Adapted from “When You Hold All the Cards,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.
One of your customers has just landed a lucrative new contract, and you’re the only supplier who can add a critical component to that customer’s production process. Concerns about violating your own ethics or harming your reputation might limit your willingness to extract as much gain from the trade as you can, but these factors won’t prevent you from at least getting a very good deal.
Yet being the more powerful party in a negotiation doesn’t guarantee a free ride. Specifically, legal rules may constrain your actions. For example, to protect the weaker party, the courts might second-guess the terms of the deal if they seem too onerous. In general, the courts have been unwilling to intervene between a willing buyer and a willing seller. If the outcome of a bargaining process is “unconscionable,” however, a court may intervene.
In a famous case from the 1960s, respected Washington, D.C., Circuit Court Judge Skelly Wright held that a contract term may be unenforceable if the weaker party did not have a meaningful choice between accepting or rejecting a term that was “unreasonably favorable” to the stronger party. The case involved purchases that Ora Lee Williams made from the Walker-Thomas Furniture Company in Washington, D.C. A single mother with seven children, Williams supported herself through public assistance. Over a five-year period, Williams paid $1,400 toward $1,800 worth of home furnishings through 14 different contracts with Walker-Thomas, which sold items on credit. When Williams defaulted on payment for a single item, Walker-Thomas attempted to repossess all her purchases, as stipulated in the densely written sales contracts Williams had signed.
The trial court and the first appeals court ruled in favor of the furniture company, citing precedent that a person who knowingly fails to read a contract cannot be relieved from a bad outcome. The first appeals court did note its sympathy for Williams, however, stating, “We cannot condemn too strongly [Walker-Thomas’s] conduct. It raises serious questions of sharp practice and irresponsible business dealings.” But once the case got to the Circuit Court, Judge Wright reversed the lower courts’ rulings that they lacked authority to refuse to enforce the Walker-Thomas contract with Williams and sent the case back to the trial court for a determination on whether the contract terms were “unconscionable.”
Since Williams v. Walker-Thomas Furniture Company, scholars and practitioners have attempted to apply the doctrine of unconscionability to recording contracts (to protect artists who sign deals when the artists are unknowns), arbitration clauses in employment agreements (to protect employees from process terms that are advantageous to the employer), releases that relieve property owners from liability for injuries suffered on their premises, “shrink-wrap” license agreements (to protect consumers who remove product packaging without any ability to negotiate the terms of the license), and many other arenas.
Two strands of the unconscionability doctrine have emerged over the years: procedural unconscionability, or unfairness in the bargaining process; and substantive unconscionability, or unfairness in the bargaining outcome. Both strands allow a court to void certain contract terms or to hold an entire contract unenforceable, and both have implications for your negotiation strategy.
The doctrine of procedural unconscionability suggests that you should “play nice” with the other side as a matter of course. Many negotiation experts recommend educating the other party about the importance of reaching any deal if that party’s no-deal alternative is weak. This may be good advice in many situations, but procedural unconscionability indicates that you should avoid threatening (or being perceived as threatening) the other side with no deal.
With regard to substantive unconscionability, if the bargaining relationship appears unequal, try to include terms in your contract that explicitly address the question of reasonableness, such as, “both parties stipulate and agree that the agreed-upon provisions are reasonable.” Courts don’t have to pay attention to such language, but it may help if the issue of substantive unconscionability were litigated.