Business Law: Unconscionability

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Business Law: Unconscionability

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Business Law: Unconscionability

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Discuss about the Business Law for Unconscionability.

Unconscionability is a legal protection against the enforcement of a contract that is unfair to one party. If the contract is unfair that is shows an abuse during its formation, the jury may find it unconscionable and decline to employ it. In most occasions when a court finds an agreement to be unconscionable, they declare the contact as annulled. No issuance of specific performance or compensations is awarded, but in its place, the parties will be relieved from their contract responsibilities (Mccullough, 2016). Other than that, the reason why it may mean that a contract is enforceable under the law is because such contracts favor only the dominant party, thus, making it unfair to the weaker party.
The leading cases of unconscionable conduct are in transactions between stronger and weaker parties. It is therefore partly related to duress and unwarranted influence. It is common where a superior party manipulates the weaker party with special disabilities such as old age, lack of education, illiteracy and much more. The transaction is also oppressive and harsh to the weaker partner. Its is also common in business contracts where there are provisions that limit damages against the seller, prevents the rights of the buyer to seek court help against the seller, among others (Mccullough, 2016). Additionally, it is also found in acts of deceit and fraud. It is whereby one party deliberately misrepresents a fact that deprives an individual of an expensive possession.
The main reason why such laws exist in the business world is because it is used to limit the dominant parties from fraudulently manipulating the weaker parties in business contracts. It is meant to reduce exploitation of the consumers who are poorly educated, less fortunate, and cannot be able to get the best price available in the competitive trade (Mccullough, 2016). On the other hand, it prevents the undue influence, whereby one party practice unreasonable authority to make the other party sign the contract. Additionally, it used in business to prevent the use of threat to make other parties agree to the contract. Furthermore, it prevents the dominant party from limiting their liabilities to breach of contract.
There are various characteristics of the unequal bargain that must or might demonstrate unconscionability. These characteristics may include duress, undue influence, unfair surprise, limited warranty, and unequal bargaining power. To start with, duress is a situation where one party uses threats so that to make the other party agree to the contract terms and conditions. It can be physical or any other form of threat. For example, the seller may refuse to release the goods rightfully until the other parties append his signature on the contract. Additionally, undue influence is a situation whereby one party practices irrational pressure to make the other party signs the contract. This happens under circumstances where one party takes advantage of the other party in one way or the other. Moreover, unfair surprise takes place when the party who developed the contract inserts a term in the agreement without the awareness and anticipation of the other party (Marrow & Penn, 2013). Furthermore, limiting warranty is a situation in which one party tries to minimize their liability for damages that may be as a result of his actions. Lastly, unequal bargaining power happens where one party has an unfair advantage over the other (Landrum, 2014). It occurs when the dominant party obviously knows that the other party lacks the knowledge of what the contract entails.
A good example of these characteristics is when a business broker requires a customer to sign an agreement, but within the accord, he inserts a difficult term to understand. The broker writessuch terms using tiny fonts and placed the phrase in a manner that will mislead the customer to sign in the unwarranted term.
The legislation that supports the principle that a contract may be so unfair that it is unenforceable is section 2-302 of the Uniform Commercial Code. Under this Act, if the jury finds that any section of the contract could have been unconscionable at its time of formation, the court may refuse to put into effect the agreement (Landrum, 2014). Additionally, the court may also implement the remainder part with no unconscionable section, or it may stop the application of any section that is unconscionable so that to avoid an unconscionable outcome.
Moreover, when it appears to the court that any of the sections of the contract or if the contract is unconscionable the parties shall be awarded a sensible chance to present evidence as to its business situation, reason and effect to help the jury in deciding the case. The doctrine of unconscionability got formed when it was realized that some contracts would be injurious to one party, despite the available limiting public policies, that the court should be able to practice some manner of discretion (Landrum, S 2014). The judge, in such cases, is permitted to interpret the situation and to introduce her own understanding of what is to be treated as unconscionable or conscionable within her jurisdiction under the court of law.
Courts concentrate on the size and the setting of the business transaction to see whether the deceptive or authoritarian tactics were applied. It also examines if there was the use of fine print in the contract, for example, if the contents of the contract were readable to all parties. Additionally, the court also scrutinizes to know the familiarity and education of the party that claims for unconscionability (Landrum, 2014). Further, examines the situation to know whether there was a disparity in the bargaining power. However, for the court to decide on the case, it first analyzes whether there were actual conditions of the contract that unreasonably favors the party to whom unconscionability is recommended.
Being that the courts have been reluctant in addressing the issues concerning the unfair or unequal business between the bank and the consumer has really favored the banks and other larger institutions. In most cases courts have ruled cases in favor of the bank because of the contract term and conditions. Where the courts have looked entirely at the written document to determine the rights of each party, the creditor, which is the bank, prevails. In many cases contract laws have failed to provide debtors with enough remedies against the tortuous conduct of creditors (Winter, 2008). However, the real importance of debtors win lies in the recognition of some courts, for example, the Australian Part 2B of the Victorian Fair Trade Act 1999 that has tried to hold the banking industry to high values of good faith and conduct.
In 2003 Australian government introduced a new Section 2B of Victorian Fair Trade Act 1999 and made it a law. This provision of Part 2B of nullifies any term in a customer contract that is not fair. In banks, if a contract condition or term that imposes a cheque is unfair according to Part 2B of the Fair Trading Act, it will be nullified, which is fairly different from whether it is unenforceable or not as a fine under the law (Winter, 2008). Section 32W of the Fair Trade Act shows that in a consumer contract a phrase can get observed as unfair if, “contrary to the requirements of good faith and in all the circumstances, it causes a significant imbalance in the parties’ rights and obligations emerging under the contract to the detriment of the consumer” (Consumer Action, 2013)
Moreover, article 32X also presents directions as to whether a condition or a term may get considered unfair. Therefore, it can be said that Part 2B renders dishonor charges unenforceable by financing institutions against customers. Banking sectors are still entitled to recover defaulter’s cost, but they are not entitled to use penalty fees when recovering the cost they have incurred due to customers who have defaulted. Under Part 2B of the Victoria Fair Trading Act, penalty fees might be annulled as unfair (Cornell, 2016).  Because banks are not disclosing the accurate cost of the customer defaults, it will remain difficult for both the regulatory authorities and customers to conclusively or accurately make an assessment of whether dishonor fees are penalties or liquidated damages. However, given the complexities that an individual customer may face, especial the low-income consumers, in trying to stop penalty fees charged on their accounts by banks, it is, therefore, vital that the regulatory authority take charge. The regulatory authorities should imperatively take steps in safeguarding the customers and stop the financing institutions from stressing their customers by charging lawfully unenforceable fines.
From the readings I have had, I found the case between Centerre Bank of Kansas City v. Distributors, Inc. to be an interesting one with regard to unfair agreements and the attitude of the courts when making a decision on the enforceability of a contract. The debtors bought a business after they had been promised by the bank that it would continue with the company’s line of credit. The debtors were told by the bank’s credit officer that the bank will only continue with the credit line if they will personally guarantee the loan. However, the loan officer failed to disclose to them that the bank considered the loan at a risk, and was, therefore, arranging to demand full payment of all the money that previously had been disbursed. Depending on the assurance from the loan officer, debtors bought the business and submitted their personal guarantees to the bank. After three days, the bank continued with its arrangement of demanding full payment of the credit. The debtors surrendered their business assets to the bank because of failing to find another financing. After the bank liquidated the business assets, they realized was less and decided to sue debtors in which they collected further $400,000 on the guarantees that debtors provided (Rich, 2004).
The debtors decided to countersue the bank by challenging that the bank fraudulently made a misrepresentation. The also claimed that the bank breached the agreement of good faith and fair dealing. After jury ruling in favor of the debtors, the bank forwarded an appeal. The court of appeal held that the written contract was an integrated agreement. The court found that the written contract gave the bank privileges to demand payment at any time and that the bank auction was acceptable (Rich, 2004). The court also noted that the relationship between the debtors and the bank was based on borrowing and lending and that debtors were not owed a fiduciary obligation to the bank. Additionally, the failure of the bank to disclose its plans concerning the loan did not make it fraudulent. Consequently, the court stated that the conduct of the bank was fair and in good faith.
The role of the consumer advocate groups regarding unfair agreement are: (1) to support the vulnerable Victorian customers who are facing financial difficulty. (2) Promoting the financial counseling sector by using its casework, law reform, and advocacy, to take up and uphold best practice. (3) working with the government, utilities, debt collection, banks and other stakeholders to improve approaches to financial problems for defenseless customers (Consumer Action. 2013).
My research showed that there are other similar groups to Financial and Consumer Rights Council (FCRC) – Victoria. Some of such groups may include:

