Chapter Seven | Consideration

Consideration may be defined as “something bargained for in return for a promise.” Some promises have little or no legal significance because the element of bargain is missing. For example, if a person promises to give a gift to another person, a court would not generally impose an obligation to complete the gift because the bargain element is missing. Gifts are legally classified as donative transactions and are not enforceable as contractual promises — they are considered as gratuitous and not supported by consideration.

Consideration may consist of the following:

  • In a bilateral contract, the consideration for the promisor’s promise is a promise made by the promisee.
  • In a unilateral contract, the consideration for the promisor’s promise is the act of the promisee.
  • In a forbearance on the part of the promisee, which is defined as the giving up of a valid legal right. For example, “I will give up my right to sue you for defamation if you agree to retract your comments.”
  • In the creation, modification, or destruction of a legal relationship. (Example: I promise to pay you $500 if you will agree to let me out of my apartment lease/revise my employment contract.)

The common law placed great emphasis on the concepts of “benefit” and “detriment” in deciding if a promise would be enforced. Under a modern view, courts look instead to the existence of the bargain to determine if a promise will be enforced.

Moral Obligations And Past Consideration

A promise based on past consideration (an act that occurred in the past), or upon a moral obli­ga­tion, a moral duty, a sense of honor, or love or affection is generally not enforceable­. For example, “in consideration of the fact that you named your first son Stanislaus in my honor, I promise to pay you $10,000.” This promise is generally not enforceable because the act had occurred in the past. How does this differ from the following promise; “If you agree to name your first son Stanislaus in my honor, I promise to pay you $10,000”?

The Rules of Consideration

There are two general rules that supply the basis for an understanding of consider­ation.

First, a court will not usually question the adequacy of consideration. That is, simply stated, courts are not generally concerned if the transaction was a good bargain or a bad bargain in an economic sense, only that there in fact was a bargain! This rule has one major exception: where a bargain is made between parties within a fiduciary or confidential relationship, a court of equity may be concerned with the adequacy of the bargain and will carefully scrutinize such a bargain in order to assure that any consideration was adequate.

The second general rule may be stated as follows: Once parties enter into an agreement, they are bound by the terms agreed upon. Any attempt to change the terms of the agreed-upon bargain (especially the compensation term), “hold out” or renegotiate a “better deal,” will be met with a “consideration problem” found in the application of what is known as the pre-existing duty rule.

Pre-Existing Duty Rule

The pre-existing duty rule states: “Where a party does or promises to do what he is already legally bound to do or promises to refrain from doing or refrains from doing what he is not legally permitted to do, he has not incurred legally sufficient detriment.” Under these circumstances, there is no consideration for the underlying promise. The pre-existing duty may arise in the context of a prior contract or may be imposed by a statute or law. Let’s look at three examples of the application of the pre-existing duty rule.


Frederick agrees to hire Williams for a two-year period at $500 per week. After a six-month period, Frederick orally promises to increase Williams’ wages to $600 per week. Later, when Wil­liams notices that his pay has remained at $500, he contacts Frederick and Frederick refuses to increase the pay. Frederick’s promise to pay the additional $100 is unenforceable because it is essentially gratuitous and is not supported by consideration. Williams was already under a preexisting duty (a contract) to work for a two-year period for $500 per week.


Ray Ryker is a Sheriff in Bergen County. When a drunk driver kills Mrs. Gyros’ husband, she posts a $5,000 reward for the capture of the driver. Later, when Ryker appre­hends the driver in a drunk-driving stop, he seeks the reward. Since Ryker was already under a preexisting duty to perform the act in question by virtue of his job as an under-sheriff, he is not entitled to the reward because he has suffered no legal detriment. Ryker has furnished no new or additional consider­ation to Mrs. Gyros for her promise.

The pre-existing duty rule has been seen as overly harsh and rigid in some circumstances where conditions change and where there may be legitimate reasons to seek a revision in contract terms. As a result, several exceptions to the pre-existing duty rule developed.


Jacobs, a contractor, agrees to build a home for the Martins. After completing about half of the job, Jacobs demands an additional $10,000 or he will “walk out on the job.” Even if the Martins agree to the payment of the additional $10,000, their promise would not generally be enforceable because Jacobs was already under a preexisting duty to construct the home at the original contract price. Their promise to pay the additional amount of $10,000 is not supported by consideration and would be barred by the pre-existing duty rule. 


