George Mason School of Law

1. George Mason School of Law Contracts I Unconscionability F.H. Buckley fbuckley@gmu.edu 1

2. Next day • Offers and Invitations to Treat • Acceptance • Counter-offers

3. Forms of Unconsionability • UCC § 2-302. Unconscionable Contract or Clause • (1) 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.

4. Forms of Unconsionability • Substantive Unconscionability • The “just price” doctrine • Procedural Unconscionability • “bargaining naughtiness”

5. Substantive Unconscionability • Thornborrow v. Whitacre, 92 Eng.Rep. 270 (1705): • W. borrows £5 and in return promises to pay two grains of rye-corn in the first week, four in the second, eight in the third, and so on for a year. The court refused to enforce the contract when it appeared that there was not enough grain in the whole world to satisfy this.

6. Substantive Unconscionability in Walker-Thomas Furniture? Consumer lending and usury 6

7. Substantive Unconscionability • Why did the church prohibit usury?

8. Substantive Unconscionability • Why did the church prohibit usury? • The Biblicalprohibition against taking interest on a loan • Deut. 23:20 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee …. • Canon 27, Council of Nicea

9. Substantive Unconscionability Why did the church prohibit usury? The Biblical prohibition? Rent-seeking? Tolleson et al., 5 J.L.E.O. 307 (1989)

10. Substantive Unconscionability Why did the church prohibit usury? The Biblical prohibition? Rent-seeking Moral Hazard?: Eric Posner

11. Moral Hazard A range of outcomes associated with an investment opportunity

12. Moral Hazard How is one’s economic calculus affected if costs are curtailed at 0 on the left side of the curve?

13. Moral Hazard In that case, it’s all upside

14. Moral Hazard I wouldn’t do this without insurance!

15. Moral Hazard Do traffic signals cause accidents?

16. How to reduce speed levels…

17. Substantive Unconscionability Why would a consumer agree to high interest rates?

18. Substantive Unconscionability Why would a consumer agree to high interest rates? Ignorance as to the terms?

19. Substantive Unconscionability Why would a consumer agree to high interest rates? Ignorance as to the terms? Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them?

20. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? Assume that the low risk borrower can hold his hand in a fire for a longer period of time…

21. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? The willingness to do so might provide a separating equilibrium

22. Substantive Unconscionability Signalling: Separating and pooling equilibria:

23. Secured Lending as a separating equilibrium Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? Assume that default is costly for both borrowers. However, the low risk borrower has a lower probability of default and a lower cost of default

24. Substantive Unconscionability Separating and pooling equilibria: Separating equilibrium: Benefit > CostHigh Quality Borrower Benefit < CostLow Quality Borrower

25. Substantive Unconscionability Separating and pooling equilibria: Separating equilibrium: Benefit > CostHigh Quality Borrower Benefit < CostLow Quality Borrower Pooling equilibrium: Benefit > CostHigh Quality Borrower Benefit > CostLow Quality Borrower

26. Cheap Talk as a Pooling Equilibrium Hobbes: He which performeth first doth but betray himself to his enemy.

27. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? A separating equilibrium if the low risk borrower is ready to accept a penalty on default?

28. Now Procedural Unconscionability

29. Now Procedural Unconscionability Is unconscionability something different from the fraudlets we have seen? Is it simply all or many of them, in the ensemble? Or a weaker threshold for the Π? Or something else entirely?

30. Now Procedural Unconscionability Just what was wrong in Walker-Thomas?

31. Now Procedural Unconscionability Just what was wrong in Walker-Thomas? Capacity Poverty Nature of goods Welfare grants Kids

32. Seabrook: 502Apartment to be ready three months later Unfinished Apartment Building 32

33. Seabrook • Let’s say your counsel for Commuter Housing. How would you draft clauses 33 and 19 differently? 33

34. Seabrook Can you articulate the legal principle behind the case? 34 34

35. Here’s one… 35

36. Seabrook • Did the lessee have “no choice but to sign an unconscionable lease agreement” • “does not have the option of shopping around” 36

37. Seabrook • Did the lessee have “no choice but to sign an unconscionable lease agreement” • Were there other rental properties in NYC? 37

38. Seabrook • Did the lessee have “no choice but to sign an unconscionable lease agreement” • Were there other rental properties in NYC? • If they were hard to get, might rent control have had something to do with this? 38

39. Seabrook • Just what was unconscionable? • Did the lessee know that the building was not completed when he signed the lease? 39

40. Seabrook • Just what was unconscionable? • Do you think the lessee might have considered that there was a possibility that the building would not be completed three months later? 40

41. Seabrook • Just what was unconscionable? • Do you think the lessee might have considered that there was a possibility that the building would not be completed three months later? • What do you think he would have expected to happen in that case? 41

42. Seabrook • Just what was unconscionable? • Do you think the lessee might have considered that there was a possibility that the building would not be completed three months later? • What do you think he would have expected to happen in that case? • What do you think was the Δ’s argument? 42

43. Seabrook • If you’ve rented an apartment, did you sign a lease agreement? • Can you articulate the principle that such agreements are unenforceable “in our enlightened society”? • What do you think the consequences might be if lease contracts are presumptively unenforceable? 43

44. Seabrook • If you’re advising a lessor, do you take any drafting tips from this case? 44

45. Seabrook • If you’re advising a lessor, do you take any drafting tips from this case? • If you thought that the lessor should have known just what problem would arise, is that the hindsight bias at work? 45

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