A contract is unconscionable if it is “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.” In re Estate of Hoffbeck, 415 N.W.2d 447, 449 (Minn. App. 1987), review denied (Minn. Jan. 28, 1988) (quoting Hume v. United States, 132 U.S. 406, 415, 10 S. Ct. 134, 137, 33 L. Ed. 393 (1889)).
Do you any problems with that formulation? The phrase makes obvious sense and the concept is easily applied and uncontroversial in extreme cases — e.g., a seller trying to enforce a sales agreement on, perhaps, a vulnerable, uneducated, perhaps illiterate consumer, a sales agreement that no reasonable person would ever have agreed to.
“It is generally held that the unconscionability test involves the question of whether the provision amounts to a taking of an unfair advantage by one party over the other.”
The problem with this alternative formula is the notion of “unfair” advantage, of course.
What happens if Smart Business cuts a highly advantageous deal with Stupid Counterparty Business? When is that “unfair” vs. the critical essence of how markets are supposed to work? Smart businesses thrive and stupid ones fail and we want it to be that way, right?
In our experience, a general rule of thumb is that unconscionability in Minnesota might help a person get out of a highly disadvantageous “unfair” contract in extreme cases. However, if our clients are businesses, courts almost seem, by definition, to consider them to be “sophisticated,” which is to say they are held to contracts; they are held responsible if they are stupid. (“Minnesota law…[has] recognized that a finding of unconscionability is an unusual event, especially in the context of a commercial non-consumer contract.” Valley Tree Serv. v. RDO Equip. Co., File No. C9-05-7657, 2007 Minn. Dist. LEXIS 73, *17 (May 25, 2007).)
As such, if businesses enter into bad deals, even horrible deals, they almost always have to live with them. (See Klinge v Gem Shopping Network. In Klinge, a women bought gems from a TV gem-selling operation thinking that she’d going into business re-selling them. Her lawsuit against GSN failed.)
But then there’s Prairie River Home Care Inc. (“PRHC”) v. Procura, a case we’ve posted about previously. PRHC bought a complex software system for its business from Procura that allegedly failed terribly. The contract included limitations on remedies and damages.
Recently, U.S. District Court Chief Judge John R. Tunheim (D. Minn.) found elements of the contract between Plaintiff PRHC and Procura “procedurally and substantively unconscionable” (see here at pp. 20-23 ).
We’re quite confident that other judges might not have as broad a view of the doctrine of unconscionability as Judge Tunheim reflected in this decision. In our view, many judges would have let Prairie Home Care live with the contract terms that it agreed to.
We won’t take sides other than to suggest that a rule that businesses are per se sophisticated and, thus, unable to find protection from an onerous contract terms based on unconscionability, seems palpably false. Thus, a blanket prohibition of unconscionability in the business-to-business context seems overly broad.
A blanket prohibition of unconscionability in the business-to-business context insulates and protects oppressive and unfair business practices from judicial intervention and, without a doubt, extreme cases of such dealings damage markets rather than optimize them.