“Contract Unconscionability: Brewer Opens the Door” by Jay Preston
The language of a contract is the essence of the agreement between parties. Absent an ambiguity in the contract, parties are bound by its express language and generally may not offer evidence of other oral agreements to vary or contradict its terms. Given these fairly strict rules, the negotiation stage when the contract is drafted becomes that much more important. Each party wants the contract to be as favorable as possible with every scenario addressed. The problem is what happens when the contract goes too far. This concept is referred to as unconscionability and gives a judge or jury discretion to invalidate contracts when a party is subject to the absence of a meaningful choice and the terms of the contract are unfairly oppressive.
In the past, rendering a contract unconscionable required the showing of both procedural and substantive unconscionability. Substantive unconscionability refers to the terms of the contract. Terms are unconscionable when they are unreasonably oppressive or one-sided. Procedural unconscionability refers to the formalities of making the contract. In practice, this generally refers to issues of fairness in the formation process such as high pressure sales tactics, unreadable fine print, misrepresentations, and unequal bargaining positions.
The Missouri Supreme Court in a recent decision eliminated this dual requirement. In Brewer v. Missouri Title Loans, the court invalidated an arbitration agreement executed as part of a title loan. The agreement provided that all disputes were to be decided in individual arbitration, referred to as a class action waiver. It also provided that each party would be responsible for its own expenses and judicial action was only available to the title company to aid in repossession of the vehicle. Brewer is actually the rehearing of a previously decided Missouri Supreme Court decision from 2010. The 2010 decision struck down the entire arbitration agreement as unconscionable because of the class arbitration waiver; combined with the alleged unavailability of counsel to take an individual arbitration, the small amount of damages, and small fees for the attorney; all of which could be considered substantive unconscionability. Subsequent to the 2010 decision the U.S. Supreme Court in A.T. & T. v. Concepion held that states could not declare arbitration agreements to be unconscionable on the basis of a class action waiver alone. In light of Concepion the U.S. Supreme Court vacated the 2010 decision and sent the case back to the Missouri Supreme Court.
In Brewer, the Missouri Supreme Court once again invalidated the entire arbitration agreement, but on the basis that the agreement as a whole, not just the class action waiver, was unconscionable. While the court did not delineate which facts it thought related to procedural versus substantive unconscionability, the separation is apparent from the organization of the opinion. In reference to procedural unconscionability the court noted that the arbitration clause was non-negotiable, it was difficult for the average customer to understand, and the title company had the superior bargaining position. As to the substantive terms several provisions were identified as greatly favoring the title company; that each party would bear their own costs placing a higher burden on the customer, Brewer waived her ability to sue in court but the title company did not, and the title company maintained its ability to seek attorney’s fees if victorious in arbitration. These facts coupled with the fact that no customer had ever arbitrated a claim against the title company led the Court to conclude that the arbitration agreement as a whole was unconscionable.
As compared to other decisions the amount of procedural unconscionability found in Brewer is relatively small. In Whitney v. Alltel Communications, Inc., an arbitration agreement printed on the back of a cell phone bill that stated the customer agreed to the provision by mailing in his payment was declared unconscionable. In Woods v. QC Financial Services, Inc., an agreement that compressed a 1,300-word arbitration clause onto one page was likewise invalidated. The class action waiver in Brewer was in bold capital letters and above the signature line was the bolded phrase “contains a binding arbitration provision.” Several other factors were that Brewer did not attempt to negotiate the agreement, Brewer listed twenty other title companies she could have gone to, and Brewer did not even read the agreement before signing. Nevertheless the court found that the arbitration agreement, in the context of contract formation, was unconscionable.
The importance of Brewer lies in the freedom that it gives the lower courts. While some courts may still require a party to show both procedural and substantive unconscionability, the elimination of the dual requirement opens the door for more contracts to be found unconscionable. Situations may arise, as in Brewer, where the court wishes to invalidate a contract but the plaintiff fails to provide sufficient evidence of procedural unconscionability. Under this new paradigm a court could simply state that the contract was unconscionable in reference to issues relating to contract formation, whereas under the old law the court would have been forced to uphold the contract as the plaintiff failed to prove both of the required elements of unconscionability.
How this change plays out in the courts is something that will evolve over the following years. One certainty is that by eliminating the requirement of both procedural and substantive unconscionability, the door is open for judges to find more contracts unconscionable. Careful drafting and contract execution are now that much more important. Contracts should be written in plain language that can be easily understood, important provisions should be bolded or capitalized, and maybe most importantly one should ensure that the other party reads and understands the contract. Everyone wants contracts that they enter into to favor them, but in light of Brewer one must be cautious as to how far the contract goes, or face the possibility that they are left with no contract at all.