In California, an unconscionable contract is one that puts one party at a significant disadvantage. A court can refuse to enforce this type of contract.
One of the challenges we face as attorneys at LawPLA is demystifying legal concepts for our clients. Take the legal definition of a contract, for example. It is: an agreement made between at least two parties (individuals, businesses, or agencies) based on certain conditions that includes a promise to do something in exchange for something of value called a “consideration.” It can be made verbally or in writing. It can also be unilateral or bilateral.
In other words, a contract is a written or oral transaction in which Person A agrees to pay Person B for the provision of products or services by a specified date; or an oral or written transaction in which Person B promises to provide products or services by a specified date and Person A promises to render payment upon receipt of said products or services.
Not all contracts are enforceable in California, however. For example, a California court may refuse to enforce a contract if it finds that all or part of the contract is outrageously unfair to one party. The legal term for this is “unconscionable.”
The defining aspects of an unconscionable contract
Of course, the phrase “outrageously unfair” as we have just used it, is subjective. Therefore, what seems shockingly inequitable to one person may not seem like a big deal to someone else. That’s why courts use objective standards to determine whether a contract is unconscionable.
In general, a court will rule that a contract is unconscionable based on a finding that one party was at significant disadvantage due to:
- An imbalance in bargaining power (oppression)
- Unfair terms (surprise)
An imbalance in bargaining power occurs when one of the parties has more knowledge or experience with regards to the contractual matter than the other. The difference is often – but not always — due to age, education, or the amount of time spent working in a specific profession.
Unfair terms are contractual stipulations or provisions favorable to only one party. Let’s say, for instance, that the contract includes onerous provisions limiting Person B’s options for legal recourse if Person A breaches the contract. This could almost certainly be construed as unfair and therefore unenforceable. The use of hidden language – language that is difficult to read, or obscured in unrelated passages – may also be classified as unfair.
Additional factors considered in the determination of unconscionability include the use of undue influence and duress. The former occurs when one of the parties uses inordinate pressure to force the other to sign the contract. The latter occurs when one party bullies or otherwise intimidates the other into signing the contract.
What happens if a contract is unconscionable?
When a party to a contract alleges it is unconscionable, California law gives all parties a “reasonable opportunity” to help the court make a determination by presenting evidence concerning the contract’s “commercial setting” and purpose. The law affords the same opportunity to parties to a contract when a court believes it is partially or entirely unconscionable.
If a California court finds that a contract is either partially or entirely unconscionable it can refuse to enforce the entire contract. Alternatively, it can enforce all of the contract except for the unconscionable clause or clauses. Depending on the circumstances, the court could also restrict the application of any unconscionable clause to such an extent that it prevents any unfair result.
As always, however, a proverbial ounce of caution is worth a proverbial pound of cure. In other words, the best way to avoid becoming entrapped in an unconscionable contract is to take a few simple precautions. The experienced business attorneys here at LawPLA recommend that you:
- Do not sign any contract without reading the whole thing carefully.
- Do not sign any contract without having one of our Los Angeles business litigation attorneys review it first.
- Raise any issues or concerns that you have about contract terms during negotiations.
- Do not sign any contract without a clear explanation from the other party or parties.
- Make sure you are familiar with relevant subject matter before you sign the contract.
If you believe you entered into an unconscionable contract, it’s important to get prompt legal advice. That’s where we come in. Contact the business litigation team at LawPLA to schedule a consultation today. You can always reach us here by using the contact page on our website, or by giving us a call.