Source: http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77
Timestamp: 2017-10-20 02:41:53
Document Index: 305531615

Matched Legal Cases: ['§ 2', '§ 2', '§235', '§ 128', '§ 1', '§ 2', '§ 10', '§ 10', 'Art.138', 'Art.242', 'Arts 1341', 'Arts 1118', 'Art.2078', 'Art.138', 'Arts 39', 'Art.2', 'Art.2', 'Art.2', 'Art.2', 'Art.2', 'Art.2', 'Art.3', 'Art.3', 'Arts 3', 'Art.3', 'Art.5']

Policing Contracts for Unconscionability: Guidelines for International Arbitrators Subject to the Scrutiny of US Courts | Paul Marrow - JDSupra
This article is about what courts in the United States take into account when determining whether a term or agreement is unconscionable, i.e. unduly harsh, inflexible, grossly unfair or one-sided, and how these rules compare with those applied throughout the rest of the world. Familiarity with the subject is essential if an arbitrator’s performance and award are subject to the scrutiny of a court in the United States.
Arbitrators familiar with civil law systems who have to rule on unconscionability need to understand that they possess a broad discretionary power that is unstructured and fluid.
But there are some limits. Also readers from other common law countries need to appreciate how different the US approach is from their own. Finally, American arbitrators need to be mindful that, if called upon to apply the laws of virtually any jurisdiction outside the United States other than Australia and perhaps Canada, the US scheme for policing the validity of private contracts is not applicable.
Policing Contracts for Unconscionability: Guidelines for International Arbitrators Subject to the Scrutiny of US Courts By Paul Bennett Marrow Reprinted from (2007) 73 Arbitration 382–393 Sweet & Maxwell Limited 100 Avenue Road Swiss Cottage London NW3 3PF (Law Publishers) L*t •1 Chartered Insti'ute of Arbitrators aArb Contracts for Guidelines for Arbitrators Subject to Scrutiny of US Courts Bennett Marrow fom 73 Arbitration 382-393 & Maxwell Limited Avenue Road Cottage 3PF Publishers) THOMSON TM SWEET & MAXWELL Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY Contracts for Unconscionability: Guidelines International Arbitrators Subject to the Scrutiny of US Courts 1. INTRODUCTION This article is about what courts in the United States take into account when determining whether a term or agreement is unconscionable, i.e. unduly harsh, inflexible, grossly unfair or one-sided, and how these rules compare with those applied throughout the rest of the world. Familiarity with the subject is essential if an arbitrator’s performance and award are subject to the scrutiny of a court in the United States. Arbitrators familiar with civil law systems who have to rule on unconscionability need to understand that they possess a broad discretionary power that is unstructured and fluid. But there are some limits. Also readers from other common law countries need to appreciate how different the US approach is from their own. Finally, American arbitrators need to be mindful that, if called upon to apply the laws of virtually any jurisdiction outside the United States other than Australia and perhaps Canada, the US scheme for policing the validity of private contracts is not applicable. In recent years in the United States the issue of who (a court or an arbitrator) decides whether a term or an entire contract is invalid as being grossly unfair has garnered a great deal of attention. A recent US Supreme Court decision1 makes it clear that if a challenge is directed to the entirety of the contract, as opposed to just the arbitration clause, the arbitrator must make the decision. Therefore it is important for arbitrators to familiarise themselves with the US approach on how courts define and use the doctrine of unconscionable contracts. In the United States, the freedom to contract without governmental intervention is highly prized and the doctrine of unconscionability has evolved with this tradition in mind. Unconscionability is about the limits placed on the behaviour of the parties at the time of the ripening of the contract, but is not intended to act as a damper on the basic freedom to contract. One New York state appellate court observed2: “should always in . . . ‘some violation of public the they wish, no matter how unwise it might appear to a third party’. . . unconscionability, its emphasis on the contract-process, of, than an exception to, this principle. contract entered and the status the parties, the doctrine is designed it.” Unconscionability is a stand-alone tool that courts use along with companion doctrines such as duress, fraud and mistake. Occasionally it is incorporated into statutory schemes where the policing of contracting behaviour is thought to be important. The equitable doctrine of unconscionability is grounded in the English common law tradition,3 meaning that judges made up the details over time. The doctrine developed in large 1 Buckeye Cashing v Cardegna, 126 2 v 96 A.Dept., 1983). 3 In Earl of Chesterfield v Janssen, 28 E.R. 82, 100 (Ch., 1750) Hardwicke proclaimed an agreements: “It the POLICING CONTRACTS FOR UNCONSCIONABILITY Policing Contracts for Unconscionability: Guidelines for International Arbitrators Subject to the Scrutiny US Courts by PAUL BENNETT MARROW is about what courts in the United States take into account when determining is i.e. unduly harsh, infexible, with with the subject is essential if an arbitrator's performance and award are a court in the United States. with civil law systems who have to rule on unconscionability need a broad discretionary power readers other common law countries need to appreciate Finally, American arbitrators need called upon any jurisdiction outside other than Australia perhaps Canada, the US scheme for policing the validity recent United States (a court or an arbitrator) decides invalid as being grossly unfair has garnered a great recent Supreme decisions it a challenge the contract, as it for arbitrators to familiarise themselves the US approach defne and use of unconscionable contracts. States, to without intervention unconscionability has evolved with mind. is the of the contract, but is not intended to act as a damper on the basic freedom state observed: "It should always be remembered in analyzing (such) cases ... `absent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party'.. . The doctrine of unconscionability, with its emphasis on the contract-making process, is really an expression of, rather than an exception to, this principle. By focusing on the manner in which a contract is entered into and the status of the parties, the doctrine is designed to insure freedom of contract and not to negate it." is a stand-that courts companion doctrines such fraud incorporated into statutory schemes contracting behaviour thought be important. is in 3 1Buckeye Check Cashing v Cardegna, 126 S. Ct. 1204 (2006). State v Wolowitz, 96 A.D. 2d 47, 68 (2d Dept., 1983). 3In Earl of Chesterfield v Janssen, E.equitable rule against enforcing unconscionable agreements: "It may be apparent from the 382 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77measure to protect young lords inheriting huge estates from being victimised by unscrupulous people preying on their lack of sophistication. But in later years, the doctrine fell away from the mainstream of English legal thought. The doctrine has taken on unique characteristics in the United States. Here courts sitting contracts.4 courts5 method for analysis. First, they try to determine if the clause or contract is tainted by “procedural unconscionability” and then they look for “substantive unconscionability.” Most civil law systems have no statutes that speak to unconscionability as it is understood in the common law. Courts police contracts by close reference to civil codes and judges are afforded little latitude. What is and is not unfair and oppressive is defined by statute. In most civil law countries, standard form contracts are regulated by specific statutory provisions that identify unfair factual scenarios and in some cases even provide examples and lists of clauses deemed unenforceable. 