Can a New York court refuse to enforce this clause as unconscionable?
Rarely, and ordinarily only on a showing of BOTH elements. A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made: an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favourable to the other party. The procedural element requires an examination of the contract formation process and the alleged lack of meaningful choice; the substantive element entails an analysis of the substance of the bargain, to determine whether the terms were unreasonably favourable to the party against whom unconscionability is urged. The doctrine is rooted in equitable principles and is a flexible one, intended to be sensitive to the realities and nuances of the bargaining process, which is why the answer is a judgment and not a formula. There have, however, been exceptional cases where a provision is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone.
The trap
In a commercial transaction, a signer's claim that he did not read or know of the terms did not establish procedural unconscionability (Gillman): commercial setting is one of several formation factors the court lists, alongside deception, high pressure, fine print, experience and disparity in bargaining power. Gillman rejected procedural unconscionability where the signer said he had never read, and did not know of, the security agreement, because the transaction was commercial and the agreement's existence was noted in boldface directly above the signature line: location and size of print matter, but not where the document announces itself, and the fine print was on the REVERSE of the application, which did not save the claim either. The rest of the formation record did the same work: he signed in his own office, where he had time to study the form and to consult a lawyer; the transaction was one his company entered routinely and with which he was necessarily familiar; there was no deception, no inexperience and no high pressure; he gave no explanation for not reading the legend; and under the general rule a signer is conclusively bound by an instrument he did not read. A failure to read in analogous circumstances has been held to amount to gross negligence. The substantive-only route exists but is reserved for the exceptional, outrageous term: in Gillman the terms 'would clearly not fall within this exceptional category', and, considering their commercial context, their purpose and their effect, they were not so overbalanced in favour of the bank as to be substantively unconscionable. Note which way the appeal ran. After a nonjury trial the trial court DID find the agreement unconscionable and awarded compensatory, consequential and punitive damages; the Appellate Division reversed on the law and the facts and dismissed the complaint; and the Court of Appeals affirmed that reversal, with costs. A first-instance finding of unconscionability is not the end of the matter.
8 authorities
The words that state the rule
We address first the basic determination of the trial court on which its grant of relief is premised: that the security agreement was unconscionable when entered into and, therefore, unenforceable (see, UCC 2-302). An unconscionable contract has been defined as one which "is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms. (See 1 Corbin on Contracts, § 128, p. 400.)” (Mandel v Liebman, 303 NY 88, 94 .) The doctrine, which is rooted in equitable principles, is a flexible one and the concept of unconscionability is "intended to be sensitive to the realities and nuances of the bargaining process” (Matter of State of New York v Avco Fin. Serv., 50 NY2d 383, 389-390 ). A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made — i.e., "some showing of an 'absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party’ (Williams v Walker-Thomas Furniture Co., 350 F2d 445, 449).” (Matter of State of New York v Avco Fin. Serv., supra, at 389; see also, Jones v Star Credit Corp., 59 Misc 2d 189,192 .)
The words that state the rule
After a nonjury trial, Supreme Court concluded that the security agreement was unconscionable and, therefore, unenforceable. Accordingly, it held that Chase acted illegally in transferring the funds from the checking account to the other account and thereby putting the funds beyond the reach of Jamaica Tobacco. The court awarded compensatory, consequential and punitive damages to the assignee, finding that Chase had acted in bad faith and that it had caused or contributed to Jamaica Tobacco’s subsequent business collapse by failing to notify it of the transfer of the account, dishonoring checks payable to the company’s creditors, and preventing Jamaica Tobacco from using the funds in its business. The Appellate Division reversed on the law and the facts and dismissed the complaint, holding that the security agreement was neither substantively nor procedurally unconscionable.
The words that state the rule
The procedural element of unconscionability requires an examination of the contract formation process and the alleged *11 lack of meaningful choice. The focus is on such matters as the size and commercial setting of the transaction (see, UCC 2-302 [2]), whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power
The words that state the rule
Nor are we persuaded by the assignee’s argument that the security agreement was substantively unconscionable. This question entails an analysis of the substance of the bargain to determine whether the terms were unreasonably favorable to the party against whom unconscionability is urged (see, Matter of State of New York v Avco Fin. Serv., supra, at 389). While determinations of unconscionability are ordinarily based on the court’s conclusion that both the procedural and substantive components are present (see, Matter of State of New York v Avco Fin. Serv., supra, at 389), there have been exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone (see, State of New York v Wolowitz, 96 AD2d 47, 68 , supra; White and Summers, Uniform Commercial Code § 4-7, at 164, 165 [2d ed]). The contract terms in question here would clearly not fall within this exceptional category. Moreover, considering their commercial context, their purpose, and their effect, we conclude, that by any reasonable standard, those terms were not so overbalanced in favor of Chase as to be found substantively unconscionable.
The words that state the rule
Neither does the argument that the terms of the security agreement were inconspicuous because typed in fine print on the reverse side of the application, nor the contention that Frohlich was not alerted to its existence. While the location and the size of print may, in a proper case, be factors bearing on procedural unconscionability, they have no bearing where, as here, the existence of the security agreement was clearly noted in boldface print directly above the signature line (see, Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516, 518, n 2 , supra)
The words that state the rule
Here, the claim of procedural unconscionability is based solely on Frohlich’s testimony that he was unaware of the terms in the security agreement, that the security agreement was never called to his attention, that he never read it, that no one read it to him, and that, indeed, he did not know of its existence. There is no allegation of deception or that Frohlich lacked experience or expertise. Nor is there any suggestion that the application was signed as a result of high-pressured tactics. On the contrary, Frohlich signed the instrument in his own office where he had time to study it and, if necessary, to discuss it with a lawyer. The contract concerned a type of commercial transaction routinely entered into in the course of Jamaica Tobacco’s business and one with which Frohlich was necessarily familiar from his several years of running the business. Frohlich signed the application form immediately below the bold-face legend stating: "The Security Agreement on the reverse hereof is hereby accepted and made applicable to this Application and the Credit.” He states that he did not read the front of the form or the legend but gives no explanation for his failure to do so. Under the general rule, Jamaica Tobacco would be conclusively bound by the security agreement irrespective of Frohlich’s testimony that he did not read it and was unaware of its terms (see, Metzger v Aetna Ins. Co., 227 NY 411, 416 ; 9 Wigmore, Evidence § 2415 [Chadbourn rev 1981]). Indeed, it has been held that the failure of a signer to read an instrument in circumstances analogous to those here amounts to gross negligence (see, Pimpinello v Swift & Co., 253 NY 159, 162-163 ; Wallach Agency v Bank of N. Y., 75 AD2d 878, 879 ).
The words that state the rule
Given the commercial setting of this transaction, Frohlich’s claim that he was unaware of the security agreement provisions — even if the claim were to be fully credited — does not support a determination of procedural unconscionability
The words that state the rule
Accordingly, the order of the Appellate Division should be affirmed, with costs. Chief Judge Wachtler and Judges Simons, Kaye, Alexander and Titone concur; Judge Bellacosa taking no part. Order affirmed, with costs.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.