THESIS UNCONSCIONABILITY IN CONTRACTS: A NEW TEST Submitted by Michael Louis Aaronson Department of Philosophy In partial fulfillment of the requirements For the Degree of Master of Arts Colorado State University Fort Collins, Colorado Summer 2013 Master’s Committee: Advisor: Katie McShane Jane Kneller Ann Gill ABSTRACT UNCONSCIONABILITY IN CONTRACTS: A NEW TEST The goal of this thesis is to answer a number of unresolved, fundamental legal and moral questions about contracts. Answering these important questions will require a broad legal, applied ethical, and normative ethical analysis of historical and contemporary case law, statutory law, and legal literature. The end result will be a unified theory of unconscionability: it will capture the intent of contemporary statutory law, provide a test that consistently yields judgments of unconscionability where it ought to do so, and include plausible, well-developed normative ethical justification for the judgments yielded by the test. In Chapter 1 there will be a brief presentation of the legal historical context. We will have a look at unconscionability in statutory law, case law, and the legal literature of the previous era of unconscionability law and find that there has for a long time been broad, fundamental disagreement about the nature of unconscionability itself, and more recently, equally serious disagreement about how contemporary statutory legal attempts to define unconscionability should be interpreted and applied. In Chapter 2, we will examine and critique two contemporary attempts at legal and moral analysis of extant case and statutory law. In Chapter 3, I will take a stand on the issues discussed throughout the first two chapters, proposing a general theory of unconscionability and a two- pronged test for identifying unconscionability in contracts. The theory will capture the intent of contemporary statutory unconscionability law, explain and solve the difficulties that led to broad inconsistency in the case law we saw in Chapter 2, and lead us to a plausible test. Chapter 4 will present the normative theory that undergirds and unites both prongs of the test proposed in ii Chapter 3. The goal is to show how my theory of unconscionability is explained and justified within moral theory more broadly. iii ACKNOWLEDGMENTS I would like to thank my advisor, Katie McShane, for the many hours she spent providing written feedback and discussing the thesis with me. iv TABLE OF CONTENTS ABSTRACT .................................................................................................................................... ii ACKNOWLEDGMENTS ............................................................................................................. iv Introduction ..................................................................................................................................... 1 Chapter 1: Unconscionability in Statutory Law, Case Law, and Pre-U.C.C. Legal Literature ...... 3 I. Unconscionability in Statutory Law ........................................................................................ 3 II. Unconscionability in the Legal Literature: Corbin ................................................................. 8 III. Unconscionability in Case Law........................................................................................... 12 Chapter 2: Contemporary Legal Analysis of Unconscionability .................................................. 26 I. Unconscionability in the Legal Literature: Wertheimer ........................................................ 26 II. Unconscionability in the Legal Literature: Quraishi ............................................................ 37 Chapter 3: The Nature of Unconscionability and a New Test ...................................................... 44 I. The Nature of Unconscionability and a New Test ................................................................. 44 II. Applying the Test ................................................................................................................. 54 III. Some Further Objections and Replies ................................................................................. 59 Chapter 4: The Normative Basis ................................................................................................... 62 I. Consequentialism and Prong 2............................................................................................... 62 II. Price Gouging and Total Consequentialism ......................................................................... 63 III. Price Gouging, Maximizing Consequentialism, and Satisficing Consequentialism ........... 65 IV. Pre-contractual Baseline Measurement, ‘Threat Advantage’, and a Dilemma ................... 68 V. Wants and Needs: the Rich/Poor Case Resolved ................................................................. 73 VI. Wants and Fair Market Value ............................................................................................. 80 VII. Further Morally Relevant Factors and Direct vs. Indirect Consequentialism ................... 81 VIII. Further Applications of the Acceptance Rule Consequentialist Approach to Prong 2 .... 87 IX. Prong 1 and Paternalism ..................................................................................................... 90 X. Prong 1 and Anti-paternalism............................................................................................... 93 XI. Prong 1, Consequentialism, and Reasonable Expectations ............................................... 101 XII. Two Further Problems for Prong 1 .................................................................................. 104 XIII. Finishing Off the Objections .......................................................................................... 107 v XIV. Final Case Analysis ........................................................................................................ 110 Conclusion .................................................................................................................................. 117 vi Introduction The goal of this thesis is to answer a number of unresolved, fundamental legal and moral questions about contracts: what is wrong, legally and/or morally, with contracts that are ‘unconscionable’ under the law? Can a contract be so one-sided as to be simply morally wrong to enforce? Or is it, rather, that extreme one-sidedness is sufficient evidence of such a great disparity in bargaining power between two parties that we can say there was fraud or duress? If it is not one-sidedness that is the problem, is it something else, or a combination of other things? How in the world can we justify, legally and morally, interfering with people’s free will and the free market? Answering these (and other) important questions will require a broad legal, applied ethical, and normative ethical analysis of historical and contemporary case law, statutory law, and legal literature. The end result will be a unified theory of unconscionability: it will capture the intent of contemporary statutory law, provide a test that consistently yields judgments of unconscionability where it ought to do so, and include plausible, well-developed normative ethical justification for the judgments yielded by the test. In Chapter 1 there will be a brief presentation of the legal historical context. We will have a look at unconscionability in statutory law, case law, and the legal literature of the previous era of unconscionability law. We will find that there has for a long time been broad, fundamental disagreement about the nature of unconscionability itself, and more recently, equally serious disagreement about how contemporary statutory legal attempts to define unconscionability should be interpreted and applied. In Chapter 2, we will examine and critique two contemporary attempts at legal and moral analysis of extant case and statutory law. Both these analyses consider many of the same well- 1 known, oft-cited cases examined in Chapter 1 of this work, and both come up with different answers about what unconscionability is and what we ought to do about it while remaining consistent. We will find that both analyses have serious shortcomings. In Chapter 3, I will take a stand on the issues discussed throughout the first two chapters, proposing a general theory of unconscionability and a two-pronged test for identifying unconscionability in contracts. The theory will capture the intent of contemporary statutory unconscionability law, explain and solve the difficulties that led to broad inconsistency in the case law we saw in Chapter 2, and lead us to a plausible test. After proposing the test, before the end of the chapter, I will briefly present and answer some practical objections. Chapter 4 will present the normative theory that undergirds and unites both prongs of the test proposed in Chapter 3. The goal is to show how my theory of unconscionability is explained and justified within moral theory more broadly. This will include ruling out some normative approaches, re-examining the major problems raised by the legal theories of others in Chapter 2 and by my critique of those theories, presenting and addressing some objections, and ultimately, showing how my normative theory justifies the answers my test gives about the landmark cases. 2 Chapter 1: Unconscionability in Statutory Law, Case Law, and Pre-U.C.C. Legal Literature The purpose of this chapter is to explore the recent history and