It is entirely possible that two parties can mutually agree to terminate an existing agreement if the agreement is executory and has not yet been performed. The surrender of rights under the agreement by each party is the consideration for the mutual agreement of rescission. For example, Carr and Hanner enter into a con­tract whereby Carr will purchase Hanner’s Honda. Carr later calls Hanner and informs him that he is no longer interested and “could he just back out.” Hanner agrees. This results in a rescission of the original contract and a termination of the obligations of both parties.

Unforeseen Difficulties

During the performance of a contract, a party might encounter unforeseen and substantial problems that could not have been anticipated at the time the contract was entered into. These problems must be of the type and character that are “entirely beyond the contem­plation of the parties.” One such problem is seen in the concept of force majeure. Unforeseen difficulties would ordinarily not include occurrences such as strikes, labor shortages, inclement weather, or an increase in the price of components or goods. These types of “difficulties” indeed should have been foreseen and provided for in a contract, as risks which might be ordinarily or normally encountered in an “arms length” business relation­ship.

Secondly, if the “unforeseen difficulty” involves a severe and unexpected increase in price, as in Westinghouse Corporation Uranium Contract Litigation (405 F. Supp. 316 (1975), some courts will hold that the contract has been “frustrated” and will permit an increase in the price or will permit a party to remove him or herself from a contract. However, the increase in price or circumstances must be unusual, extreme, or severe.

Unforeseen difficulties may be analogized to the doctrine of “commercial impracticability” found in UCC Section 2-715 which provides a valid excuse for breach of contract “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

It should be noted that while a plea to a court on grounds of “unforeseen difficulties” or “commercial impracticability” might be successful on the first occasion where a severe price increase occurs, most analysts agree that such a plea might not be appropriate or successful on a subsequent occasion.

Special Aspects of Consideration

Accord and Satisfaction

An issue may arise where a debtor realizes that he or she is in a relative position of strength with respect to the desire of a creditor to secure some amount of repayment on a debt. In such a case, the debtor may attempt to hold the payment hostage to a demand that the creditor will accept less than a contract requires. In contrast, there may be a case where the debtor has a genuine dispute with a creditor as to any amount owed that the debtor wishes to resolve the dispute by making a final payment. In this case, a debtor may attempt to discharge a disputed amount through an accord and satisfaction.

An accord and satis­faction is an attempt by a debtor to legally extinguish a debt by paying or tendering a lesser amount than that stipulated in the contract or that is demanded by a creditor. The accord is defined as the agreement whereby one of the parties undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than that which was originally promised or agreed upon. Satisfaction takes place when the accord is executed (when a party agrees to accept the lesser amount in satisfaction of the debt).

Read the following case carefully.


Case Summary

A. G. King Tree Surgeons v. Deeb

356 A.2d 87 (NJ 1976)


This is a contract action brought by A. G. King Tree Surgeons for the contract price of $480, plus tax and interest, for tree pruning work performed at the home of defendant George Deeb on or about May 30, 1975.

Plaintiff alleges the work was performed pursuant to an oral contract made by telephone, after an estimate of $480 had been transmitted orally, also by phone, to defendant. The work agreed on and actually performed was, according to plaintiff, the pruning of 15 trees on defendant’s property.

Defendant states by way of affirmative defense that * * * an accord and satisfaction was reached before the filing of this lawsuit. * * *

First, it is undisputed that defendant, upon receipt of the invoice for $504 (representing the $480 contract price plus $24 tax), protested to plaintiff by telephone that he had never entered into a contract for this amount and had only authorized an estimate from plaintiff, nor did he ever sign a contract or an acknowledgment of work performed. This is not, therefore, a case of a liquidat­ed sum which is due and owing but rather a genuine dispute between the parties as to what liability, if any, defendant owes to plaintiff for the work performed.

Second, it is undisputed that shortly after this controversy arose defendant’s attorney forwarded to plaintiff defendant’s check in the amount of $100 with a notation typed on the reverse side (above the space for the endorser’s signature) to the effect that this $100 was in full and final settlement of all claims of A. G. King against defendant for work performed in May 1975. Along with the check defendant’s attorney sent a letter of transmittal which stated in no uncertain terms that although defendant denied that authorization was ever given to plaintiff to perform work for defendant, nevertheless the $100 check was submitted in good faith in an attempt to amicably settle the claim, and that if plaintiff wished to settle for this amount, he should deposit the check. Plaintiff corporation, through its president A. G. King, did deposit the check but only after he obliterated the notation placed on it by the drawer and substituted in its place a notation that the check was only in partial payment of the amount due. Based on this set of facts defendant argues that an accord and satisfaction was reached between the parties at the time the check was deposited, notwithstanding the fact that the president of plaintiff corporation altered the notation on the reverse side of the check. This court agrees.

