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Report No. 199

Debate whether mere proof of procedural unfairness has to be coupled with some unfair advantage or unfair disadvantage:

There is considerable debate on the question whether it is sufficient for a party to merely prove for purposes of section 5 "procedural unfairness", conduct or circumstances and manner in which the contract or its terms have been arrived at or entered into or whether, something more has to be proved.

In the USA, while some courts have taken the view that where there is procedural unconscionability, it is not necessary to prove substantive unconscionability also, while some other Courts have taken the view that it is necessary to prove substantive unfairness also. On the converse proposition whether procedural and substantive unfairness, if proved, whether it is alone sufficient, there is again a conflict of views. These divergent views have been referred to recently in Strand vs. U.S. Bank National Association ND (Supreme Court of Dakota) 2005 ND 68 = 693 N.W. 2d. 918 (2005). Kapsner J, speaking for the Court, summarized the position in US as follows:

"In Construction Assocs: 446 N.W. 2d (at 242-44), however, we impliedly held that some measure of both procedural and substantive unconscionability must be shown to allow a Court to refuse to enforce unconscionable provisions.

Courts in other jurisdictions have reached varying results on this issue. Some Courts hold that a showing of either procedural or substantive unconscionability is sufficient to invalidate a contract. See Luna v. Household Fin Corp III, 236 F Supra 2d 1166 (1174) (W.D. Wash. 2002). Other Courts have held that procedural unconscionability by itself is not enough, but substantive unconscionability by itself may be (See Maxwell v. Fidelity Fin Servs, Inc 184 Ariz 82, 907 P. 2d. 51 (58-60) (Ariz 1995); see Gillman vs. Chase Manhattan Bank N.A.: 73 N.Y. 2d1 = 534 NE. 2d 824 (828-29) 537 NYS 2d. 787 (N.Y. 1988) (noting that a "determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made", but recognizing that "there have been exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone".)

The majority of Courts, however, have held that a showing of some measure of both procedural and substantive unconscionabiliy is required, and courts are to employ a balancing test looking at the totality of circumstances to determine whether a particular provision is unconscionable and unenforceable. See Roussalis vs. Wyoming Med Ctr., Inc, 4 P 3d. 209 (246)(Wyo 2000) ("most courts require a quantum of both and take a balancing approach in applying them"); 1 James J. White & Robert Summers, Uniform Commercial Code para 4-7 (4th Ed. 1995) ("Most Courts take a "balancing approach" to the unconscionability question, and to tip scales in favour of unconscionability, most courts seem to require a certain quantum of procedural, plus a certain quantum of substantive unconscionability").

Unfair (Procedural and Substantive) Terms in Contract Back

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