Today we discuss unconscionability, through the classic case of Williams versus Walker Thomas Furniture. This case was decided in 1965 by a well-known Judge, Jay Skelly Wright, of the Circuit Court of the District of Columbia. It also raises important questions about the respective roles of courts and legislatures. The facts, orally, Williams the defendant and appellant in this case, purchased several items on installment, from the Walker Thomas Furniture Company. The last of these items, was a stereo set valued at over $500. Ms. Williams, a woman of limited education and means, owed a $164 from her prior purchases at the time, she bought the stereo. The contracts for these goods contained in fine print a cross collateral clause. In effect, this clause gave the furniture company the right to repossess all of Mrs. Williams prior purchases, if she defaulted on the payments for one of her last purchases. Even if you'd paid enough to previously pay off some of ordered on these earlier purchases. Ms. Williams did indeed default on a stereo payment and Walker Thomas Furniture attempted to repossess all of her prior purchases. So the procedural history was this, the trial court found for Walker Thomas Furniture Company, The District of Columbia Court of Appeals affirmed, but the instant court, with Skelly Wright, reversed and remanded the case. The central issue was this, even the lower court that had ruled in favor of Walker Thomas furniture company believed that the company's contracts were exploited, but believe there was no basis not to enforce the contracts. So the central issue is this, can courts declined to enforce unconscionable contracts? And were these contracts unconscionable? This central issue was a matter of first impression in the District of Columbia. In his opinion Judge Wright, looked to provision of the Uniform Commercial Code 2-302, which had just recently been enacted but had not yet taken affect. Judge Wright felt his power as a common law judge and relied on this provision, even though it wasn't enforced yet, saying it was persuasive authority. It was authority because he was persuaded by it and this provision says that courts can refuse to enforce contracts they find unconscionable. Judge Wright held that, where the element of unconscionability is present, at the time a contract is made, the contract should not be enforced. The case was remanded in order to determine whether the contracts in questions were in fact unconscionable. Now in dissent, Judge Danaher, agreed with the lower court which found no basis for failing to enforce the contract. But concluded, Congress should consider corrective legislation to protect the public from such exploitative contracts. He emphasized the many public policy concerns the case involved, and suggested that the Court's decision might have unintended negative effects on individuals of low-income. Maybe it would increase the interest at which they had to borrow money. So let's make sure we understand the structure of the purchase at issue in this case. First, Walker Furniture, sold goods on installment. It sales contract specified that instead of paying for an item all at once, the purchaser would make regular smaller periodic rent payments on the items purchased. The furniture company, would retain title to it until the total installment payments equal the item's value. Transactions structured in this way, can be especially appealing for individuals who want to give an item but, don't have the ability to pay for it all at once. The very controversial provision in the Walker Thomas Furniture contracts, was the cross collateral clause. This clause required that all installment payments on a given purchase to be prorated against the amounts due on all purchases that a borrower such as Ms. Williams had outstanding. This would keep open the debts on each purchase until all the goods were paid for, as a result, The Walker Thomas furniture company retained the security interest in all of the goods Ms. Williams bought until the balance on the last item she purchased was paid. This means, the company could seize those goods to discharge your debt on whatever item those goods secured. All of the goods that the Walker Thomas furniture company's sold to Ms. Williams were security for the last thing she bought, in this case the stereo. This meant that, if Ms. Williams couldn't make the payment on that stereo, Walker Thomas Furniture under this provision could take all of the goods that had previously sold on credit to Ms. Williams. This they did, they also seized from her among other things draperies and apron set, pot holder set, and rugs. So now let's talk about unconscionability. What does unconscionability actually mean? Well, here's what the UCC Section 2302 says, the provision that Judge Wright found pervasive. If the court finds as a matter of law any clause of a contractor who had been unconscionable at the time it was made, the court may refuse to enforce the contract. Comment one to that provision provides some additional guidance. It says, the basic test is whether in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided, as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power. According to the UCC, the primary factors in determining unconscionability or whether it causes oppression and unfair surprise to one of the parties to a contract. Judge Wright went into a considerably deeper discussion of unconscionability's meaning in his own opinion, focusing on an absence of meaningful choice on the part of one of the parties together with contractual terms which are unreasonably favorable to the other party. Acknowledging that both these factors are difficult to define, Judge Wright nevertheless, noted that meaningful choice could be negated by gross inequality of bargaining power and by a party's lack of opportunity to understand the terms of the contract. Another common way of talking about unconscionability, is to distinguish between procedural unconscionability on one hand, and substantive unconscionability on the other. The former refers to, defects in the bargaining process the later, to unfairness in the outcome of the process, the terms of the agreed upon contract. Usually, some mixture of both procedural and substantive unconscionability, must be present for a court to declare a contract unconscionable. The distinction between procedural and substantive unconscionability, maps nicely onto Judge Wright's requirements of the absence of meaningful choice and unreasonably favorable terms respectively. They also map onto the factors in UCC 2-302 comment