The traditional elements of an accord and satisfac­tion are the following: (1) a dispute as to the amount of money owed; (2) a clear manifestation of intent to settle the dispute; (3) accep­tance of satisfaction by the creditor.

The president of plaintiff corporation alleges, of course, that there could be no acceptance of any offer of settlement since he deliberately altered the check before depositing it, making it clear that he considered the $100 only a partial payment and not a full settlement of the matter. However, it is clear that plaintiff had no right to alter the check. If the check was unacceptable as a final settlement, plaintiff’s remedy was to return the check to defendant and sue for the full amount claimed due. Plaintiff chose rather to alter the check, accept the $100 “in partial payment” and sue for the difference.

In this case, however, the check did not stand alone; it was accompanied by a letter from defendant’s attorney which made it clear that (1) there was a genuine dispute between the parties as to what amount of money, if any, was due plaintiff; (2) defendant intended that the $100 check was to be in full satisfaction of the dispute between the parties; and (3) if, and only if, plaintiff agreed to settle the dispute for this amount, the check was to be deposited.

It is the opinion of this court that the check and letter can, and indeed must, be read together as consti­tuting an offer to settle this dispute for $100, and that the depositing of the check constituted the acceptance of this offer. Once the check was deposited by plaintiff, no matter what alterations the corporation’s president personally made on its reverse side, an accord and satisfaction was reached. * * *

The letter of transmittal * * * recites the basis of the genuine dispute between the parties and the intent of defendant to have the enclosed payment totally satisfy the dispute, and this satisfies the first two require­ments of an accord and satisfaction. The third require­ment of an accord and satisfaction is the acceptance of the offer and, in this case, the deposit of the check by plaintiff operated ipso facto as such an acceptance. * * *

Judgment for defendant.

Substitutes for Valuable Consideration

Some promis­es may be enforced without consider­ation, either on grounds of public policy or in the exercise of a court’s equitable jurisdiction. These include:
A composition of creditors’ agreement is an agree­ment between an insolvent debtor and his/her creditors under which the creditors will accept either a specified amount or a percent­age of the amount owed. Such an agreement is fully enforce­able without consideration. These agreements frequently are substitutes for a filing of a petition in bankruptcy and are favored by courts.

The doctrine of promissory estoppel: This equitable doctrine is usually applied where a promisor makes a gratuitous promise, often involving a promise to make a gift. The parties are not bargaining for anything in a true commercial sense. For example, Aunt Edna tells her godson, Richard: “I promise to pay you $500 per week so you won’t have to teach any longer.” Later, Richard quits his job, but Aunt Edna now refuses to pay. The doctrine of promissory estoppel may permit the court to enforce Aunt Edna’s promise under certain circumstances if Richard has relied on the promise and changed his position by resigning from his teaching job.

The doctrine of promissory estoppel is based on the re­quirement of reliance on the part of the promisee. It is found in Section 90 of the Restatement of the Law of Contracts:
“A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”

One final point. In enforcing a promise based on promissory estoppel, a court may only enforce the promise to the extent of the reasonable reliance damages of the promise — not necessarily the full amount of the contract.

For example, suppose Jerry Lynch promises to donate $500,000 to St. Rose Church for the Athletic Fund and its drive to build an athletics complex. Based on Lynch’s pledge, St. Rose hires an engineer and clears two fields of underbrush. Later, Lynch backs out of his promise. If Lynch were sued on his promise under a contract theory, a court would probably dismiss the suit because, as we know, a promise to make a gift is generally not enforce­able because it is not supported by consideration. However, if a court were to apply the doctrine of promissory estoppel, St. Rose might be able to enforce the promise to the extent of its reasonable reliance damages—the monies actually expended by St. Rose in reliance on Lynch’s promise. Remember, promissory estoppel is not consideration; it is a substitute for consideration.