2. THE US APPROACH—DECIDING WHO RULES, THE ARBITRATOR OR THE COURT the contract specifies that the arbitrator can on any validity of the arbitration clause itself, all American courts will respect the wishes of the parties. That is because the Federal Arbitration Act (FAA) requires all courts to respect the contractual right of parties to remove their dispute from the public judicial system. What constitutes an unequivocal statement is not entirely clear. However, if the contract states that “the arbitrator shall have the power to rule on the validity of the entire contract, including the arbitration clause,” the requirement has been met. Incorporating rules of an arbitration association that in turn permit the arbitrator to rule on the contract and the arbitration clause have been found by the majority of courts to be sufficient.6 What happens if a clause provides that “any claim, dispute or controversy” shall be resolved by the arbitrator? Is this specific enough to include a ruling on the validity of the intrinsic nature and subject of the bargain itself; such as no man in his senses and not under a delusion would make on the one hand, and as no honest man would accept on the other; which are unequitable and unconscientious bargains, and of such even the common law has taken notice.” See E.L. Brown, “The Uncertainty of U.C.C. Section 2-302: Why Unconscionability Has Become a Relic” (2000) 105 Com. L. J. 287, 290 and discussion, Rick Bigwood, Exploitative Contracts (Oxford: Oxford University Press, 2003), 227–278; A.H. Angelo and E.P. Ettinger, “Unconscionable Contracts: A Comparative Study of the Approaches Germany and the United States” (1992) 14 Loy L.A. Int’l 4 Legislatures got into the act with the creation of § 2-302 of the Uniform Commercial Code (UCC) but notably this statutory scheme leaves the definition of unconscionability to the courts. § 2-302. Unconscionable Contract or Clause, provides: 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, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. (emphasis added). The UCC has been adopted in every state but Louisiana, a civil law jurisdiction; R.L. Hersbergen, “Unconscionability: The Approach of the Louisiana Civil Code” (1983) 43 La. L. 5 Some states, e.g. New York, have other similar schemes; §235-c Real Property Law is an example. 6 e.g. The Shaw Group v Triplefine Int’t Corp and Rodriguez v American Technologies, 322 F.3d Inc., (2007) 73 ARBITRATION 4 to protect young lords from victimised doctrine fell States. in equity use the doctrine to police all contracts.4 State courts have come up with a twostep for First, they try the clause "unconscionability" "substantive unconscionability." law systems have no statutes as is understood Courts police contracts by close reference codes and judges latitude. What is and is not unfair and oppressive defned statute. law countries, standard contracts specifc statutory provisions unfair factual scenarios and in some cases lists APPROACH-DECIDING WHO RULES, If the contract unequivocally specifes that the arbitrator can rule on any issue, including the of the arbitration clause American courts respect the wishes the the Federal Arbitration Act requires courts to respect right judicial system. is not entirely the contract states "to of the entire contract, clause," met. Incorporating that in on the the clause found by majority suffcient.6 if clause "dispute controversy" be by arbitrator? Is this specifc to include a ruling validity of man in his senses the one hand, and honest accept the are unequitable and unconscientious and common notice." L. "The Uncertainty U.C.Section Relic" J. 287, 290 and Exploitative Contracts Oxford University Press, 227-"Unconscionable the in England, France, Germany and the United States" (1992) 14 Loy L.A. Int'l & Comp L.J. 455. 4Legislatures got into the Uniform Commercial Code the defnition to the Clause, (1) If the court as a matter of law finds the contract or any clause of the contract to have been at the time it made the court to or the the application of any unconscionable clause as to avoid any unconscionable result. When it is claimed or appears to the court that the contract or any clause thereof be to present evidence the determination. in state but Louisiana, a civil jurisdiction; R."Unconscionability: The Approach of the Louisiana Civil Code" Rev. 1315. 5Some e.g. New have other similar schemes; c Law an 6e.Shaw Group v Triplefne Int't Corp and Rodriguez v American Technologies, 115 (2nd Cir., 2003); Rodriguez v American Technologies, Inc., 136 Cal. App. 4th 1110 (2006). November 2007 383 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY arbitration clause? The answer appears to be that, if there is any question whatsoever, the court has authority to determine if the claim is against the arbitration clause or the contract itself. Where things go after that is a function of the court’s ruling. In Conklin Mfg Co.7 the US Supreme Court held: “a federal court may consider only issues relating to the making and performance of the agreement to arbitrate.” All other issues are for the arbitrator to resolve. This rule was recently reiterated by the Court in Buckeye Cashing v Cardegna.8 Moreover, the Buckeye court made it clear that for a court to intervene the challenge has to be “specifically” to the arbitration clause, implying that if the challenge is to the contract in its entirety and to the arbitration clause as well, the arbitrator rules on all the challenges. Therefore, if the laws of any state within the United States are to be considered, arbitrators need to be familiar with the rules governing unconscionability as they apply to the contract in the entirety and to an arbitration clause as well. Taken together, if the agreement states categorically that the arbitrator has the power to rule on the validity of the contract and the arbitration clause, the contract governs. Similarly, if the challenge is directed to the contract as a whole and the arbitration clause as well, the arbitrator makes the determination. But if there is any ambiguity the courts decide issues involving the validity of the arbitration clause and the arbitrator decides the question of the validity of the entire contract. Let us look closely at what unconscionability is all about. It is often said that the doctrine of unconscionability is “an amorphous concept that evades definition.”9 Professor Arthur Leff noted there is “nothing clear about the meaning of unconscionable except perhaps that it is pejorative”10 and that it is “easy to say nothing with words.”11 Still, there is no shortage of reported cases where judges have declared categorically that they know it when they see it! This may seem especially mystifying and challenging for those trained in the civil law tradition. Whatever unconscionability is, it is rarely an issue where an agreement is commercial in nature and has been negotiated between two sophisticated parties of equal stature. The doctrine has gained traction in the review of transactions that include printed standard form agreements, “take-it-or-leave-it” contracts of adhesion. Not all adhesion contracts are unconscionable but all adhesion contracts containing clauses found to be unduly harsh, inflexible, grossly unfair and one-sided are. Dichotomy “Unconscionability” requires a judicial determination that a term or contract unduly harsh, inflexible, grossly unfair and one-sided.12 there are many views about the propriety of specific clauses and contracts, all states have adopted the view that whether ruling in equity or applying and enforcing statutory schemes such as the UCC, the proper method of analysis is a search for “procedural” and “substantive” exploitation.13 7 8 126 S. Ct. at 1210 “We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator”. 9 Wisconsin Auto Title Loans Inc v Jones, 290 Wis. 2d 514 (2006). 10 “Unconscionability and the Code: the Emperor’s New Clause” (1967) 115 U. Pa. L. Rev. 485, 11 559. 