An “unconscionable” contract is one that the courts may nullify under the theory that no one in their right mind would have agreed to the contract if they actually understood what was in it.
The classic case here is Williams v. Walker-Thomas Furniture Co. This was a 1965 D.C. Circuit case that concerned a furniture store’s credit policies. The store would allow buyers to take home furniture, and pay for it over time, but on the condition that each individual purchase was collateralized by all the purchases. So, if you bought a couch two years ago, and paid it off, and bought a dining room set this year, and then became delinquent in paying off the dining room set, the furniture company could repossess the dining room set as well as the couch. The idea, presumably, is that the dining room set diminished in value as soon as it left the showroom, and the furniture store wanted to attach the credit to additional collateral in order to recoup the full value of the loan.
Judge J. Skelly Wright held that the contract was unconscionable because of a disparity in bargaining power:
The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.
I agree that the circumstances of the case illustrate a disturbing inequality, but I find it to be of a different nature, one perhaps too close to the judge’s nose for him to see it clearly. There is, indeed, an inequality in expertise, specifically expertise in reading and understanding contracts. But why is this much-desired expertise not readily and cheaply available to all? Why are we trying to fix the problem after-the-fact rather than trying to prevent the problem in the first place?
The answer is clear. We have longstanding collusion between the coercive regulations of the state and the guild-like bar associations, which act to create barriers to entry and reduce the number of people permitted to offer legal services for hire. This is aimed at propping up fees for lawyers. We’re all familiar with this racket.
If I could snap my fingers and reshape things in an instant, I’d allow anyone to offer legal services, without any limitation by the state or by third parties. Let these service providers compete based on reputation and price. This would open things up, especially on the low end. In particular, a person offering expertise to review contracts would not be required to also have course work in unrelated areas such as constitutional law, probate law, criminal procedure, etc. Such expertise in basic consumer contracts might be as available and affordable as notaries are today. You might expect most banks to have one, that the library might have one, that they were widely available online, that the AARP offered the service free to its members, etc. There might even be an “app” for that.
Break the bottlenecking in legal expertise, and the inequality in power vanishes.