Ethical Considerations

Berry and Cleary

Berry Publishing is in a dispute with the Cleary Corporation, a book printing company located in South Bend, Indiana. Berry claims that Cleary has breached its contract with Berry by failing to deliver on its promise to produce sufficient copies of the “History of The Chicago Cubs” for distribution in several “Chicagoland” banks as a premium for opening up a new checking or savings account. After months of frustration and protracted negotations regarding acquiring a credit, Berry sends a check to Cleary, deducting $100,000, an amount it calculates represents its losses on the project. Cleary receives a letter explaining this deduction and a check reflecting the deduction. However, Cleary has crossed out the notation “Paid In Full” on the memo portion of the check and wrote “Partial Payment” instead.

Should a court enforce the alleged “accord and satisfaction” even though Cleary maintains that it was Berry who actually was responsible for the loss because they had delayed in providing the page proofs to Cleary? Shouldn’t this case proceed to a trial on the issues rather than on a “technical rule” like an “accord and satisfaction?”



  1. Find the unusual case of Fiege v. Boehm. Read it carefully. Do you agree with the court’s conclusion?

A. G. King Tree Surgeons v. Deeb

  1. What did King do when he received Deeb’s check?
  2. What are the elements of an “accord and satisfaction”? Were they present here?


Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin


Chapter Five | Contracts Overview

Definition Of A Contract

A contract may best be defined as an enforceable promise. A contract may be oral or it may be in writing. Professor Williston, a remarkable teacher and legal scholar of contracts in the last century, noted: “A contract is a promise, or a set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” A promise is an undertaking that something either will or will not happen in the future. The term “contract” may also used by both laymen and lawyers to refer to a document in which the terms of a specific agreement are written.

Every contract involves at least two parties: the offeror (the party who makes an offer) and the offeree (the party to whom the offer is made). The offeror promises to do or to refrain from doing something.

Requirements of a Valid Contract

This discussion of contracts is not meant to be exhaustive. Rather, this text discusses contracts in the larger context of the legal, social, and regulatory environment of business from a managerial standpoint.

The following are the four basic elements of a valid contract:

  • An agreement, consisting of an offer and an accep­tance. Whether by words or actions, or a combination of both, the parties must form or come to an agreement. An essential prerequisite to the formation of a contract is the mutual manifestation of assent (agreement) to the same terms. This is sometimes called the “meeting of the minds” or “consensus ad idem” in Latin.
  • Consideration is defined as “something bar­gained for in return for a promise.” Today, courts focus especially on the concept of bargain in deciding if a particular promise should be enforced.
  • Legal capacity of the parties. Both the offeror and the offeree must have the contrac­tual capacity to enter into a contract. Contractual capacity may involve issues such as age (so called minors’ contracts) and mental state (e.g., persons suffering from senility or Alzheimer’s disease), and may involve issues such as fraud, undue influence, or duress.
  • Legal purpose. A contract cannot be formed for an illegal or immoral purpose, cannot violate a statute, or be in violation of “public policy.”

In addition, there are two “outside” factors that may make a contract unenforceable should one of the parties seek its enforcement in a court:

The Statute of Frauds requires that certain types of contracts must be in writing to be enforceable.

The Statute of Limitations prescribes the time period during which a party must sue for breach of contract or to enforce contractual rights.

Classifications of Contracts

Express Contract

An express contract is one in which all of the essential terms of the agreement are found in words, either orally or in writing. A brief word about oral contracts is appropriate. Strictly speaking, most contracts are not required to be in writing, unless the Statute of Frauds applies. However, attempting to enforce an oral contract may provide basic proof prob­lems for the litigants and for a court. Oral proof is valuable and probative, and in many cases, may be the only proof available. However, if parties’ oral testimony conflicts, in the absence of written proof, a court may be required to decide a dispute on the basis of credibility, or believability of witness­es. The words of humorist Will Rogers are quite appropriate: “An oral contract is not worth the paper it’s printed on!”

Implied Contract (Implied In Fact)

The following four steps generally establish an implied in fact contract:

  • Plaintiff furnished some service, goods, or property to the defendant;
  • Plaintiff expected to be paid for the service, goods, or property;
  • Defendant knew or should have known that payment was expected; and
  • Defendant had the opportunity to reject the service, property, or goods and did not do so.

