When is a contract “unconscionable” under Texas law?

When electric bills hit mailboxes next month, many Texans may wonder, does the law allow a consumer to get out of a contract if the result of enforcing the contract terms turns out to be really unfair?

The short answer is no.

But what if the result of the contract is really, really, really unfair?

Then the short answer is maybe. In that case the contract might be considered “unconscionable,” and therefore unenforceable.

Texas law recognizes the common-law defense of unconscionability, at least in theory. But how does Texas law define “unconscionable,” how do Texas courts apply that definition in practice, and how should they apply it?

Before we get to those questions, let’s set the goalposts.

On one end, everyone agrees, in principle, that you can’t get out of a contract just because the result turns out to be unfair.

Suppose I sign a contract with Bob the plumber to do some work on my historic Houston home for $2,000. I need the work done in two weeks because an inspector is coming. But in the meantime, a freak winter storm hits Texas, causing rates for plumbers to skyrocket. Bob could make $10,000 on other jobs instead of doing my job.

Sorry, Bob, you’re out of luck. It may be unfair to hold you to the contract, but it’s inherent in a contract that the parties take on the risk that the market rate could change. The shift in the market doesn’t make my contract unconscionable.

Several policies support this conclusion. First, freedom of contract. See Besteman v. Pitcock, 272 S.W.3d 777, 787-88 (Tex. App.—Texarkana 2008, no pet.) (“The high threshold a party must meet in proving unconscionability is based on a strong policy favoring the freedom of contract”).

Of course, there are some kinds of contracts people are not free to make: gambling, prostitution, selling illegal drugs, to name the usual suspects. But generally, private parties are free to agree on the terms of their contract, and courts aren’t going to second-guess whether those terms are “fair.” People who like economics and “free markets” really like this rationale.

A second, related reason for enforcing even unfair contracts is the principle that people should honor their agreements. Of course, this principle has deep roots in Judeo-Christian morality—it’s no accident that Anglo-American contract law uses the word “covenant”—and not only that, I would bet this principle is found among virtually every faith and culture.

There’s a third, less obvious, reason the law generally doesn’t like to get into whether a contract is fair or not. We could call this the “capability problem” or maybe “judicial economy.” If we allow people to get out of contracts just because they’re unfair, then the courts will be constantly clogged with such disputes, and it’s hard to decide what’s fair. Let’s call this the “pragmatic” rationale for not second-guessing contract terms.

Ok, so there are strong reasons for the principle that you can’t get out of a contract just because it’s unfair. But now let’s go to the other end of the football field.

Everyone agrees, in principle, that a contract term can be so grossly unfair that the law refuses to enforce it. The “pound of flesh” contract from The Merchant of Venice would fail today for this reason.

But even when the unfairness is purely economic, almost everyone agrees that there is some limit to how unfair a contract can be.

Let’s say I’m late to see the musical Memphis at the Hobby Center in Houston, and I can’t find a parking spot. I pull into a downtown parking garage and the attendant hands me a clipboard with a pre-printed parking agreement to sign. I’m in a hurry so I quickly skim through it, it seems fine, and I sign.

Assume I’m an educated, intelligent person—maybe I even have a law degree!—and  that there’s no disparity in “bargaining power” between me and the parking attendant. I’m free to say “no thanks, I’ll park somewhere else.”

After the show I hang around the stage door trying to get an autograph, and when I finally get back to the garage I find my car has been towed. It turns out the contract has a clause stating that if I’m late removing my car, the building owner can keep it as a late fee. Assume the clause is “conspicuous,” and that if I had read the contract more carefully I would have seen it.

Now, there may be some of you who say tough luck, counselor, a deal’s a deal. Cf. Allright, Inc. v. Elledge, 515 S.W.2d 266, 268 (Tex. 1974) ($100 limit of liability in month-to-month parking agreement was not void as against public policy).

But some of you also prefer Pepsi to Coke. I’m guessing that the vast majority of you would say no way, that clause is just too unfair. It’s so grossly one-sided that it should not be enforced.

In a word, it’s unconscionable.

The policy behind this unconscionability defense is perhaps a little harder to identify, but in short, it’s fairness. At some point, almost everyone agrees the policies favoring enforcement of unfair contract terms—freedom of contract, honoring one’s agreements, judicial economy—must yield when enforcement would be so grossly unfair.

But where is that point? How do we draw the line between a contract term that is merely unfair and one that is so one-sided that it should not be enforced? 

That’s the hard question. Let’s look at how Texas courts have tried to answer it.

Black letter law on unconscionability

Unconscionability is largely a “common law” defense, meaning law made by judges. (Article 2 of the UCC, Texas Business and Commerce Code Chapter 2, allows a court to refuse to enforce an “unconscionable” contract for the sale of goods, and the Texas Deceptive Trade Practices Act prohibits “unconscionable” consumer transactions, but the concept originated in common-law court decisions.) So let’s start with the case law.