12 For a general discussion of the impact of subjectivity on judicial determinations about unconscionability, P.B. Marrow, “Squeezing Subjectivity from the Doctrine of Unconscionability” Rev. 13 Manhattan below fn.10: “We address first the basic of the trial court on which its grant of relief is premised: that the security agreement was unconscionable when entered into and, therefore, unenforceable (see, UCC 2-302). POLICING CONTRACTS FOR UNCONSCIONABILITY to be that, there any question whatsoever, the claim is against the arbitration clause that is a function of court's Prima Paint Corp v Flood & Conklin Mfg Co.7 the US Supreme "a relating to arbitrate." other issues resolve. rule was recently reiterated the Court in Buckeye Check Cashing v Cardegna.8 Moreover, the Buckeye court made it clear that for challenge has to be "specifcally" implying the challenges. if any state the United States are arbitrators need to be familiar and an arbitration clause the agreement categorically of the contract and the arbitration clause, the challenge directed the contract as But there is any ambiguity the courts decide issues the validity of the arbitration clause and the arbitrator decides of the entire contract. us closely at what unconscionability all about. 3. UNCONSCIONABILITY is often said that the doctrine of unconscionability is "an amorphous concept that evades definition."9 Arthur Leff "nothing clear about meaning that is pejorative"10 is "easy to say nothing words."" Still, there is no shortage of reported cases where judges have declared it! may seem and trained in the civil is rarely an issue where an agreement commercial nature and has equal stature. the review of transactions that include printed standard agreements, "it" contracts adhesion. all adhesion contracts are but adhesion found unduly harsh, grossly unfair and one-sided are. The Dichotomy "Unconscionability" requires determination that is, as a matter of law, unduly harsh, infexible, grossly unfair and one-sided.' 2 While there of specifc clauses and contracts, all states have adopted that whether ruling in equity or applying and enforcing statutory schemes such search "procedural" and "substantive" exploitation. 1387 S. Ct. 1801 (1967). 8 "court, a challenge to the validity a whole, and not specifcally arbitrator". Auto Title 10 "and Emperor's Clause" Rev. 487. II Above fn.10, at 559. 12 of impact on judicial determinations about unconscionability, "Squeezing Unconscionability" (2006) 53 Cleveland St. L. Rev. 187. 13 Gillman v Chase Manhattan Bank, below fn.25, at 10: We address frst the basic determination the trial court on which its grant of relief is premised: that the security agreement unconscionable and, therefore, unenforceable 384 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77Procedural unconscionability is about unfairness in the formation of the contract with the central concern being the likelihood of either an absence of meaningful choice or potential surprise. Did the term get into the contract because there was no other choice or was it intended to mislead? Factors to be considered include: 1. Is the contract standard form? 2. Is the suspect clause boilerplate? 3. Was the clause hidden or made non-conspicuous? 4. Is the language used incomprehensible to a lay person? 5. Was there gross inequality in bargaining power? 6. Was there exploitation of a weakness such as lack of sophistication or education? Standard form agreements are problematic. Some courts hold that the presence of an adhesion agreement is sufficient to establish procedural unconscionability, although most require additional factors such as pressure tactics or interference with the ability of the other party to read the agreement before signing it.14 is a consumer. Merchants are presumed to be repeat participants in the marketplace and therefore to know how to protect their interests. However, in recent years, courts have come to recognise that smaller and less sophisticated merchants can also be preyed upon when dealing with enormous diversified corporate entities.15 Substantive is about the operation of a suspect clause. The focus here is on the fairness and reasonableness of the provision at issue. The list of clauses with a potential to offend is long and always being added to. It includes clauses that impose: 1. significant price disparity; 2. private penalties; 3. a denial of a basic right or remedy; 4. liquidated damages; 5. disclaimers; 6. covenants not to compete; An unconscionable contract has been defined as one which ‘is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms. (See 1 Corbin on Contracts, § 128, p. 400.) 303 The doctrine, is rooted in equitable principles, is a flexible one and the concept of unconscionability is “intended to be sensitive to the realities and nuances of the bargaining process” (Matter of State of New York v Avco Fin. Serv., 50 NY2d 383, 389–390). A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made—i.e., “‘of the parties together with contract terms which are unreasonably favorable to the other party’ (Williams v Walker-Thomas Furniture Co., 350 F2d 445, 449).” (Matter of State of New York v Avco Fin. Serv., also, Jones v Star Credit Corp., 59 192.)” ’(emphasis This dichotomy was first suggested by Professor Arthur Leff in the cited article, describing procedural unconscionability as “bargaining naughtiness” and substantive unconscionability as “evils flowing from the contract”. For a sampling of cases adopting this view see Maxwell v Fin. Serv., 184 82 (1995); Hottle v BDO Seidman, 268 Conn. Am. Auto Savage v Camps Auto Wreckers, 146 N.J. 15 (1996) and cases cited below fnn.14, 15, 17, 14 Compare Flores v Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846 (2001) with Morris v Empire Bancorp., 128 Cal. App. v Snappy 2d 21 (1994) 15 M Produce 1982) (2007) 73 ARBITRATION 4 in the formation either an absence Did the contract because there was no other choice or the contract standard Is the suspect clause Was the clause or made non-conspicuous? Is the language used a lay person? Was bargaining power? Was of a weakness sophistication or education? that the presence is suffcient to establish procedural unconscionability, although most require tactics or interference with the ability it.14 Greater sympathy exists where the complainant is a consumer. Merchants are presumed be repeat in and therefore to know protect recognise smaller and less merchants can also be preyed upon when dealing with diversifed corporate Seunbtisttiaenst.iv 1e5 unconscionability is about the operation of a suspect of the provision at issue. The list with long and always being added It includes clauses that impose: signifcant price disparity; private penalties; a denial a basic or remedy; liquidated damages; disclaimers; covenants compete; unconscionable defned `is so grossly unreasonable in the mores and business of to terms. 1Corbin on Contracts, (Mandel v Liebman, 303 NY 88, 94.) The doctrine, which is rooted in equitable principles, a flexible one and the concept unconscionability "intended be sensitive the process" of State of New York Serv., 383, 389-390). A determination of unconscionability generally requires a showing when made-i.e., ,.some showing of an `absence of meaningful choice on the part of one of the parties together contract favorable to the other party' Wlliams v Walker-Furniture 449)." (Matter of State of New York v Avco Fin. Serv., supra, at 389; see also, Jones v Star Credit Corp., 59 Misc 2d 189, 192.)" '(emphasis added). frst suggested Arthur the cited article, describing as "bargaining naughtiness" and as "fowing from the contract". For a sampling of cases adopting view see Fidelity Fin. Serv., 184 Ariz 82 (1995); Hottle v BDO Seidman, 268 Conn. 694 (2004); All Am. Auto 146 N.15 cited below 18 and 24. Flores v Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846 (2001) with 14 Redwood Empire Bancorp., 128 Cal. App. 4th 1305 (2005); Morris v Snappy Car Rental, 84 N.Y. 2d 21 (1994) 15 A & M Produce Co. v FMC Corp., 186 Cal Rptr. 114 (Cal. Ct. App., 1982) November 2007 385 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY 7. limitations on remedies; 8. absence of mutuality concerning access to the judicial system; 9. pre-dispute mandatory arbitration. There is some disagreement about the need for both types of unconscionability. While the majority of jurisdictions require both, many rely on a sliding scale as a guideline for magnitude of each. The stronger the substantive unconscionability