this position. Further, it is possible that a dealer in the North End would not have sold L a car because she was a poor credit risk. Therefore, she may not have had a choice in car dealers. Again, this is a close call but on these facts I would conclude that L has a better-than-even chance of prevailing on this prong of the procedural unconscionability analysis.
Substantively, L will have difficulty establishing unconscionability, at least with respect to the purchase price. The basic rule is that a contract is substantively unconscionable if involves an overly harsh allocation of risks or costs. L's argument is that the car cost twice what it did in the North End. However, Ed can make a strong case for his pricing scheme. His security costs are presumably greater than those dealers must bear in the North End. The facts state he had to install an expensive fence and hire security guards and that despite these measures, one out of every six of his cars will still be stolen. Ed may also have a lower sales volume than dealers in the North End because his shop is located in a poor community. Further, he does not require full payment up front. Given that interest rates in the city hover around 20%, the effective price of the car is $2000. This price may be justified given his costs and sales volume.
L can make a better case that the default clause which allowed Ed to repossess the car and keep all payments previously tendered is unconscionable. Ed was fully aware of L's precarious financial position. This clause smacks of bad faith and I believe it likely that a court would render this provision void. Alternatively, it might, as allowed under the UCC, modify the arrangement so that L could be given additional time to make the last two payments plus pay additional interest at the prevailing rate until she does so.
In sum, L can probably show that the default provision of the contract was both procedurally and substantively unconscionable. I think the price would stand but that the court would either allow her additional time to make the payment or would have her return the car and receive most of her money back.
The following contains the Rules of Law you'll need for the Contracts Practice Exam. These rules are presented in outline form only for purposes of the practice exam.
NOTE: Some rules are stated with elements that must be proven. Other rules are just stated without being broken into elements. In the latter case, you should figure out what the elements of the crime are yourself and incorporate that into your answer.
Uniform Commercial Code (UCC) 2-102
Uniform Commercial Code (UCC) 2-302
Unconscionability
Procedural Unconscionability
Substantive Unconscionability
Uniform Commercial Code (UCC) 2-102
Contracts for the sale of goods should be interpreted by the UCC.
Uniform Commercial Code (UCC) 2-302
If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract....
Unconscionable Contracts
Courts that find any contract or clause to be unconscionable at the time it was made can refuse to enforce the contract or limit the application of an unconscionable clause to avoid an unconscionable result.
Unconscionability requires two elements, both of which must be present in order to make a contract invalid - procedural unconscionability and substantive unconscionability. In applying element, a sliding scale allows for a greater degree of one factor and a lesser degree of another to result in a finding of unconscionability.
Procedural unconscionability may be shown by either:
Inequality in Bargaining Power
Evidence of inequality in bargaining power can be shown by 1) terms unreasonably favorable to other party, 2) terms that are hidden in the contract, and 3) a plaintiff with a lower education.
OR Unfair Surprise
Evidence of unfair surprise is shown by hidden terms in a prolix document.
Defense: Although procedural unconscionability may be present, this element can be defeated if the complaining party had other sources of supply at a price, which was not unconscionable.
Substantive unconscionability may be shown by:
Overly harsh allocation of risks or costs not justified by the circumstances.
Great price disparity
Three to four times the fair market value is considered to be a great price disparity.
Contracts Practice Exam
Instructions:
Read the following fact pattern, and answer the question. Give yourself 30 minutes to complete this exam. Do not go over the time limit.
We recommend that you take this exam only after you have completed your study of unconscionable contracts. If necessary, review the Contracts Rules of Law before starting this exam.
Once you have completed the practice exam in the time allotted, then compare your answer with this Contracts Sample Answer.
Contracts Fact Pattern
Fast Eddie is the only car dealer in the west end of Anytown. The west end is in the slums and has a high crime rate. Eddie sells junkers with a high mark up -- typically twice what a similar car would cost in the north end where there are three car dealers.
Fast Eddie has just bought a brand new electrified fence at a substantial cost and hired several security people with attack dogs to patrol his lot at night. Up until the new security measures, one out of three cars had been stolen off of his lot. "The security cost me a bundle," Eddie says, "but I bet I'll only lose one out of six of these junkers now."
Only one bus drives through the west end and makes only two circuits. It picks people up at 10 am and drops them off in the north end at 11 am. It starts from the north end at 3 PM and drops them off in the west end at 4 PM. There are no other buses. There is no way to reasonably walk out of the west end. You either take the bus or have a car.
Laura is a welfare mom. She dropped out of high school to have her baby. Laura is about to lose her welfare money as part of the new welfare-to-work program. She has secured a job in the north end which pays her $1000 a month after taxes. She must report to work by 9 am each day and stay until 4 PM or she will lose the job. There are no taxis willing to go to the west end.
Laura goes to Fast Eddie to buy a car. He offers her any car on the lot for $2400, which is approximately twice the cost of the same vehicle if you bought it in the north end. She tries to negotiate with Eddie, but he brushes her off by saying, "It's part of my 'No Haggle Policy'. One price for everything -- $2400. Take it or leave it. Here's the contract."
The terms are that Laura can pay off the $2400 over the course of a year in 12 equal installments, or $200 a month. If Laura defaults on any payment then Eddie gets to repossess the car and keep all of the payments. Laura's expenses are $750 a month, which Eddie is aware of. The interest rate on a good loan in this city would be 20%.
Laura reads the contract, but doesn't understand the part about keeping all of the payments and repossession. She's desperate for a car, however, so she signs an agreement to these terms and buys the car. She starts work and everything goes well until the 11th month when her baby gets sick. Laura has to pay the doctor and misses a payment on the car. Eddie repossesses. Laura loses her job, gets evicted from her apartment and ends up in a homeless shelter where her baby gets even more sick because of the drafty conditions. Laura's boss says that if she can get the car for transportation, then she gets her job back.
Question: Does Laura have a remedy under a theory of unconscionable contracts?
Once you have completed the practice exam in the time allotted, then compare your answer with this Contracts Sample Answer.
Contracts Sample Answer
The following is a sample answer to the Contracts Practice Exam. If you have not already done so, take the exam and then compare your answer to this sample. If necessary, you can also review the Contracts Rules of Law for this exam. Since law school professors vary in what they consider excellent work, this answer is only presented as a sample.
This problem raises the issue of whether the agreement between fast Eddie (Ed) and Laura (L) should be enforced or instead should either be modified or rendered void because it was unconscionable.
This agreement should be interpreted by the relevant provisions of the UCC because it involves the sale of goods. (UCC 2-102). Normally, bargains are enforced according to their terms. However, courts may choose not to enforce contracts, which they deem unconscionable. (UCC 2-302). The case law states that unconscionable contracts have two major elements -- procedural and substantive -- and that both elements must be established to prevail on this defense. Traditionally courts have applied a "sliding scale" analysis to unconscionability claims: the greater the procedural unconscionability, the less the plaintiff must show substantive unconscionability and vice versa.
L could prove procedural unconscionability in one of two ways. She could demonstrate that there was unfair surprise in the bargaining process or she could show that there was an inequality of bargaining power, which left her no meaningful choice. Per the former, L's argument would be that she didn't understand the contract provisions regarding what would happen should she default. Her argument is bolstered if we assume, as the facts suggest, that she has little formal education and that Ed didn't explain the default provision (he only said "Here's the contract."). Courts often consider the plaintiff's lack of education, the technical wording of the default clause and the fact that the clause was buried in fine print in holding that there was procedural unconscionability.
Ed's best argument would be that L read the contract and should reasonably have known what she was agreeing to. Ed could bolster his case by showing that the default clause was written in plain English and was prominently located in the contract. A court armed with these facts could well find for Ed. However, the facts we have lead me to conclude that L could likely establish unfair surprise.
L has a strong case that she had no meaningful choice in this decision. Ed was the only car dealer in the West End, L needed a car to get to work, and L had to work in order to survive. Ed's response would be that L didn't have to accept employment, which required a car and that she could have gone to the North End to buy a car. This is a situation where more facts would be helpful in establishing the merits of each side's arguments. If we assume, however, that L did job-hunt and that this job best fit her needs and qualifications, she would have a strong case.. Here, L could establish that she tried to find other work before settling on this position. Further, it is possible that a dealer in the North End would not have sold L a car because she was a poor credit risk. Therefore, she may not have had a choice in car dealers. Again, this is a close call but on these facts I would conclude that L has a better-than-even chance of prevailing on this prong of the procedural unconscionability analysis.
Substantively, L will have difficulty establishing unconscionability, at least with respect to the purchase price. The basic rule is that a contract is substantively unconscionable if involves an overly harsh allocation of risks or costs. L's argument is that the car cost twice what it did in the North End. However, Ed can make a strong case for his pricing scheme. His security costs are presumably greater than those dealers must bear in the North End. The facts state he had to install an expensive fence and hire security guards and that despite these measures, one out of every six of his cars will still be stolen. Ed may also have a lower sales volume than dealers in the North End because his shop is located in a poor community. Further, he does not require full payment up front. Given that interest rates in the city hover around 20%, the effective price of the car is $2000. This price may be justified given his costs and sales volume.
L can make a better case that the default clause which allowed Ed to repossess the car and keep all payments previously tendered is unconscionable. Ed was fully aware of L's precarious financial position. This clause smacks of bad faith and I believe it likely that a court would render this provision void. Alternatively, it might, as allowed under the UCC, modify the arrangement so that L could be given additional time to make the last two payments plus pay additional interest at the prevailing rate until she does so.
In sum, L can probably show that the default provision of the contract was both procedurally and substantively unconscionable. I think the price would stand but that the court would either allow her additional time to make the payment or would have her return the car and receive most of her money back.
posted by alfieping at 11:11 PM
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