Here are the general principles of unconscionability we can derive from the Texas cases:

• A contract is unenforceable if, “given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.” In re Poly-America, L.P., 262 S.W.3d 337, 348 (Tex. 2008).
• “Unconscionability is to be determined in light of a variety of factors, which aim to prevent oppression and unfair surprise; in general, a contract will be found unconscionable if it is grossly one-sided.” Id.
• “Unconscionability must be determined on a case-by-case basis in light of a variety of factors.” Besteman v. Pitcock, 272 S.W.3d 777, 787-88 (Tex. App.—Texarkana 2008, no pet.).
• Unconscionability has “no precise legal definition.” Id.
• An unconscionable contract is “basically” one that is “grossly one-sided.” Id. at 789.
• A “disparity in bargaining power” can result in oppression or unreasonableness that is labeled “unconscionable.” Id.
• A contract is not unconscionable “simply because it is foolish for one party and very advantageous to the other.” Instead, “a term is substantively unreasonable where the inequity of the term is so extreme as to shock the conscience.” Id. (quoting Anaheim Indus. v. GMC, No. 01-06-00440-CV, 2007 WL 4554213, at *9 (Tex. App.—Houston [1st Dist.] Dec. 20, 2007, pet. denied)).  
• Texas courts sometimes distinguish between “procedural” unconscionability, which addresses “how did the parties arrive at the terms in controversy,” and “substantive” unconscionability, which asks “are there legitimate commercial reasons justifying the terms of the contract.” Ski River Development, Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex. App.—Waco 2005, pet. denied).
• “In other words, in deciding the fairness of a contract’s substantive terms, the court must also consider whether there were ‘procedural abuses,’ such as an unfair bargaining position between the parties at the time the agreement was made.” Id.
• The party asserting unconscionability has the burden to prove both procedural and substantive unconscionability. Id. 
• Factors in determining unconscionability include: the “entire atmosphere” in which the agreement was made, the alternatives available to the parties at the time, the “non-bargaining ability” of one party, whether the contract is “oppressive” or “unreasonable,” any “gross disparity in the values exchanged,” and any “gross inequality of bargaining power.” Id., citing Restatement (Second) of Contracts § 208.
• The grounds for both procedural and substantive unconscionability must be “shocking.” Id.

So there you have it. Now you know how to determine if a contract is unconscionable or not.

Just kidding. No, of course you don’t. These are just general principles. They tell you almost nothing about how Texas courts actually decide whether any particular contract term is unconscionable. In other words, these generalities don’t help you predict whether a particular contract clause would be found unconscionable.

This is why law schools typically use the “case method.” In olden times, law school students primarily read “hornbooks” that summarized general principles of law derived from years and years of cases. But then someone figured out it was more instructive to read the key cases themselves, so students can see how courts apply the principles to specific facts.

But I digress. The question is how Texas courts have applied these principles of unconscionability.

In a perfect world, I would read hundreds of Texas cases before daring to hazard an answer, but I’m a blogger, not a law school professor, so I’ll just tell you the answer based on a sample. 

How Texas courts have applied the unconscionability defense

From dipping my toe in the Texas unconscionability waters, I can share a couple observations.

First, the vast majority of Texas cases that address the defense of unconscionability hold that the facts did not support the defense. If you research the issue, you’re going to read case after case where the court says sorry, this doesn’t rise to the level of unconscionability.

Second, it is hard to find any recent Texas Supreme Court case that found a contract unconscionable—outside of two very specific arenas.

One is arbitration agreements. See, e.g., In re Poly-America, L.P., 262 S.W.3d at 353. A lot of the cases addressing unconscionability are arbitration cases. Arbitration agreements are a special animal, so I’m just going to set this category aside.

The other category where the Texas Supreme Court has found a contract unconscionable in recent years is attorney fee agreements. See, e.g., Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 563 (Tex. 2006). Attorney fee agreements are also a special animal, because lawyers have ethical duties to clients that just don’t apply in an ordinary commercial or consumer setting. So let’s set those aside as well.

Outside of those two categories, you’re not going to find many Texas Supreme Court cases in the last 30 years finding contracts unconscionable—if any.

For example, in Ski River Development v. McCalla, the facts were like a scheme cooked up by Boss Hogg on The Dukes of Hazard. The Bakers were living in a trailer home heated by a stove. Deep in debt and desperate for money, they signed a 99-year lease of their land with the Davises. (Hmm, Jefferson Davis Hogg?) The lease provided for the Davises to pay the Bakers $3,000 per month for only 12 ½ years, and only $75 per month after that, while the Bakers agreed to pay the real estate taxes for the entire time. 167 S.W.3d at 137-39.

Those were just some of the facts, but you get the picture. The court said the evidence established “unfair bargaining positions, unfair terms, gross disparity in the value exchanged, no substantial benefit to the Bakers, shocking circumstances of the procurement of the lease, and shocking/gross lease terms.” Id. at 139.