component, the less the need for procedural unconscionability and vice versa.16 But can a term be voided upon showing just one type of unconscionability? This is not at all clear. In some states, New York being an example, where an operational term is found outrageous procedural unconscionability required.17 theory is that it does not matter how the term got into the contract; what matters is that it highly offensive. Such cases are rare. More problematic is the question: Is it possible for procedural unconscionability to be so oppressive that an otherwise conscionable term can be voided? The Illinois Supreme Court recently answered this question in the affirmative. Razor v Hyundai Motor America18 involved a term in a warranty that excluded incidental or consequential damages resulting from any inability to use a vehicle purchased from the agent of the defendant. The exclusion was not contained in the purchase agreement that was signed by the plaintiff and did not come to her attention until after she had completed the purchase. The reason was that the warranty was spelled out in the owner’s manual delivered with the car, but it was located in the glove compartment. The Court observed19: “this record, we must conclude the warranty information, the consequential was not made available to the plaintiff contract. . .. where a term is so difficult find, read, or understand the plaintiff be said to have been aware Surely, whatever other be that label must apply at bar where plaintiff testified the clause nor is there any basis for concluding that plaintiff the clause, before entering into the sale contract. ‘[A] limitation of liability is ineffective.’ ” From this, the Court concluded that it would have been unconscionable enforce the warranty. 20 word of caution is in order. Razor may not be what it seems. Notwithstanding the Razor court’s statement that procedural unconscionability, if severe enough, will 16 “In determining the conscionability of a contract, no set weight is to be given any one factor; each case must be decided on its own facts . . . However, in general, it can be said that procedural and substantive unconscionability operate on a “sliding scale”; the more questionable the meaningfulness of choice, the less imbalance in a contract’s terms should be tolerated and vice versa (Eddy, On the “Essential” Purposes of Limited Remedies; The Metaphysics of UCC Section 2-719[2], 65 Cal. L. Rev. 28, 41–42, n.56). While there may be extreme cases where a contractual term is so outrageous and oppressive as to warrant a finding of unconscionability irrespective of the contract formation process . . . such cases are the exception.” State vWolowitz, above fn.2, at 68. 17 v Star Credit, 18 222 Ill. 2d 75 (2006). Compare Wisconsin Auto Title Loans Inc v Jones, above fn.13, at 59 “Even if the arbitration provision is procedurally unconscionable, it may be enforced if it is not substantively unconscionable”. 19 101–20 105. POLICING CONTRACTS FOR UNCONSCIONABILITY limitations on remedies; absence concerning access system; pre-dispute some about the need for unconscionability. jurisdictions require a sliding scale each. substantive component, need for procedural unconscionability and vice versa.16 clear. some states, being an example, to be outrageous and oppressive, procedural unconscionability is not required.,7 There the does the offensive. Such cases are rare. possible for procedural unconscionability that term can Supreme Court recently answered this question in the affrmative. Razor v Hyundai iMnvootlover dA am teerrmic ain 1a8 warranty that excluded incidental or consequential damages resulting any inability to use a vehicle purchased the agent the defendant. agreement that was signed by the plaintiff until after she had completed the purchase. The reason out owner's observed'9: "Thus, on this record, we must conclude that the warranty information, including the disclaimer of consequential damages, was not made available to the plaintiff at or before the time she signed the purchase contract... . As previously noted, procedural unconscionability refers to a situation where a term is so diffcult to fnd, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it. Surely, whatever other context there might be in which a contractual provision would be found to be procedurally unconscionable, that label must apply to a situation such as the case at bar where plaintiff has testifed that she never saw the clause nor is there any basis for concluding that plaintiff could have seen the clause, before entering into the sale contract. `[A] limitation of liability given to the buyer after he makes the contract is ineffective.' " the Court concluded that it would have been unconscionable to enforce the 0 A word of caution is in order. Razor may not be what it seems. Notwithstanding Razor court's statement procedural if severe 16 "determining a contract, set to be given any one must be on facts can be said that unconscionability "scale"; the contract's terms should be tolerated and "Essential" of Rev. 28, 41-42, n.56). While there may be extreme cases and oppressive as to warrant a fnding of process ... such cases are exception." State v Wolowitz, 17 Jones v Star Credit, 59 misc. 2d 189 (1969). 18222 (2006). Compare Jones, "the arbitration provision is procedurally it may be enforced if unconscionable". 19 Above fn.18, at 101-102 Above fn.18, at 105. 386 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77suffice, both types of unconscionability may have been present in this case. Exclusions of consequential damages, similar to the exclusion in Razor, have been found to be substantively unconscionable on the ground that the exclusion is an unreasonable reallocation of risk.21 The court never addressed the substantive issue per se, but there seems little question that the allocation of risk must have been of concern or there would be no reason for the attention to the details of why the purchaser was unaware of the exclusion when she signed the purchase agreement. In other words, in the circumstances of this case, neither procedural nor substantive unconscionability could be found without the common denominator of an unreasonable reallocation of risk coupled with the inability of the purchaser to negotiate the allocation of the risk. 4. ARBITRATION CLAUSES: A UNIQUE ISSUE To begin with, it may seem strange to some that the issue even exists. In many jurisdictions around the world, pre-dispute arbitration agreements in consumer agreements are void unless they are actually negotiated.22 But in the United States these agreements are commonplace and fully enforceable unless found to be unconscionable. As a result, an extensive body of case law has emerged addressing the issue of unconscionability. The issue of whether or not an arbitration clause in a standard form agreement is per se procedurally unconscionable serves as a good example of the complexities that arbitrators may be called upon to deal with. A pre-dispute mandatory arbitration clause embedded in an adhesion agreement probably does not evidence procedural unconscionability where there is no evidence of something more.23 Still, some courts have found that, where the clause is embedded in a standard form agreement, that is enough to meet the requirement of surprise coupled with an absence of meaningful choice.24 How deeply embedded the clause has to be is not clear and the conclusion itself appears to conflict with the time-honoured rule that it is gross negligence not to read what you sign.25 But this willingness by some courts seems to imply that it does not take much to find procedural unconscionability if the circumstances require. The issue is resolved in favour of there being no procedural unconscionability if the party drafting the agreement provides the signatory with the option to opt out. Substantive unconscionability is about terms that operate in an unfair or unreasonable fashion. Within the context of mandatory arbitration, a group of factual situations have emerged raising questions about fairness and reasonableness: 1. Clauses that permit one party to select the arbitrator or specify qualifications. 