one, the issues of oppression and unfair surprise. Where there is procedural unconscionability, the victim is surprised to learn about the contract substantive unfairness. Can you think of any instances in which either procedural or substantive unconscionability on it's own should be enough to avoid a contract? Can you think of a contract that is substantively but not procedurally unconscionable or vice versa. If you're knowledgeable of the Old Testament in the Bible, you might think of two different contracts that Jacob entered into. One which is dominantly unconscionable from a substantive standpoint and another is dominantly unconscionable from a procedural standpoint. A party's level of education is relevant to whether there is procedural unconscionability, so is the way in which significant terms of the contract like the cross collateral clause at issue here are presented. The hiding of one-sided terms in fine print is the paradigmatic example of procedural unconscionability. As for subset of unconscionability, Wright applied the test Corbin the famous commentator on contracts set forth. Whether the contract's terms are so extreme as to appear unconscionable according to the mores in business practices of the time and place. Richard Epstein is a famous libertarian law professor who tends to extol freedom of contract. When a libertarian like Epstein tend to have more concerns about procedural or substantive unconscionability. Well, libertarians would tend to be more concerned about procedural unconscionability. If terms are hidden in fine print so that the non drafters surprise to learn what she promised, then a libertarian might worry that the surprise party did not make a sufficiently informed decision about whether or not to contract. But Epstein famously saw that substantively unconscionable terms could be problematic because their evidence of procedural unconscionability. For example, if the term is so unfavorable that no person in their right mind would have agreed to it, then the existence of substantively unconscionable terms in a contract is evidence that there must have been some procedural defect in contracting. Okay. Here's another quiz. Did the DC Circuit court find that Walker Thomas Furniture's contract was an unconscionable? Yes or no? Well, it's a trick question. Judge Wright didn't actually decide this question, he instead remanded the question for the lower court's consideration. Ultimately, the company settled with the plaintiff's. So no court made a final determination as to whether the cross collateral term was unconscionable. But lets us do that. Considering the contracted issue against these various tests, what factors point toward or against unconscionability? Well, the way to approach this is to first break it down into procedural and substantive questions. There's pretty strong evidence of procedural unconscionability given the convoluted language of the cross collateral term. It's probable that the borrower or purchaser would not have understood that the seller was retaining a security interest in all of the previous purchases. But the harder question is whether the cross collateral clause is substantively unconscionable? This is much harder question because the law often allows borrowers to give security that is higher in value than the amount that's being borrowed. By over securitizing the debt, the borrower might receive more favorable terms including a lower interest rate. Most home mortgages are over securitized because of the buyers down payment. Right now, my home mortgage is only about half as large as the amount the value of the house that secures it. It's also hard to see how the seller could earn an unconscionable windfall profit from the over securitization, as there's a duty to give any excess value from seized assets back to the borrower. Thus one security is seized, the seller would have a duty to sell it at auction and any extra proceeds of the auction after paying off the borrowers debt would be paid back to the borrower. The cross collateral clause also seems substantively conscionable when we consider that in the absence of any security interests, a lender could seek a monetary judgment, a court judgment against a defaulting borrower. Normally would be able to hire a sheriff to seize any of the borrowers assets and that means any of them in order to satisfy the monetary judgment. So normally, the lender would have been able to through the monetary judgment mechanism, through getting a court order, a court judgment to seize the same chattel that were seized in this very case. In fact, Doug Baird discovered that one reason Walker Thomas might have used the cross-collateralization clause was to get around the effect of a very unusual local code ordinance in the District of Columbia. Under this local statute, all beds, beddings , household, furniture, furnishings, sewing machines, radios, stoves, cooking utensils, not exceeding $300 in value, were free and exempt from the string attachment, levy, seizure, under any court order. As Doug Baird explains, Walker Thomas took the security interest in Williams other household goods, because these assets were otherwise exempt from the monetary judgment mechanism. Baird says that Walker Thomas had to take a security interest in them in order to be able to reach them in the event of a borrower default. The cross collateralization clause, Baird says serve this purpose and no other purpose. Possibly, it was the Walker Thomas Furniture's and run of the local code that makes this term substantively unconscionable. Finally, let's consider the dissent in the case. Why might someone in Ms. William's position agree with the dissent? Well, Judge Danaher's noted for instance that many poor people lack credit and thus pose a risk to companies selling goods on installment. He suggested that companies might only be willing to sell goods on credit to these individuals when their pricing policies will afford a degree of protection commensurate with the risks. If courts refused to enforce Walker Thomas Furniture's Contract's, might the company seize selling expensive items to low income purchasers at all? Or might they charge higher interest rate and who, is it the court or the legislature that is in the best position to decide what contractual terms are so exploitive as to become unconscionable? So Walker Thomas Furniture also stands for a standard concern, that whenever the law imposes a mandatory restriction to protect buyers, the perverse effect is that it might end up hurting them if the sellers react negatively enough to the restriction.