An implied in fact contract is created by conduct, rather than words. An implied in fact contract exists where facts and circumstances indicate that a contract or an agreement has been entered into. Every morning for a month, Freddy Glotz opens his front door and notices that the Ace Milk Company has delivered four bottles of milk. Freddy brings the full bottles into the kitchen, uses their contents, and leaves the empty bottles at the door. At the end of a one-month period, Freddy receives a bill for $120, representing $1 for each bottle of milk. Freddy refus­es to pay the bill stating that “no contract was entered into because I had never promised to pay for the milk.” Evaluate. Was there an express contract? Was there an implied contract? What could Glotz have done so that no implied contract would be found by a court?

The following case discusses the creation of an implied in fact contract and the obligation of the defendant, Caton, to pay for a service, despite the fact that he claimed he had no intention to do so. Pay close attention why the court inferred Caton’s promise to pay for the wall. This is also an important case relating to silence as the basis of creating an obligation in the area of contract law.


Case Summary

Day v. Caton

119 Mass. 513 (1876)

Background and Facts

Plaintiff Day owned a vacant lot that was next to defendant Caton’s vacant lot. Day decided to build a brick wall between the adjoining lots. The evidence indicated that Caton knew the wall was being built. Caton claimed that there was no express agreement between him and Day to pay for a portion of the wall, and that his silence and subsequent “use” of the wall did not raise an implied promise to pay anything for it. In the trial court, the jury found for the plaintiff, Day. Caton appealed the decision of the trial court to the Supreme Judicial Court of Massachusetts in order to have the judgment overruled.


The ruling that a promise to pay for the wall would not be implied from the fact that the plaintiff, with the defendant’s knowledge, built the wall, and that the defendant used it, was substantially in accordance with the request of the defendant, is conceded to have been correct.
The defendant, however, contends that the presiding judge incorrectly ruled that such promise might be inferred from the fact that the plaintiff undertook and completed the building of the wall with the expectation that the defendant would pay him for it, the defendant having reason to know that the plaintiff was acting with that expectation, and allowed him thus to act without objection.

The fact that the plaintiff expected to be paid for the work would certainly not be sufficient of itself to establish the existence of a contract, when the question between the parties was whether one was made. It must be shown that in some manner the party sought to be charged assented to it. If a party, however, voluntarily accepts and avails himself of valuable services rendered for his benefit, when he has the option whether to accept or reject them, even if there is no distinct proof that they were rendered by his authority or request, a promise to pay for them may be inferred. His knowledge that they were valuable, and his exercise of the option to avail himself of them, justify this inference. And when one stands by in silence, and sees valuable services rendered upon his real estate by the erection of a structure (of which he must necessarily avail himself afterwards in his proper use thereof), such silence, accom­pa­nied with the knowledge on his part that the party rendering services expects payment therefore, may fairly be treated as evidence of an acceptance of it, and as tending to show an agreement to pay for it.

* * * * *

If silence may be interpreted as assent where a proposition is made to one which he is bound to deny or admit, so also it may be if he is silent in the face of facts which fairly call upon him to speak.

If a person sees a laborer day-after-day at work in his field doing services, which must of necessity insure to his benefit, knowing that the laborer expected pay for his work when it was perfectly easy to notify him if his services were not wanted, even if a request were not expressly proved, such a request, either previous to or contemporane­ous with the performance of the services, might fairly be inferred. But if the fact was merely brought to his attention upon a single occasion and casually, if he had little opportunity to notify the other that he did not desire the work and should not pay for it, or could only do so at the expense of much time and trouble, the same inference might not be made. The circumstances of each case would necessarily determine whether silence with knowledge that another was doing valuable work for his benefit and with the expectation of payment indicated that consent which would give rise to the inference of a contract. The question would be one for the jury, and to them it was properly submitted in the case before us by the presiding judge.

Implied In Law (Also Called Quasi-Contract)

An implied in law contract is not a true contract created by the parties, but is an obligation imposed on the parties in equity in order to “do justice” and to avoid unjust enrichment. A quasi-contract may be created where one person confers a benefit on another who retains the benefit, and where it would be unjust not to require that person to pay at least something for the benefit. Recovery is generally based on the reasonable value of the services received by the defendant – in some cases, not including the profit of the person conferring the benefit. This remedy is termed quantum meruit.


While Ma and Pa Ferg are on a week’s vacation in Hoboken, the EZ Roofing Company puts a new roof on the Ferg’s home. When the Ferg’s return home, they receive a bill for $2,500.0­0. When they refuse to pay the bill, the EZ Roofing Company brings suit against the Ferg’s based on a quasi-contract. Evaluate. Has there been unjust enrichment? What else would be required? 