2. Clauses that specify inconvenient locations for the arbitration proceedings. 3. Clauses that unnecessarily require one party or the other to incur burdensome expenses in the pursuit of a claim in arbitration. 21 e.g. A&M Produce v FMC Corporation, above fn.15. 22 the Annex provision 1 (q): “TO 3 (3) 1. Terms which have the object or effect of: 1(q) excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract”. 23 In New Jersey the state Supreme Court has developed a four-factor test: (1) the subject matter of the contract; (2) the parties’ relative bargaining positions; (3) the degree of economic compulsion motivating the “adhering” party; and (4) the public’s interest affected by the 2006 N.J. Lexis 1155 (2006). 24 Transamerica Armendartz Inc, 2000). 25 Co, 253 Y. 159 (1930); Gillman v Chase 1 (v Gomez, 11 2006). (2007) 73 ARBITRATION 4 unconscionability may have been similar found that the exclusion is an unreasonable reallocation of risk .21 Razor court never addressed little risk must have been concern be no reason why the purchaser was unaware the exclusion when she signed In other case, could common an reallocation of risk with of the purchaser to negotiate CLAUSES: ISSUE it may seem strange exists. In pre-dispute arbitration agreements in consumer agreements unless they are actually negotiated.22 But in the United States these agreements are acnodm fmulloyn epnlfaocrceeable the issue of an arbitration clause a standard agreement per se as a good example of arbitrators deal with. A pre-dispute mandatory arbitration clause embedded probably not evidence procedural unconscionability something more.23 some where the clause in form that an absence choice.24 deeply embedded the clause itself to confict the sign.25 willingness by some courts seems that it does fnd procedural unconscionability if the circumstances is resolved in favour unconscionability the signatory with unconscionability is unfair or unreasonable context mandatory group of factual situations have questions about fairness and reasonableness: arbitrator or qualifcations. Clauses the arbitration proceedings. Clauses or the other to incur burdensome expenses arbitration. above Consider the Annex provision 1 (q): "TERMS REFERRED TO IN ARTICLE 3 (3) 1. Terms hindering consumer's take exercise requiring the consumer exclusively available to him or on proof which, according the another the contract". Jersey Court developed a four-the contract; the parties' relative bargaining positions; the degree economic "adhering" party; and public's interest affected the contract, Delta Funding Corporation v Alberta Harris, 2006 N.J. Lexis 1155 (2006). e.g. Flores v Transamerica HomeFirst, Inc, above fn.14, and Armendartz v Found Health Psychare, Inc, 24 Cal. 4th 83 (2000). Pimpinello v Swift & Co, 253 N.Y. 159 (1930); Gillman v Chase Manhattan Bank, 73 N.Y. 2d 1(1988); Ortiz v Gomez, 11 misc. 2d 1076A (2006). November 2007 387 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY 4. Clauses that give the drafter the right to unilaterally alter the terms for arbitration. 5. Clauses that alter existing rights and remedies, examples being clauses that shorten a statute of limitations period or restrict the authority of arbitrators to impose punitive damages otherwise permissible by law. 6. Clauses that restrict class actions. 7. Clauses that lack mutuality, i.e. relegate one party to arbitration and give the other flexibility to pick and choose between arbitration and access to the judicial system. Just because a clause appears on this list does not mean it is per se unconscionable. Determinations are made case by case and the courts have developed many special rules for confirming when a clause is offensive. For example, a claim that an arbitration clause could impose burdensome costs and expenses is not enough to establish substantive must be shown that such is actually the case.26 turn raises question of whether or not justification can be shown for the requirements of a clause. Australia, the party facing a claim of unconscionability has the absolute show that given the circumstances it is reasonable for the term to be included in the agreement.27 While there is no absolute right in the United States, in recent years the academic community has begun to focus on the possibility, with the conclusion that even unfair arbitration clauses are not always unconscionable if it can be shown that they serve a valid business purpose. For example, credit-card issuers include these clauses in almost all user agreements. This is not done to gain some special advantage or to be predatory but because they need flexibility and speed in the event of a default by the card user. Credit-card issuers operate in a very competitive environment and deal with customers about whom they have little current information. Their risk is significant. Arbitration provides card issuers with a tool to minimise risk if they uncover information suggesting that a user is or has become opportunistic. For card issuers, litigation means the credit-card user has an advantage because delay is inevitable. Rather than become bogged down by the judicial system, credit-card issuers are forced to accept settlement, making arbitration an attractive alternative.28 Absent from the entire discussion about unconscionability in the United States is good comes in connection with the performance and of the contract, not its negotiation and contract formation. The UCC § 1-203 provides that “every contract or duty . . . imposes an obligation of good faith in its performance and enforcement,” while § 2-302 mandates that a contract becomes unconscionable when it is made, not when it is performed. There is no affirmative obligation to negotiate in good faith while there is an obligation to refrain from intentional conduct designed to exploit. Finally, unconscionability in the United States has a time line. Determinations are made as at the time the agreement is made and no consideration is supposed to be given to subsequent events. For example, a party claiming unconscionability cannot rely on financial circumstances which have changed since the agreement was entered into.29 26 2003). 27 M. Sneddon, “Unconscionability in Australian Law: Development and Policy Issues” (1992) Loy. Int’l & Comp. L.J. 545, 547. 28 P.B. Marrow, “Non-Negotiable Mandatory Arbitration Clauses: From the Perspective of the Drafting Party” (2006) 24 Alternatives Drahozal, “ ‘Unfair’ Arbitration Clauses” L. Rev. 695. 29 Overstreet v Contigroup Cos, 462 F. 3d 409 (5th Cir., 2006); American Software Inc v Ali, 46 1386 1996). POLICING CONTRACTS FOR UNCONSCIONABILITY Clauses alter the arbitration. Clauses existing rights and remedies, examples being clauses of arbitrators impose otherwise permissible Clauses class actions. Clauses relegate to pick and choose between arbitration and access the system. a clause appears on this list mean is per se unconscionable. confirming when a clause is offensive. For example, claim that an arbitration is unconscionability. It must be shown that such is actually the case.26 This in turn raises the justifcation can be shown for the requirements of a clause. 5. OTHER MATTERS In Australia, the party facing a claim of unconscionability has the absolute right to show is reasonable the term to be included in the agreement.27 there no absolute in the United States, recent to focus on the possibility, the that arbitration clauses can be shown that they serve a valid business purpose. card issuers these user agreements. or to be predatory but because they need fexibility in a default by the card user. Credit-card issuers whom little signifcant. Arbitration provides card issuers they uncover information suggesting that a user is or has become means the credit-card user has delay bogged down by system, credit-card issuers an attractive alternative.28 the entire discussion States good faith. There, good faith comes into play in connection with the performance and enforcement negotiation "an obligation of in its performance and enforcement," 2-302 mandates contract becomes when it not when it There is no affrmative negotiate refrain from intentional conduct designed unconscionability in the United States has time line. Determinations are made time the agreement made no consideration supposed to events. For example, a party claiming unconscionability cannot rely on fnancial have changed since the agreement was entered into.29 Garrett v Hooter-Toledo, 295 F. Supp. 2d 774 (N.D. Ohio, 2003). Sneddon, "Australian Law: Development and Policy Issues" (1992) 14 Loy. L.A. Int'l & Comp. L.J. 545, 547. "Non-Negotiable Mandatory Arbitration Clauses: From the Perspective Party" (2006) 164; C.R. Drahozal, -'Unfair' Arbitration Clauses" (2001) U. Ill L. Rev. 695. v Contigroup Cos, 462 F. 3d 409 (5th Cir., American Sofware Cal. App. 4th 1386 (1996). 