How does an Alabama court decide whether a clause is unconscionable?
By four factors, applied to a party the court first finds unsophisticated or uneducated. In Layne v. Garner the Supreme Court of Alabama said that although Alabama law lacks an explicit standard for determining whether a contract or contractual provision is unconscionable, case law reveals four important factors: in addition to finding that one party was unsophisticated and/or uneducated, a court should ask (1) whether there was an absence of meaningful choice on one party's part, (2) whether the contractual terms are unreasonably favorable to one party, (3) whether there was unequal bargaining power among the parties, and (4) whether there were oppressive, one-sided, or patently unfair terms in the contract. In Blue Cross Blue Shield of Alabama v. Rigas the Court added that it has also recognized a distinction between substantive unconscionability and procedural unconscionability and categorized those factors as either substantive or procedural: substantive unconscionability relates to the contract terms themselves and whether they are unreasonably favorable to the more powerful party, while procedural unconscionability deals with deficiencies in the formation process, analysed in terms of whether the imposed-upon party had meaningful choice about whether and how to enter into the transaction. In that case the Court held that to avoid an ARBITRATION provision on the ground of unconscionability the objecting party must show BOTH procedural and substantive unconscionability, and that unconscionability is an affirmative defence whose burden falls on the party asserting it; Rigas concerned an arbitration provision in a health plan, and whether the both-required rule governs every kind of clause was not decided there. For a sale of goods the statute supplies the remedy: if the court as a matter of law finds the contract or any clause unconscionable at the time it was made, it may refuse to enforce the contract, enforce the remainder without the clause, or so limit the application of the clause as to avoid an unconscionable result, and the parties must be afforded a reasonable opportunity to present evidence as to the clause's commercial setting, purpose and effect (Ala. Code § 7-2-302).
The trap
The threshold is the part that defeats most commercial challenges: Layne states the four factors as questions to ask "in addition to finding that one party was unsophisticated and/or uneducated", and in Layne the Court rejected the unconscionability challenge on a record showing the challenger was a sophisticated businessman, while also finding against him on meaningful choice, bargaining power and one-sidedness. Read the passage for what it is: the Court decided the appeal on the clause's unambiguous language and held the contribution suit premature, and reached unconscionability only as an alternative argument the challenger had not made at trial. The factors are also assessed as of the time the contract was made (§ 7-2-302(1) says "unconscionable at the time it was made"), so a clause that becomes harsh in operation is not thereby unconscionable. And the burden is the challenger's: unconscionability is an affirmative defence and the party asserting it bears the burden of proving it (Blue Cross Blue Shield of Alabama v. Rigas, 923 So.2d 1077 (Ala. 2005), citing Conseco Finance Corp. v. Murphy, 841 So.2d 1241 (Ala. 2002)). For an arbitration provision the challenger must show BOTH procedural and substantive unconscionability, so failing either half ends the challenge.
7 authorities
The words that state the rule
Further, Garner argues that Section 5 is unconscionable, and, therefore, that it *Page 408 should be rescinded or that this Court should refuse to enforce it. Initially, we note that Garner failed to make this argument at the trial level; nevertheless, we will address it. While it is true that a court may rescind a contract, or a portion of a contract, for unconscionability, "[r]escission of a contract for unconscionability is an extraordinary remedy usually reserved for the protection of the unsophisticated and uneducated." Marshall v. Mercury Finance Co. , 550 So.2d 1026 , 1028 (Ala.Civ.App. 1989), quoting E W Building Material Co. v. American Savings Loan Ass'n , 648 F. Supp. 289 , 291 (M.D.Ala. 1986); and see Wilson v. World Omni Leasing, Inc. , 540 So.2d 713 (Ala. 1989). An unconscionable contract or contractual provision is defined as a contract or provision "such as no man in his sense and not under delusion would make on the one hand, and as no honest and fair man would accept on the other." Lloyd v. Service Corp. of Alabama , 453 So.2d 735 , 739 (Ala. 1984), quoting Hume v. United States , 132 U.S. 406 , 410 , 10 S.Ct. 134 , 136 , 33 L.Ed. 393 (1889). Although Alabama law lacks an explicit standard for determining whether a contract or contractual provision is unconscionable, case law reveals that four factors are important in making this determination. In addition to finding that one party was unsophisticated and/or uneducated, a court should ask (1) whether there was an absence of meaningful choice on one party's part, (2) whether the contractual terms are unreasonably favorable to one party, (3) whether there was unequal bargaining power among the parties, and (4) whether there were oppressive, one-sided, or patently unfair terms in the contract.