Australia Service of social Service (ACOSS), which is known to be speaking on behalf of the low-income and underprivileged customers in matters regarding economic and social principles.
Consumer Credit Legal service Western Australia (CCLSWA), that offers advice and representation to consumers in Western Australia.
Consumers’ Federal of Australia. This group’s role is to forward the view its member organizations to industry and government and are supporters of consumers.
Financial Rights Legal Centre (FRLC) – New South Wales, which is an organization offering advice for consumers in financial stress.
Financial and Consumer Rights Council (FCRC) – Victoria, which is a non-profit organization that lobbies for policy development through discussion with caseworkers performing financial counseling services, among others.

On the other hand, one of the issues in Australia that demonstrated the characteristics of unconscionable by a vendor who supplied vacuum cleaners to various ladies who were over 80 years of age. The case was ACCC v Lux Distributors Pty Ltd in 2013 (Jade.io. 2013). Australia Competition and Consumer Commission won the case against Lux Distributors.
Consumer Action.(2013). Australian Consumer Organisations – Consumer Action. [online] Available at: https://consumeraction.org.au/help-for-consumers/who-else-can-help/australian-consumer-organisations/
Cornell, N 2016, ‘A Complainant-Oriented Approach to UnconscionabilityAnd Contract Law’, University Of Pennsylvania Law Review, 164, 5, pp. 1131-1175,
Jade.io. (2013).BarNet Jade – Find recent Australian legal decisions, judgments, case summaries for legal professionals (Judgments And Decisions Enhanced). [online] Available at: https://jade.io/article/300107 [Accessed 23 May 2017].
Landrum, S 2014, ‘Much ado about nothing?: What the Numbers Tell us about how State Courts Apply the Unconscionability Doctrine to Arbitration Agreements’, Marquette Law Review, 97, 3, pp. 751-812, Academic Search Premier, EBSCOhost, viewed 23 May 2017.
Marrow, P, & Penn, C 2013, ‘The “Circle Of Assent” Doctrine and the Mandatory Pre-Dispute Arbitration Clause: When The Unconscionable Contract Analysis Just Won’t Do’, Dispute Resolution Journal, 68, 3, pp. 1-28,
Mccullough, C 2016, ‘UnconscionabilityAs A Coherent Legal Concept’, University Of Pennsylvania Law Review, 164, 3, pp. 779-825, Academic Search Premier, EBSCOhost, viewed 23 May 2017.
Rich, N. (2004). Unfair fees: A report into penalty fees charged by Australian banks.
Winter, CS 2008, ‘The Rap on Clickwrap: How Procedural Unconscionability is Threatening the E-Commerce Marketplace’, Widener Law Journal, 18, 1, pp. 249-292.

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