388 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f776. THE CONSEQUENCES OF AN ARBITRATOR’S ERROR Assuming that an arbitrator makes a legal error and/or applies the wrong legal standard in determining whether a contract is unduly harsh, inflexible, grossly unfair and one-sided, will this open the award to pursuant to 9 U.S.C. § 10 (a)(4)30 or applicable state law? The federal courts are consistent in holding that mere error, if made in good faith, is not grounds for vacatur.31 And a mere good faith error will not be subject to challenge on the grounds that the error is a manifest disregard of the law, this standard requiring that the arbitrator both clearly knew of the law in question and made a conscious effort to disregard it.32 These rules, taken together, suggest that if an arbitrator, in good faith, applies the wrong legal standard, the award will survive an attempt at vacatur. Most state courts follow this rule in the absence of a state statute mandating arbitration.33 7. OTHER JURISDICTIONS England is where the doctrine got its start. Originally it was designed to protect the wealthy from harsh and unfair contracts usually designed to separate them from their landed estates. Over time the doctrine has been found to be of limited use, probably because of reluctance to interfere with the freedom to contract. The modern approach has been to apply the doctrine in a very limited manner, in circumstances of exceptional oppression.34 30 “any of the following cases the United States the district wherein arbitration–. . . 4) where the arbitrators exceeded them that a definite award upon the subject matter submitted made”. 31 Prudential-Bache Servs., 987, (“arbitrators may construe the governing law imperfectly in the course of delivering a decision that attempts in good faith to interpret the relevant law, or may make errors with respect to the evidence on which they base their rulings, is a risk that every party to arbitration assumes, and such legal and factual errors lie far outside the category of conduct embraced by § 10(a)(4)”. 32 “arbitration award may be ‘law.’ Inc, requires more than a mistake of law or Siegel Titan Indus. Corp, 779 F.2d 891, be established only where a governing legal principle is ‘well defined, case,’ the arbitrator ignored it arbitrator’s a that assured nature. Tel. Co v Communications Workers of America Local 1100, AFL-CIO One, Halligan, 148 F.3d at 202; see also DiRussa, with identified by the parties). An arbitrator (even an arbitrator who is a lawyer) is often selected expertise the commercial aspect the dispute or for trustworthiness, rather than knowledge the applicable and is to be a blank educated in the law parties.” Options of 514 U.S. 938, 942-(1995). 33 Compare Tilbury Fabrics v Stillwater, Inc, 56 N.Y. 2d 624 (1982); Motor Vehicle Accident Indemnification & 2d 214 (1996); Detroit Automobile Insurance 416 Mich. 34 g. Ltd v Total Oil 1 W.183 Lloyds 1 Q.B. 326 (CA); A Schroeder 1974] 1 W.L.R. 1308 (HL); Credit Lyonnais Bank Nederland 1997] 1 E.R. 144. (2007) 73 ARBITRATION 4 OF AN ARBITRATOR'S standard contract is unduly harsh, infexible, will vacatur pursuant U.S.30 state are consistent in holding that mere error, if in vacatur.31 not be subject to challenge that this standard of the law in question and made a conscious to disregard 32 taken together, suggest that if an arbitrator, in the award will follow rule in the absence of a state statute mandating arbitration.33 it was designed harsh and contracts usually designed to separate their landed estates. has use, probably because the freedom to contract. The modern approach limited manner, in circumstances of exceptional oppression.34 "a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-... 4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and defnite award upon the subject matter submitted was not made". e.g. Kyocera Corp v Prudential-Bache T Servs., 314 F.3d 987, 1003 (2003): "The risk that the governing law a decision in or may make respect that every party to arbitration assumes, and outside the category conduct embraced 4)". "An arbitration award may be vacated if it exhibits a `manifest disregard of the law.' DiRussa v Dean Witter Reynolds, Inc, 121 F.3d 818, 821 (2d Cir., 1997). Given the deference afforded arbitration decisions, this standard requires more than a mistake of law or a clear error in fact finding. Siegel v Ttan Indus. Corp, 779 F.2d 891, 892-93 (2d Cir., 1985). Manifest disregard can be established only where a governing legal principle is `well defned, explicit, and clearly applicable to the case,' and where the arbitrator ignored it after it was brought to the arbitrator's attention in a way that assured that the arbitrator knew its controlling nature. New York Tel. Co v Communications Workers ofAmerica Local 1100, AFL-CIO District One, 256 F.3d 89, 91 (2d Cir., 2001) citing Halligan, 148 F.3d at 202; see also DiRussa, 121 F.3d at 823 (holding that arbitrators are only charged with having knowledge of governing law identifed by the parties). An arbitrator (even an arbitrator who is a lawyer) is often selected for expertise in the commercial aspect of the dispute or for trustworthiness, rather than for knowledge of the applicable law, and under the test of manifest disregard is ordinarily assumed to be a blank slate unless educated in the law by the parties." Goldman v Architectural Iron Co., 306 F. 3d 1214, 1216 (2d Cir., 2002); First Options of Chicago, Inc v Kaplan, 514 U.S. 938, 942-43 (1995). 33 Tilbury Fabrics v 2d 624 (1982); Motor Vehicle Accident Indemnifcation Corp v Aetna Cas. & Sur. Co., 89 N.Y. 2d 214 (1996); Detroit Automobile Inter-Insurance Exchange v Standfest, 416 Mich. 407 (1982). e.g. Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1985] 1W.L.R. 173 at 183 (CA); Lloyds Bank Ltd v Bundy [1975] 1 Q.B. 326 (CA); A Schroeder Music Publishing Co v Macaulay [1974] 1 W.L.R. 1308 (HL); Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All E.R. 144. November 2007 389 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY In Canada, unconscionability is defined as the taking of undue advantage of an inequality in bargaining power.35 In Australia, two elements are required, one party being at a special disadvantage and the other unfairly benefiting by the special disadvantage. Where both conditions are present, the courts will set aside transactions but not before giving the stronger or advantaged party an opportunity to show that the transaction was fair, just and reasonable in the circumstances.36 All modern civil law systems have tools for policing contracts. This is usually accomplished by requiring judges to use the dictates of civil codes as the boundary for discretion. Judge-made doctrines are uncommon but possible. One example is France, where the doctrine of pre-contractual good faith has been established by the courts.37 France also has l´esion, a doctrine meaning “a loss that results from a serious imbalance or disproportion in the reciprocal obligations of parties to a contract.”38 This is sometimes used with the general articles of the French Civil Code to police agreements.39 But in most of these systems unconscionability is not seen as a stand-alone tool available to courts. Some countries, such as Germany (e.g. Art.138(2) of the Civil Code) and Switzerland (e.g. Art.242 of the Civil Code), have adopted legislation that identifies specific factual scenarios as being unfair and unenforceable. In Italy, as a technical matter, the legal system does not recognise unconscionability as it is known in the common law; but Council