Today, we will examine a case in which a court invalidated a contract primarily because the price of the product was too high. The Jones versus Star Credit Corporation case, was decided by the Supreme Court of New York in 1969. The judge who wrote this decision, Solomon Watchler, went on to have a storied judicial career, and served as the Chief Judge of the New York Court of Appeals. He was also a key figure in making spousal rape a criminal offense. Sadly, Watchler, also achieved notoriety for serving a criminal sentence on charges of extortion and blackmail. But, Judge Watchler was mentally ill at the time of these events and has crafted an admirable second career as a law professor. The plaintiffs, plural. So, tell me when you want me to start. Okay, we're ready. The plaintiffs, in the Jones case were welfare recipients who agreed to pay defendant Star Credit Corporation $1,234.80 for a freezer, after tax and credit charges following an in-home visit from a sales person. Plaintiffs paid $619.88 of the amount that was owed, and then stopped and they're now brought suit, and they're trying to avoid having to pay the rest of the money owed under the contract. The trial judge found the freezer to be worth at most $300 retail. The $1,234.80 consisted of the freezer price as well as credit charges and tax. The credit charges alone, that's the interest on the credit, exceeded by more than a $100 the retail value of the freezer. The main issue is whether a contract for the sale of a $300 freezer, for over $1,200, should be unconscionable as a matter of law, within the meaning of the UCC Section 2-302. Before we get to the holding of the case, let's do a quick review of unconscionability. When we studied Williams versus Walker Thomas Furniture Company, we noted that unconscionability has two central elements; procedural and substantive unconscionability. Procedural unconscionability concerns among other things, inequality in bargaining power. Inequality in bargaining power can arise in cases where one party has a much lower education than the other. Substantive unconscionability on the other hand, concerns whether the objective terms of the contract, strongly favor one party over the other. In other words, does the contract allocate risk and costs in a way that is so one-sided as to be substantively unfair. When a contract is both procedurally and substantively unconscionable, UCC Section 2-302 allows the court to find a contract unconscionable as a matter of law. So, here's a video quiz, is the court's finding in this case predominately based on procedural or substantive unconscionability? The answer is, substantive unconscionability. In this case, the court held that selling a $300 freezer for over $1,200 was unconscionable as a matter of law. The finding of unconscionability relied primarily on substantive unconscionability. The Court argues that it's possible to find fraud in the terms of the bargain itself. That is to derive or infer procedural unconscionability from the existence of substantive unconscionability. The opinion does not supply other facts about whether procedural unconscionability existed. Well, except we do know that the plaintiffs were on welfare and that the sale was probably made at home. But we don't know anything about the education, language, skills, health or relative cognitive capacities of the parties. Thus, this case is unusual because it's found unconscionability using primarily the price term and inferred procedural unconscionability from the substantive unconscionability of that high price. When is a price discrepancy too large, or so large that it necessitates a finding of unconscionability? Well, the court notes that it does not intend to reduce the import of 2-302 solely to a mathematical ratio formula, that would be the ratio that 1,200 over 300 is too great a ratio. So, what do we rely on instead? The decision gives us little concrete guidance, but includes the oft-quoted phrase that a bargain "Such as no man in his senses and not under delusion would've make," should be invalidated. Relying on the price term to find unconscionability under 2-302, is controversial. While the court is adamant that there's no reason to doubt that this section is intended to encompass the price term, most courts, up to the time of this opinion, had been reluctant to find price term unconscionability. For one thing, the term is always disclosed. It's a very salient item to buyers. So, there really isn't unfair surprise usually with regard to a price term. Additionally, the buyer has a choice of course on whether to take this high price or a shop elsewhere in many circumstances. Let's turn next to the financial resources of the buyer. We know that the buyer in this case was on welfare and the decision does mention that "The very limited financial resources of the purchaser known to the seller at the time of the sale, is entitled to weight." Critics often argue that whether the buyer is impoverished should not be a factor though in determining unconscionability. Here are some reasons why. First, this factor may lead manufacturers to refuse to deal with poor people. It's important to remember that those who are poor may have to pay a higher interest or higher prices because they're deemed to have a higher risk of default. If courts are overly eager to deem contracts with the poor unconscionable, business might refuse business with poor people at all, leaving the poor with fewer contractual options. Second, courts may be using poverty as a proxy for ignorance, which is viewed by some as classist or at least excessively paternalistic. These critics argue that many impoverished people are perfectly capable of making their own choices. Do you think accounting for buyers poverty is a sign of paternalism? According to James Gordley, "The state is paternalistic when it circumscribes or influences the choice of a citizen would otherwise make, because it believes the citizen's choice is wrong. Whether through a want of prudence or some other virtue." To make the discussion concrete by making findings of unconscionability in this case dependent on a person's poverty, the government may make it harder for those who are poor to purchase a big ticket item such as a freezer or a high-end flat-screen TV. Finally, let's take a look at the remedy in this case. Do you remember what that remedy was? Well, as a remedy, the court reforms the contract to require plaintiffs to only pay what they've already paid, which was $619.88. Recall that under the UCC section 2-302, there are three options when a court finds a contract unconscionable. It may, number one, refuse to enforce the contract and on or number two, it may enforce the remainder of the contract without the unconscionable clause, or three, it can limit the application of any unconscionable terms as to avoid an unconscionable result. In this case, the court appears to have opted for the third option. It did not invalidate the contract entirely, but instead chose to find that the $620 already paid was enough. No further money will need to exchange hands after this decision. This decision essentially implies that the true or fair value of the freezer unit was exactly what the plaintiff already paid. But what if the plaintiff had paid less or had paid more? The court here, chose a fairly arbitrary number that had the advantage of transactional simplicity. The plaintiffs get what they wanted, while the defendant doesn't have to pay any restitution. This may not be the best outcome. The court could have used other measures like calculating what it felt was the just price based on the market price of freezer units adjusted for standard interest rates. Today, we have examined the case where a court found a contract to be unconscionable, primarily based on the price of the goods sold. Jones versus Star Credit Corporation provides a rare caveat to the rule that courts usually don't inquire into the adequacy of the consideration. If there is a large objective disparity in the value of what's being exchanged, the courts can infer procedural unconscionability and find the contract to be both procedurally and substantively unconscionable.
