March 7, 2014

What is substantive unconscionability?

By Deborah J. La Fetra Senior Attorney

The California Supreme Court would like to know!  That court recently issued an unusual order in Sanchez v. Valencia Holding Co. LLC, asking for supplemental briefing from parties and amici on how it should define “substantive unconscionability.”  This case arose when Gil Sanchez bought a used Mercedes for $54,000.  He signed a standard sales contract used by dealerships throughout California, that he did not read.  The contract contained a provision that any disputes would be resolved by arbitration on an individual basis, and it waived any right to proceed as a class action.  Nonetheless, when he had a dispute with the dealership, he sought to bring a class action lawsuit.  In 2011, the United States Supreme Court held in AT&T Mobility v. Concepcion that an arbitration contract that waived class action procedures should be upheld under the Federal Arbitration Act.  However, Concepcion also held that a contract is still subject to state law defenses, such as unconscionability, so long as those defenses are not applied more strictly to arbitration contracts than to any other type of contract.

While an “unconscionable” contract was originally defined by the Supreme Court as what “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,” modern cases generally boil down this standard to “shocks the conscience.”  Unconscionability has two aspects:  procedural (how the contract was formed); and substantive (the terms of the contract).  In California, both aspects must exist for a contract to be declared unconscionable, but “substantive unconscionability” has proven a very slippery term.  California courts apply the “shocks the conscience” standard to some contracts, but when it comes to arbitration contracts, they apply an entire range of standards, from “overly harsh” to simply “unreasonably favorable.”  These more generous formulations have proven susceptible to overbroad, subjective interpretation that undermine contractual freedom, diminished judicial values of predictability and certainty, and have led California law into recurring conflict with the federal substantive law of arbitration.  For all these reasons, PLF’s supplemental amicus brief, filed today, argues that the court should adopt the “shocks the conscience” standard of substantive unconscionability.

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