Directive 93/13 adopted Arts 1341 and 1342, schemes directed to standard form consumer agreements that provide lists of oppressive clauses.40 Inherent in the civil law approach is the doctrine of good faith. While the principle of good faith exists in the common law, it has its limitations. For example, in the common law tradition there is no duty to negotiate in good faith on the theory that the option to walk away from a bad deal is always available. But most civil law systems do impose such a duty. The broad reach of this duty may well reflect local political and historical concerns. Consider as examples India and China. In India, where English law came into conflict with Hindu and Mohammedan law, policing is accomplished within the context of free consent and undue influence as these principles are defined and brought into play by a series of 41 In China, where communist and capitalist values have had to be reconciled, the Uniform Contract Law (1999) (UCL) places great emphasis on good faith. Good faith is 42 The UCL also imposes the duty to act in manner and the draftsman of a standard form agreement has a duty to disclose harsh terms. Certain types of exculpatory clauses are deemed invalid.43 35 Syncrude Ltd, 4th 321 (1989); S.M. Waddams, “Contract Law” (1992) 14 Loy. L.A. Int’l Comp. L.J. 541. 36 Sneddon, “Unconscionability in Australian Law”, above fn.27. 37 M.W. Hesselink, “The Concept of Good Faith,” Molengrafica Series, (2003) International Contract Law 103. 38 “Unconscionable Contracts”, 474. 39 Arts 1118, 1674 and 1685. Another example is Art.2078. It prohibits someone holding property pledge facto, Angelo and Ettinger, “Unconscionable Contracts”, above fn.3, 473–478 40 C.Cicoria, “The Protection of the Weak Contractual Party in Italy vs. United States Doctrine of Unconscionability,” (2003) 3 Global Jurist, article 2 available at www.bepress.com. 41 14, 16 and 19A; Specific 1963 s.111; Sarin, “Contract India” (1992) Loy. L.A. Int’l & Comp. J. 42 W. Liming and X. Chuanxi, “Fundamental Principles of China’s Contract Law” (1999) 13 Colum. J. Asian L. 1, 16: “good (chengxin; literally, honesty and trustworthiness) requires parties to a civil act to conduct themselves honorably, to perform their duties in a responsible manner, to avoid abusing their rights, to follow the law and common business practice, and so on”. J. Matheson, “Convergence, Culture and Contract Law China” Int’l 329. 43 and POLICING CONTRACTS FOR UNCONSCIONABILITY defned as undue of 35 two elements are a special and the other unfairly benefting by the special disadvantage. both courts will set but that the transaction just and reasonable in the circumstances. 36 modem civil law systems have tools for policing contracts. is usually by requiring judges to the of codes pre-contractual good faith has been established by the courts.37 France also has lesion, "of parties to a contract."38 is sometimes the the French Civil Code to police agreements.39 in most of these systems seen as a stand-available to courts. Some countries, (e.g. Art.138(2) of Civil Code) and Switzerland g. Code), have adopted identifes specifc factual scenarios as being and as a technical matter, the legal system does recognise it the common but Council Directive 93/13 adopted 1341 and 1342, schemes standard consumer agreements oppressive clauses. 0 in law approach of example, bad always law systems do impose such of refect local political and historical concerns. examples India and China. In India, where English law came into confict law, accomplished the context of free consent as these principles are defned and brought into play statutes. 41 China, where communist and capitalist values Contract (1999) (UCL) places great on defined as honesty and trustworthiness. 42 The UCL also imposes the duty to act in a fair drafsman of a standard form agreement has to disclose harsh terms. Certain types of exculpatory clauses are deemed invalid.43 Hunter Engineering Inc v Syncrude Canada Ltd, 57 D.L.R. 4th 321 (1989); S.M. Waddams, "Unconscionability in Canadian Contract Law" (1992) 14 Loy. L.A. Int'l & Comp. L.J. 541. "Unconscionability Law", above Hesselink, "The Concept Good Faith," Molengrafca Series, 103. Angelo and Ettinger, "Unconscionable Contracts", above fn.3, 474. Another is Art.as a pledge appropriating that property ipso facto, Angelo and Ettinger, "Unconscionable Contracts", fn.473-"the Weak vs. United States Unconscionability," (2003) 3 Global Jurist, article 2 available at www.bepress.com. Indian Contract Act 1872 ss.14, 16 and 19A; Specifc Relief Act 1963 s.20; Evidence Act 1872 s i l l ; M.L. Sarin, "Contract Unconscionability in India" (1992) 14 Loy. L.A. Int'l & Comp. L. J. 569. Liming and X. Chuanxi, "Fundamental China's Contract Law" (1999) The principle of good faith honesty and requires parties to a civil act to conduct themselves a responsible to avoid abusing their rights, to law and practice, and so on". "Culture in China" (2006) 15 Minn. J. Int'l L. 329. Arts 39 and 54. 390 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77The Islamic world presents a completely different perspective on the problem of unfair agreements. The Western concepts of freedom to contract and good faith exist in all Islamic countries because they are recognised by the Qur’an. But these principles are trumped by the overriding belief that a contract is divine in nature. This imposes a duty to perform the contract unless its terms are otherwise in violation of Shari’a because of dictates of the Qur’an. Strict constructionists in countries such as Saudi Arabia reject the Western doctrine of efficient breach.44 With respect to standard form consumer contracts, the European Union has adopted an approach similar to the German and Swiss preference for defined fact patterns and clauses with the enactment of Council Directive 93/13 (1993), “On Unfair Terms in Consumer Contracts.” Article 3 provides: 1. A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. 2. A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. The fact that certain aspects of a term or one specific term have been individually negotiated shall not exclude the application of this Article to the rest of a contract if an overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract. Where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him. 3. The Annex shall contain an indicative and non-exhaustive list of the terms which may be regarded as unfair. The Annex leaves little room for judicial interpretation as to the fairness of clauses listed therein. Included in this group are clauses that: 1. Limit the liability of a seller for the death or for personal injury resulting from the seller’s omission or act. 2. Inappropriately limit the right of a consumer in the event of the seller’s nonperformance or inadequate performance. 3. Make the terms of the agreement binding on the purchaser but leave the seller’s obligations subject to the discretion and control of the seller. 4. Bind a consumer to terms and conditions that the consumer did not have a meaningful opportunity to review prior to a purchase. 5. Allow the seller to unilaterally alter or modify terms without a valid reason set forth in the agreement. Other modern legal systems have statutory schemes for the regulation of standard form agreements and virtually all of them are rooted in the civil law concept of good faith. For example: Japan, the Consumer Contract Act (2001); the Indian Consumer Act 1986; Adhesion Contracts Act of South Korea; Brazilian Consumer Protection Act 1990. This includes England,45 not given the same emphasis respect general rules of contracting. In Australia, a statute specifically addresses unconscionable 44 “The Shari’a Factor in International Arbitration” Loy. L.Int’l Comp 609–45 The Unfair Terms Act 1977, Consumer Credit Act 1974 and Money-Lenders Act 1990. (2007) 73 ARBITRATION 4 presents on of The Western concepts of freedom to contract and good faith exist in all they are recognised by the Qur'an. nature. imposes its terms are otherwise in violation Shari'a because the Qur'an. constructionists in countries such as reject the Western breach. respect to standard form consumer contracts, the European has adopted an the German defned fact patterns and clauses the enactment Council Directive 93/13 "Unfair Terms in Consumer Contracts." 