Tips for Avoiding Unconscionability in Your San Diego Business Contracts

Here in San Diego and in California, there are a few circumstances in which courts will not enforce a contract or contract provisions. One such circumstance is when the contract is deemed to be “unconscionable.” Here is a quick rundown on the legal doctrine in California and some tips for avoiding unconscionability.

San Diego Corporate Law: Procedural Unconscionability and Substantive Unconscionability

Under California law, unconscionability consists of two parts – procedure and substance.

As the name implies, “procedural unconscionability” examines the procedure by which the contract was agreed upon and entered into. The focus is on the time that the contract was negotiated and the manner of the negotiation. The courts look for two factors to determine unconscionability – oppression and surprise. Oppression is usually found when there is unequal bargaining power between the parties and when there is no real meaningful choice of the weaker party. As one court stated it: “… unequal bargaining power, and lack of negotiation and meaningful choice indicate oppression.” Penilla v. Westmont Corp., 3 Cal.App.5th 205 (Cal. App. 2nd Dist. 2016)

Often, oppression is found because the contract is deemed to be a contract of adhesion, which is generally defined as “… a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Brandon v. Marcus & Millichap Real Estate Invest. Services, Inc., Case No. B276540 (Cal. App. 2nd Dist. 2018) (unpublished).

Surprise, on the other hand, arises when one party — or the contract form — is misleading in some manner. Examples include having onerous provisions in tiny print and/or the back of the preprinted form, which is unlikely to be read by the other party, etc. Between the two, oppression is more important. Often, if oppression is found, surprise need not be shown.

In terms of “substantive unconscionability,” the courts look to the provisions of the contract and ask if the terms are “unreasonably favorable to the more powerful party?” That is, are the results “overly harsh” or “one-sided?”

Procedure and substance are combined on a sliding scale; the more substantively oppressive the contract terms, the less evidence of procedural unconscionability is required to come to the conclusion that the contract is unenforceable. See A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473 (Cal. App. 4th Dist. 1982).

San Diego Corporate Law: Tips For Avoiding Unconscionability

If your business uses many standardized and pre-printed form contracts, here are some tips for avoiding unconscionable contracts:

• Hire a good San Diego corporate attorney to review your contracts
• Review the contracts on a regular basis, every couple of years (or just before it is time to have more contracts printed)
• Review font size, bolding, etc. — the form contracts themselves can be made less procedurally unconscionable with changes in font size and bolding and various directions indicating that signatories should read the back of the form.
• Add blanks requiring the customer to “initial here” and “initial there”
• For double-sided forms, have a place for initializing on the back of the form stating something like: “I have read this page.”
• Use “plain” language as much as possible avoiding so-called “legalese.”
• Where applicable, consider implementing a program of employee training; employees can be instructed to talk with customers and to verbally highlight various possible “onerous” provisions (such as an arbitration provision or a provision limiting liability).

These and other steps can help reduce the possibility that a California court will hold your form contracts to be unconscionable.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.

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