Bilateral and Unilateral Contracts

A contract is unilateral if the offer can be accepted by the performance of an act. A contract is bilateral if both parties, the offeror and the offeree, have made mutual promises and are bound to fulfill obligations towards each other. For example, in a typical sales contract, the seller has promised to deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.


Heller says to Teston, “If you cut my lawn next Wednes­day, I promise to pay you $10.” Heller has made a promise but has not asked Teston for a return promise. Heller has requested Teston to perform an act, not to make a promise or commitment to do so. Heller has thus made an offer for a unilateral contract that arises when and if Teston performs the act called for. However, if Teston fails to cut the lawn, he is not in breach of contract since he made no promise to do so.

Suppose Heller had said to Teston, “I promise to pay you $10 if you promise to cut my lawn each week this summer.” In this case, Heller’s offer requests Teston to make a commitment or promise to cut the lawn. A bilateral contract arises when the requisite return promise is made by Teston. deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.

Executory Contracts

A contract that has been fully performed by both the promisor and promisee is termed an executed contract. A contract that has not yet been full performed by either party is said to be executory. A contract that has been partially performed by one of the parties is called a partially executed contract.

Void and Voidable Contracts

A void contract is one that has no legal significance and results in no legal obligation upon the part of either a promisor or promisee. A void contract generally cannot be enforced by a court. A contract to commit a crime or a tort or a contract that violates “public policy” is an example of a void contract. A voidable contract is a contract in which at least one of the parties has the power to avoid his or her legal duty established in the contract by disaffirming the contract. In essence, one of the parties has the option or right to remove him or herself from the agreement with no negative legal consequences. If a party decides not to elect to remove him or herself from the contract, the contract will continue in full force.

Examples of voidable contracts may include agreements entered into by a minor, or a contract entered into as a result of fraud, mutual mistake, duress, or undue influence.

Unenforceable Contracts

An unenforceable contract arises when a court is legally constrained from enforcing a contract because of some extrin­sic factor not connected with the elements of a valid con­tract discussed above. For example, an otherwise valid contract may not be enforced by the courts because of the operation of the Statute of Frauds or the Statute of Limitations. Whether or not a contract is unenforceable is usually determined at a very early stage of a case, as a “threshold question,” through a motion for a summary judgment, or through a motion to dismiss a lawsuit filed by one of the parties.

Unconscionable Contracts

Under the early common law, courts would regularly enforce contracts entered into by parties under a principle known as freedom of contract—even contracts that appeared to be onesided, unfair, oppressive, burdensome, or unconscionable. This principle was embodied in the concept of “caveat emptor,” translated as “let the buyer beware.”

The modern basis for unconscionability appears in the Uniform Commercial Code, Section 2302, which attempted to change the essential relationship between the parties from “caveat emp­tor” to “caveat venditor,” or “let the seller beware!” The purpose of the doctrine of unconscionability is twofold: “prevention of oppression (sometimes called substantive unconscionability) and unfair surprise (procedural unconscionability).” It should be noted that in fashioning Section 2302, the writers of the Uniform Commercial Code intentionally failed to provide a precise definition of the term “unconscionable” in the belief that to do so might be to limit and defeat the purposes of the rule.

Williams v. Walker-Thomas is one of the seminal cases in the area of unconscionability. Judge Skelly Wright added much to the understand­ing and development of this difficult concept and to interpreting the reaches of Section 2-302.

Read Williams v. Walker-Thomas carefully.


Case Summary

Williams v. Walker – Thomas Furniture Store

198 A. 2d 914 (D.C. App. 1964)

J. Skelly Wright, Circuit Judge:

Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item. 
The contract further provided that “the amount of each periodical installment payment to be made by [purchaser] to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by [purchaser] under such prior leases, bills or accounts; and all payments now and hereafter made by [purchaser] shall be credited pro rata on all outstanding leases, bills and accounts due the Company by [purchaser] at the time each such payment is made.” (Emphasis added.) The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings. 
On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95. She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants’ motion for leave to appeal to this court.