3 provides: contractual term which has not been individually negotiated shall be regarded as contrary to the requirement good faith, it causes signifcant imbalance parties' and A term shall always be regarded negotiated drafed therefore not able to infuence in the context of a pre-formulated standard contract. of specifc term have shall not exclude the application of this Article of if of nevertheless supplier claims that a standard term has been the burden of respect The Annex shall contain an and for judicial interpretation as to the fairness of clauses listed this group are clauses the liability of a seller for the death or for personal injury resulting the seller's act. limit the a consumer the event of the seller's nonperformance inadequate the terms of the agreement on the purchaser leave the seller's the seller. Bind a consumer to terms and that the prior to a purchase. the seller to unilaterally alter or modify terms without a valid reason set the agreement. for standard and virtually all of are rooted in law concept good faith. the Contract Act 1986; Act South Korea; Brazilian Consumer England'45 where good faith is not given the same emphasis with respect to the contracting. In Australia, a statute specifcally addresses unconscionable 44 F. Kutty, The Shari'a Factor in International Arbitration" (2006) 28 Loy. L.A. Int'l Comp L. Rev. 565, 609-610. 45 Terms 1977, Consumer 1974 and Lenders 1990. November 2007 391 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77UNCONSCIONABILITY contracts without direct reference to good faith and provides a list of factors to be considered. The same statute incorporates by reference the equitable principles developed by the courts.46 Finally, the UNIDROIT Principles of International Commercial Contracts (2004) presents a blending and harmonising of common and civil law approaches to the issues involved. Policing of unfairness as applicable to procedural issues involving contract formation is governed by Art.2. Standard forms and standard terms are defined as those which “are prepared in advance” by one party and “actually used without negotiation with the other party.”47 While tolerated, these forms and terms are subject not only to all rules for contract formation48 but to three significant additional restraints: No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party. In determining whether a term is of such a character regard shall be had to its content, language and presentation. 49 In case of conflict between a standard term and a term which is not a standard term the latter prevails.50 Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.51 Principles involving bargaining behaviour apply to all contracts regardless of form. Thus, fraud,52 threat53 and mistake54 can be invoked to challenge any agreement. But most important, the Principles police for clauses that are “grossly unfair” and that contain a term that unjustifiably gives one party excessive advantage. This gross disparity comes about by exploitation of a bargaining handicap defined as: “economic duress or urgent needs . . . improvidence, ignorance, inexperience or lack of bargaining skill . . . and the nature and purpose of the contract.”55 Hopefully, this short overview should make it apparent that there are many approaches to defining unfair behaviour, unfair contract terms and even unconscionability. Arbitrators called on to apply the laws of a system that differs from their own must be mindful to look openly and beyond their own traditions. “unfair” agreement large function culture and training. While there are no hard and fast rules as to exactly what is unfair, many legal cultures tie the conclusion to attitudes about reciprocal obligations concerning good faith and honesty. In most legal systems the role of equity is down played and the flexibility that equity affords might seem perplexing and perhaps even daunting. 46 Trade Practices Act 1974 ss.51AA and R. Bigwood, “Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd: Curbing Unconscionability: Berbatis High Australia” (2004) R. 203. 47 48 2.1.19 M.J. Bonell, An International Restatement Law, 3rd edn Street 151–158. 49 2.1.20. 50 2.1.21. 51 2.1.22. 52 53 54 and 55 POLICING CONTRACTS FOR UNCONSCIONABILITY reference and of factors to be considered. incorporates developed by the courts.46 Principles of International Commercial Contracts (2004) presents common law approaches to the issues involved. unfairness procedural involving by Standard and standard "are in advance" by "other party."47 forms terms are subject not only to all but signifcant additional restraints: contained standard such a character reasonably effective unless it has been expressly accepted determining of such a character 49 In case of confict which is not a standard term the latter preWvhaeirlse. b5o0th parties use standard reach agreement the agreed standard are substance unless one party clearly in or undue delay informs the other party, that it does not intend to be bound by such a contract.51 bargaining behaviour to all contracts regardless Thus, 52 mistake54 invoked to challenge any agreement. most clauses "unfair" and unjustifably gives one party excessive advantage. a bargaining handicap defned as: "dependence, economic duress or urgent needs ... improvidence, ignorance, inexperience or lack of bargaining skill ... and the nature and purpose of the contract."55 this short overview should make it apparent that there are many approaches unfair behaviour, unfair contract terms and even unconscionability. that differs from be mindful 8. CONCLUSION What is meant by an "unfair" agreement is in large measure a function of geographic location, there are to exactly reciprocal In most legal systems the role of equity is down played and the fexibility might seem perplexing and perhaps even 51AA and 51AB; R. Bigwood, "Australian Competition and Commission v CG Berbatis Holdings Pty Ltd: and the High Court of Australia" (2004) 28 Melbourne U. L.R. 203. Art.2.1.19 (2). Art.2.1.19 (1); M.J. Bonell, An International Restatement of Contract Law, 3rd edn (Washington D.C.: Bridge Street Books, 2005), pp.151-158. Art.2.1.20. Art.2.1.21. Art.2.1.22. Art.3.8. Art.3.9. Arts 3.4 and 3.5. Art.3.10. 392 November 2007 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77Arbitrators called upon to evaluate contracts and contract terms by application of the laws of the United States may find that doing so is challenging and unfamiliar. But complying with any such mandate will be made easier if before proceeding they see to it that they have been briefed thoroughly by the parties on their views concerning applicable law and local attitudes on the issue of unconscionability. Developing a checklist will simplify matters and reduce the likelihood of a subsequent challenge based on doctrines such as “manifest disregard” for law and those enumerated in Art.5 of the New York Convention. The checklist of concerns should include whether the law of the jurisdiction involved requires a showing of both procedural and substantive unconscionability and the magnitude of each where both must be shown, whether or not there are special rules for evaluating arbitration clauses, and facts confirming the time frame of the materialisation of the unconscionability. And, most important, arbitrators must take special care to factor out preconceived attitudes, imposed by the legal culture from which they come, concerning pre-contract good faith obligations. (2007) 73 ARBITRATION 4 called upon to evaluate by States fnd that doing so is challenging complying any such be made before proceeding to they briefed views concerning and issue of unconscionability. Developing a checklist will matters of a subsequent challenge based "manifest disregard" and in Art.the law involved requires a showing procedural and each evaluating arbitration clauses, and the materialisation the unconscionability. preconceived which they come, concerning pre-obligations. November 2007 393 Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=1b0d6eea-3d15-4b9f-88fe-e1aa7bb12f77