The Texas Supreme Court has held that Texas has a “public policy strongly favoring the freedom of parties to contract.” At the same time, it has recognized that “this notion that parties are free to negotiate their own bargains conflicts with the equally compelling notion that grossly unfair bargains should not be enforced.” The defense of unconscionability attempts to balance these competing interests.
Texas law recognizes two types of unconscionability as a defense to a breach of contract claim: Procedural unconscionability and substantive unconscionability. Substantive unconscionability refers to the inherent unfairness of a particular contract or provision; procedural unconscionability deals with the circumstances surrounding a contract’s adoption.
Under Texas law, unconscionability does not have a precise legal definition but is instead based upon the totality of the circumstances. Although difficult to define, the defense has a long history. One of the earliest decisions to apply the defense described an unconscionable contract as one that “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.” Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100, 2 Ves. Sr. 125, 155 (1751)
Procedural unconscionability exists when some form of unfairness is involved in the negotiation of the contract. The unfairness must be serious. For example, the plaintiff used deception or unethical tactics during negotiation; the defendant had no real alternative but to accept unfair contractual terms; or, there was a large imbalance in the parties’ knowledge or abilities.
Substantive unconscionability is when the contract’s terms are so unfair that the court feels the need to involve itself. For example, on the face of the contract, the terms are so unfair that it shocks the court’s conscience; the terms of the contract violate a statutory right or public policy; the contract is extremely one-sided; or, there is no reasonable equality in the exchange of values between the parties.
In determining whether the defense of unconscionability exists, Texas Courts will consider the facts and circumstances, including: (1) the entire atmosphere in which the agreement was made; (2) the alternatives, if any, available to the parties at the time the contract was made; (3) the non-bargaining ability of one party; (4) whether the contract was illegal or against public policy; and (5) whether the contract is oppressive or unreasonable. The first three factors go toward the issue of procedural unconscionability; the last two factors go to the issue of substantive unconscionability.