Appellants’ principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

“Appellant’s second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant’s financial position. The reverse side of the stereo contract listed the name of appellant’s social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.”
    “We cannot condemn too strongly appellee’s conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable. While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. In Scott v. United States, 79 U.S. (12 Wall.) 443, 445, 20 L. Ed. 438 (1870), the Supreme Court stated:

“* * * If a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. * * *”

Since we have never adopted or rejected such a rule, the question here presented is actually one of first impression. 
Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. 28 D.C.CODE § 2-302 (Supp. IV 1965). The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived. Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced. 
Unconscionability has generally been recognized to include 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.  Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration.

Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld. 
In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered “in the light of the general commercial background and the commercial needs of the particular trade or case.” Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” 1 CORBIN. We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract. 
Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.
 So ordered.

Generally, four major factors appear in the cases that have dealt with the question of unconscionability. These factors originated in Williams v. Walker-Thomas.

They include:

  • The absence of meaningful choice (that is, a condition that may be found in a tradi­tional “take it or leave it” or “boilerplate” contract);
  • Great inequality of bargaining power (where there is only one or a very few sellers available in the market­place);
  • The inclusion of terms that would cause unfair surprise, hardship, or oppression (e.g., penalty clauses, clauses which severely limit remedies, a “confession of judgment” claus­e); or
  • Circumstances where race, literacy, language, ethnicity, economic circumstances, or education are significant factors in determining the nature of the bargain, and the relationship between the parties.

In the case of Jones v. Star Credit (Supreme Court of NY, 1969), the court extended the concept of unconscionability to the price term of the contract. Jones v. Star Credit involved welfare recipients who purchased a freezer for $900 from “Your Shop at Home Service.” The contract was later assigned to the Star Credit Corporation, the defendant in this action.

According to Judge Wachler, the freezer had a maximum value of $300, but it ended up costing $1,234.80 after interest and other “add on” charges such as interest, credit life insurance, and credit property insurance were included in the contract. The court analyzed the contract under Section 2-302 of the Uniform Commercial Code and found it to be unconscionable as a matter of law.

Now, read Wille v. Southwestern Bell. Pay special attention to the expanded list of “unconscionable factors” noted by the court. Can you suggest any others for consideration? Do you agree with the inclusion of all of these factors? What is the most important factor? Consider this question: Why were Mrs. Williams and Mr. and Mrs. Jones successful in claiming unconscionability and Mr. Wille was not?

Case Summary

Wille v. Southwestern Bell Telephone Company

219 Kas. 755 (1976)

Background and Facts

The plaintiff, an operator of a heating and air conditioning business, sued the telephone company to recover damages caused by the omission of his ad from the yellow pages of the telephone directory. The contract for the ad contained a provision limiting the liability of the telephone company to the cost of the ad. The plaintiff contended that this provision was unconscionable. The lower court found for the defendant the plaintiff appealed.


Appellant asserts unconscionability of contract in two respects: the party’s unequal bargaining power and the form of the contract and the circumstances of its execution.

American Courts have traditionally taken the view that competent adults may make contracts on their own terms, provided they are neither illegal nor contrary to public policy, and that in the absence of fraud, mistake, or duress, a party who has fairly and voluntarily entered into such a contract is bound thereby, notwithstanding it was unwise or disadvantageous to him. Gradually, however, this principle of “freedom of contract” has been qualified by the Courts as they were confronted by contracts so one-sided that no fair-minded person would view them as tolerable. An early definition of uncon­scionability was provided by Lord Chancellor Hardwicke, in the case of Chesterfield v. Jensen (1750).

* * * “A contract that such as no man in his senses and not under delusion would make on one hand, and as no honest and fair man would accept on the other; which are unequitable and unconscientious bargains; and of such even the Common Law has taken notice.”

* * * This doctrine received its greatest impetus when it was enacted as a part of the Uniform Commercial Code but the writers did not define the limits or parameters of the doctrine. Perhaps this was the real intent of the drafters of the code. To define is to limit its applica­tion and to limit its application is to defeat its purpose.

* * * The basic test is whether in the light of general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of the prevention of oppression and unfair surprise, and not of disturbance of allocation of risks because of superior bargaining power.

* * * One type of situation is that involving unfair surprise: where there has naturally actually been no assent to the terms of the contract. Contracts involving unfair surprise are similar to contracts of adhesion. Most often these contracts involve a party whose circumstances, perhaps his inexperience or igno­rance, when compared with the circumstances of the other party, make his knowing assent to the fine print terms fictional. Courts have often found an absence of a meaningful bargain. The other situation is that involv­ing oppression: where, although there has been actual assent, the agreement, surrounding facts, and the relative bargaining positions of the parties indicate the possibility of gross overreaching on the part of the person with the superior bargaining power. The economic position of the parties is such that one becomes vulnera­ble to a grossly unequal bargain.

