By Daniel Edstrom
DTC Systems, Inc.
This appeals court case, FOR PUBLICATION, provides an excellent discussion of unconscionable contract terms. Although this case does not relate to mortgage loans, it does discuss this as a contractual issue.
Turning to the case at hand, we first address petitioners’ argument the mandatory arbitration provisions contained in their franchise agreements were unconscionable and therefore unenforceable. The doctrine of unconscionability is a judicially created doctrine which was codified in 1979 when the Legislature enacted Civil Code section 1670.5. (Armendariz v. Foundation Health Psychcare Services, Inc, supra, 24 Cal.4th at pp. 113-114.) That section provides in relevant part, “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 . . . .” (Civ. Code, § 1670.5, subd. (a).) While the statute does not attempt to precisely define “unconscionable,” there is a large body of case law recognizing the term has “both a procedural and a substantive element, both of which must be present to render a contract unenforceable. [Citation.] The procedural element focuses on the unequal bargaining positions and hidden terms common in the context of adhesion contracts. [Citation.] While courts have defined the substantive element in various ways, it traditionally involves contract terms that are so one-sided as to ‘shock the conscience,’ or that impose harsh or oppressive terms. [Cit ation.]” (24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App. 4th 1199, 1212-1213.)
Both elements need not be present to the same degree. “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 114.) Additionally, a “claim of unconscionability often cannot be determined merely by examining the face of a contract, but will require inquiry into its [commercial] setting, purpose and effect.” (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 926.)
Thus, “[u]nconscionability analysis begins with an inquiry into whether the contract is one of adhesion. [Citation.] ‘The term [contract of adhesion] signifies 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.’ [Citation.]” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 113.)
When a contract is adhesive, “the court must then determine whether ‘other factors are present which, . . . operate to render it [unenforceable].’ [Citation.]” (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 113.)
Under the circumstances, the “place and manner” terms are unduly oppressive: The agreement requires franchisees wishing to resolve any dispute to close down their shops, pay for airfare and accommodations in Utah, and absorb the increased costs associated in having counsel familiar with Utah law. To rub salt in the wound, the agreement provides franchisees are precluded from consolidating arbitrations to share these increased costs among themselves. And the potential to recoup expenses with a favorable verdict is limited by the restriction against exemplary or punitive damages.
This is a remedy contemplated by the Legislature. Civil Code section 1670.5, subdivision (a) provides that, “If the court . . . finds the contract or any clause of the contract to have been unconscionable . . . 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.” The Legislative Committee comment explains, “Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.” (Legis. Com. com., 9 West’s Ann. Civ. Code § 1670.5 (1985 ed.) p. 494.)