Many entrepreneurs are familiar with the Pareto Principle or 80/20 rule as it applies to client-relationships. Essentially, 20% of your clients make up 80% of your problems. This can be especially difficult if your burgeoning business is trying to get a foothold in the industry and you have to deal with a client that refuses to pay or worse, claims the contract is unconscionable and they’ll take it to a judge. This can sound daunting, but consider if the contract is unconscionable.
An unconscionable contract is typically a document that’s unreasonably one-sided; simply put, any contract that is inequal that no person of sound mind would agree to it. This is why many cases are those involving contracts with children or people suffering from a mental illness. That said, there are also many cases of someone’s power/status resulting in an unconscionable contract.
Unconscionable claims are not handled in front of a jury, but go directly to a judge to determine its validity. If a claim is unconscionable, then it can be deemed unenforceable and the judge will determine a reasonable resolution.
This is one of the reasons it’s integral to understand the market value of the goods or services you’re selling as this can be one of the main ways someone will claim your contract unconscionable.
Consider Jones V. Star Credit Corporation, a case in 1969 that was an example of an unconscionable contract which was rendered unenforceable.
The Events Leading to the Contract
The plaintiffs (Jones) bought a home freezer from a door-to-door sales representative. Since they were unable to pay the full amount up front, the plaintiffs set up a financing arrangement through the defendant. The retail price of the freezer was approximately $300, but the plaintiffs were charged a price of $900 plus various other credit and insurance charges. The final purchase price of the freezer came out to $1,234.80.
The plaintiffs had paid $619.88 when the matter was brought before a judge to determine if the difference between the purchase price of the freezer and its maximum retail price indicated an unconscionable contract.
How Does the Judge Decide?
Only a judge may rule on unconscionable claims (no jury). And even today, there is no set parameters for what exactly constitutes unconscionable.
The judge can consider the contract unenforceable if it finds the contract to be unconscionable either in whole or in part. In sales transactions (especially in this case), the court may give weight to the difference between the market (or retail) price of an item and its selling price. Additionally, the court may also give weight to the specific circumstances (i.e. socioeconomic, financial, etc.) of the buyer.
Jones V. Star Credit Corporation Ruling
The Supreme Court of New York, Second District, determined that the contract was unenforceable given that the difference between the retail price and selling price was so wide. Although the court did not find any evidence of fraud or malice, the court nonetheless found that the sheer size of the disparity indicated an unconscionable contractual agreement on its face.
All business owners should be conscious of contract law since it can play a significant role in the success of your business.