* * * These factors include: 1) the use of printed form or boilerplate contracts drawn skillfully by the party in the strongest economic position, which establish industry-wide standards offered on a take-it-or-leave-it basis to the party in a weaker economic position, 2) a significant cost-price disparity or excessive price, 3) a denial of basic rights and remedies to a buyer of consumer goods, 4) the inclusion of penalty clauses, 5) the circumstances surrounding the execution of the contract, including its commercial setting, its purposes and actual effect, 6) the hiding of clauses which are disadvantageous to one party in a mass of fine print trivia or in places which are incon­spicuous to the party signing the contract, 7) phrasing clauses in language that is incomprehensible to a layman or that divert his attention from the problems raised by them or the rights given up through them, 8) an overall imbalance in the obligations and rights imposed by the bargain, 9) exploitation of the underprivi­leged, unsophisticated, uneducated and the illiterate, and 10) inequality of bargaining or economic power.

Important in this case is the concept of inequality of bargaining power. The UCC does not require that there be complete inequality of bargaining power or that the agreement be equally beneficial to both parties.

* * * At least some element of deception or substantive unfairness must presumably be shown.

The cases seem to support the view that there must be additional factors such as deceptive bargaining conduct as well as unequal bargaining power to render the contract unconscionable. In summary, the doctrine of unconscionability is used by the courts to police the excesses of certain parties who abuse their right to contract freely. It is directed against one-sided, oppressive and unfairly surprising contracts, and not against the consequences per se of uneven bargaining power or even a simple old-fashioned bad bargain.
Williston on Contracts states: “Parties should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side. It is only where it turns out that one side or the other is to be penalized by the enforce­ment of the contract so unconscionable that no decent, fair-minded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability.”

The inequality of bargaining power between the parties here is more apparent than real. There are many other modes of advertising to which the businessman may turn if the contract offered him by the telephone company is not attractive. We find in the record no basis for a conclusion that the application of the Limitation of Liability Clause could lead to a result so unreasonable as to shock the conscience. The language of the chal­lenged paragraph is not couched in confusing terms designed to capitalize on carelessness but is clear and concise. Appellant was an experienced businessman and for at least thirteen years had used the yellow pages. In his business, it is reasonable to assume he as a seller and serviceman had become familiar with printed form contracts that are frequently used in connection with the sale and servicing of heating and air condition­ing equipment and their attendant warranties and limita­tions of liability. Each case of this type must necessarily rest upon its own facts but after examining the terms of the contract, the manner of its execution and the knowledge and experience of the appellant, we think the contract was neither unconscionable or inequi­table so as to deny its enforcement.


A final note on remedies for unconscionability. Should a court conclude that a contract is unconscionable (note that unconscionability is a matter of law to be decided by the judge), it may:

  • Refuse to enforce the contract;
  • Enforce the contract without the unconscionable clause; or
  • Limit the operation of the unconscionable clause.


Ethical Considerations

Private Contract Rights

Is it fair for the courts to interfere with the private contract rights of individuals?



  • What is the definition of a “merchant” under the Uniform Commercial Code?
  • What is the definition of “good faith” under the Uniform Commercial Code?
  • What is the definition of a “good” under the Uniform Commercial Code?

Day v. Caton

  • What does it mean to have a judgment overruled?
  • Why was the defendant’s silence construed as an agreement to pay?
  • Who normally decides questions of fact in contract cases? Who decides questions of law?

Williams v. Walker-Thomas

  • What is an installment note? A revolving charge? A pro rata payment?
  • What particular characteristics of Mrs. Williams were important to the court in determining if the contract was unconscionable?
  • What remedies are available to a court in a case where it finds a contract to have been unconscionable?

Wille v. Southwestern Bell

  • What early view of unconscionability was cited by Judge Harman?
  • What test did the court apply?
  • Of the circumstances cited in the case, which was most important to the court in arriving at its decision?
  • Why did Mr. Wille lose and Mrs. Williams and Mr. and Mrs. Jones win?
  • What is a “limitation of liability” clause?

    Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin