Can a court refuse to enforce a contract on the ground of unconscionability, absent a statute expressly authorizing it, where the contract was made between parties of grossly unequal bargaining power and contains terms unreasonably favorable to one party?

Walker-Thomas Furniture Company operated a retail furniture store in the District of Columbia. From 1957 to 1962, appellants Ora Lee Williams and William Thorne each purchased household items on installment plans using a printed form contract that styled each transaction as a lease with monthly rent payments. Title remained with Walker-Thomas until the total payments equaled the stated value of the item. On default, Walker-Thomas could repossess the item.

The contract also contained an obscure clause providing that each installment payment was inclusive of amounts owed under all prior leases, bills, or accounts, and that all payments were credited pro rata across all outstanding accounts. This kept a balance due on every item until all items were paid off, so each prior purchase secured each new purchase. Thorne bought a Daveno, three tables, and two lamps on May 12, 1962, then defaulted, and Walker-Thomas sought to replevy every item purchased since 1958. Williams bought a stereo set of stated value $514.95 on April 17, 1962, with a $164 balance already owing, and then defaulted. Walker-Thomas sought to replevy everything purchased since December 1957. Her total purchases were $1,800 and she had paid $1,400. Walker-Thomas knew Williams supported herself and seven children on a $218 monthly government stipend.

Walker-Thomas sued in the District of Columbia Court of General Sessions to replevy the items purchased by Thorne and Williams. The Court of General Sessions entered judgment for Walker-Thomas. The District of Columbia Court of Appeals affirmed, condemning the seller's conduct but concluding it lacked authority to declare the contracts contrary to public policy and suggesting Congress enact corrective legislation. The appellants then sought leave to appeal to the United States Court of Appeals for the District of Columbia Circuit, which granted leave, and the two cases were heard together.

(Wright, J.)

Yes. Where unconscionability is present at the time a contract is made, the contract should not be enforced, and a court may so hold under its common law powers even without a controlling statute.

The notion that an unconscionable bargain should not receive full enforcement is not novel. Other jurisdictions hold as a matter of common law that unconscionable contracts are unenforceable. Campbell Soup Co. v. Wentz, 172 F.2d 80 (3d Cir. 1948); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960). The Supreme Court recognized in Scott v. United States, 79 U.S. (12 Wall.) 443 (1870), that a court of law may award only such damages as a party is equitably entitled to on an unconscionable contract. Congress's later enactment of UCC 2-302, 28 D.C. Code 2-302, permitting courts to refuse enforcement of contracts unconscionable when made, does not imply the prior common law was otherwise. It is persuasive authority for following the rationale of the cases from which the section derives.

Unconscionability generally includes an absence of meaningful choice on one party's part together with contract terms unreasonably favorable to the other party. Meaningful choice is assessed by all circumstances, including gross inequality of bargaining power and the manner of contract formation: whether a party, considering education, had a reasonable opportunity to understand the terms, or whether important terms were hidden in fine print and minimized by deceptive sales practices. When a party of little bargaining power signs a commercially unreasonable contract with little knowledge of its terms, genuine consent is unlikely, and courts should examine the fairness of the terms.

Reasonableness is judged by the terms in light of circumstances existing when the contract was made, in light of the general commercial background and the commercial needs of the particular trade or case. The test is whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place. The lower courts made no findings on unconscionability, so the cases are remanded for further proceedings.

Dissent (Danaher, J.) The District of Columbia Court of Appeals was as troubled by the situation as any court could be, yet it made no finding of sharp practice, and Williams appears to have known precisely where she stood. The problem raises many public policy questions: what is a luxury to some is a necessity to others, and relief clients may need credit that sellers will extend only at pricing that reflects the risk. A cautious approach is warranted because the law has long allowed parties wide latitude in making their own contracts, and the decision may affect thousands of installment transactions. Any remedy is better sought from Congress or under existing statutes such as the Loan Shark law, D.C. Code 26-601. The dissent would affirm the District of Columbia Court of Appeals.