The words that state the rule
This Court has also recognized a distinction between "substantive unconscionability" and "procedural unconscionability" and categorized the above factors as either substantive or procedural. Substantive unconscionability "`relates to the substantive contract terms themselves and whether those terms are unreasonably favorable to the more powerful party, such as terms that impair the integrity of the bargaining process or otherwise contravene the public interest or public policy; terms (usually of an adhesion or boilerplate nature) that attempt to alter in an impermissible manner fundamental duties *Page 1087 otherwise imposed by the law, fine-print terms or provisions that seek to negate the reasonable expectations of the non-drafting party, or unreasonably and unexpectedly harsh terms having to do with price or other central aspects of the transaction.'" Ex parte Thicklin , 824 So.2d 723 , 731 (Ala. 2002) (emphasis omitted) (quoting Ex parte Foster , 758 So.2d 516 , 520 n. 4 (Ala. 1999), quoting in turn 8 Richard A. Lord, Williston on Contracts § 18:10 (4th ed. 1998)). See also Leeman v. Cook's Pest Control, Inc. , 902 So.2d 641 (Ala. 2004). Procedural unconscionability, on the other hand, "deals with `procedural deficiencies in the contract formation process, such as deception or a refusal to bargain over contract terms, today often analyzed in terms of whether the imposed-upon party had meaningful choice about whether and how to enter into the transaction.'" Thicklin , 824 So.2d at 731 (quoting Foster , 758 So.2d at 520 n. 4, quoting in turn 8 Williston on Contracts § 18:10). To avoid an arbitration provision on the ground of unconscionability, the party objecting to arbitration must show both procedural and substantive unconscionability.
The words that state the rule
Instead, unconscionability is an affirmative defense, and the party asserting the defense bears the burden of proving unconscionability. Conseco Fin. v. Murphy , 841 So.2d 1241 , 1245 (Ala. 2002).
The words that state the rule
We conclude that Rigas did not meet her burden of showing that the arbitration provision included in the Plan is unenforceable or inapplicable. The arbitration provision is neither substantively nor procedurally unconscionable; arbitration of Rigas's claims is not precluded by the language of the arbitration provision indicating that the arbitration will be conducted under certain rules of the AAA; and Blue Cross did not waive its right to arbitration. Thus, the trial court erred in denying Blue Cross's motion to compel arbitration. We therefore reverse the trial court's order denying Blue Cross's motion to compel arbitration and remand this case for the trial court to enter an order granting Blue Cross's motion to compel arbitration. REVERSED AND REMANDED WITH DIRECTIONS.
- statuteAla. Code § 7-2-302enactment date not established
The words that state the rule
(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. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.
The words that state the rule
The record indicates that Garner was a sophisticated businessman with experience in the cable television franchise area and with knowledge of business finance and management. Further, the record does not indicate that when he executed the guaranty agreement Garner lacked meaningful choice or that he had unequal bargaining power. Nor can we say that Section 5 is unreasonably favorable to one party or that it is one-sided, oppressive, or patently unfair. In short, Section 5 is not unconscionable.
The words that state the rule
Based on the foregoing, the judgment entered in favor of Garner against the Laynes is reversed, and the cause is remanded to the trial court with instructions to dismiss the claim for contribution. Again, we emphasize that Garner is free to sue the Laynes under the express terms of the guaranty agreement when the debt has been fully paid and discharged. The judgments entered in favor of Garner against the Laynes on their counterclaim and the judgment entered in favor of the Moseses against the Laynes on their third-party complaint are affirmed. AFFIRMED IN PART; REVERSED IN PART; AND REMANDED WITH INSTRUCTIONS.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.