Outside of extreme hard luck stories like that, most Texas appellate opinions that consider the defense find that the contract term at issue was not unconscionable. See, e.g., Besteman v. Pitcock, 272 S.W.3d at 789-90 (enforcement of written-notice provision of lease would not be unconscionable).

In short, Texas courts have set the bar extremely high for the common law defense of unconscionability.

Too high, in my opinion.

Is the common law bar too high?

For one thing, there seems to be too much focus on bargaining power. You can almost always say the party complaining about the unfairness of the contract terms had the right to just walk away. “Nobody put a gun to your head,” is the typical refrain.

That kind of argument confuses duress and unconscionability. Duress is already a contract defense. When we ask whether a contract is unconscionable, we’re already assuming the parties freely entered into the contract.

And while a gross disparity in bargaining power is an important factor, it’s not the only factor. In my view, unconscionability is also about the reasonable expectations of the parties based on the practical social context in which the contract is made—especially for consumer contracts.

Consider my hypothetical parking garage contract. There was no gross disparity in bargaining power, and I could have read the contract. Despite those factors not favoring unconscionability, two other factors made that agreement clearly unconscionable.

First, the forfeiture clause was way out of line with what a reasonable person would customarily expect a parking garage agreement to say. In other words, “unfair surprise.” In re Poly-America, L.P., 262 S.W.3d at 348.

Second, even if I could have avoided that surprise by reading the contract, there would still be a “gross disparity in the values exchanged.” Ski River Development, 167 S.W.3d at 136. Requiring me to forfeit an entire car for being five minutes late is just grossly out of proportion with the value of what the garage agreed to provide to me. In principle, it’s not that different from slipping in a clause saying “and I agree to pay building owner A MILLION DOLLARS!”

Keep in mind, I’m talking consumer contracts, not so much commercial contracts negotiated between two businesses. In most consumer settings, especially increasingly prevalent “click-wrap” agreements, the reality is that people just don’t read those agreements. The common law defense of unconscionability doesn’t seem to be keeping up with that reality.

Perhaps a legislative solution is needed. Or maybe . . . there already is one.

DTPA unconscionability to the rescue?

Remember when I mentioned the DTPA? That’s what we call the Texas Deceptive Trade Practices—Consumer Protection Act. Well, the DTPA generally prohibits an “unconscionable” action or course of action. And guess what. The DTPA definition of “unconscionable” is not the same as the common law definition.

(The DTPA’s “laundry list” of prohibited deceptive practices includes taking advantage of a disaster declared by the Governor or President by selling fuel or another necessity at an “exorbitant or excessive price,” Tex. Bus. & Com. Code § 17.46(b), but this post is about unconscionability, so let’s set that aside.)

The DTPA defines “unconscionable” as: “an act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Tex. Bus. & Com. Code § 17.45(5).[1]

In short, taking advantage of a consumer to a grossly unfair degree. That sounds pretty broad. Maybe DTPA unconscionability is better for consumers than common law unconscionability.

But don’t get too excited. As with common law unconscionability, Texas courts have set the bar high for DTPA unconscionability. The resulting unfairness must be “glaringly noticeable, flagrant, complete and unmitigated,” Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 677 (Tex. 1998), even though those words do not appear in the statutory definition. And when you look for cases applying DTPA unconscionability, it seems like most of the cases find that the facts did not support the theory.

Still, the bar for DTPA unconscionability is not insurmountable. There are cases holding that there was sufficient evidence to support a finding that the act or practice was unconscionable.

For example:

• In Rice v. Metropolitan Life Insurance Co., 324 S.W.3d 660, 677-78 (Tex. App.—Fort Worth 2010,  no pet.), evidence that the insurance company represented that the policyholder had coverage and left plaintiffs with no opportunity to obtain coverage was sufficient to raise a fact issue on a claim for unconscionability under the DTPA.

• In Century 21 Real Estate Corp., 890 S.W.2d 118, 127-28 (Tex. App.—Texarkana 1994, writ denied), the franchisors committed an unconscionable act under the DTPA by placing a second franchise in the franchisee’s area.

• In Fort Worth Mortgage Corp. v. Abercrombie, 835 S.W.2d 262, 266 (Tex. App.—Houston [14th Dist.] 1992, no writ), it was unconscionable to cancel a mortgage protection policy and to substitute a policy with significantly reduced benefits.

• In Franks v. Associated Air Center, Inc., 663 F.2d 583, 593 (5th Cir. 1981), the court held that an aircraft repair company’s charges for 80-113 hours of repair work were “grossly disparate” to the value the plaintiff received, considering another mechanic later fixed the same problem in one hour.

So, it is possible to prove unconscionability under the DTPA. Does that mean we will now see a wave of DTPA suits filed by Texas consumers who receive exorbitant electric bills they never would have expected?

I sure hope so.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm (zachwolfelaw.com). Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020, 2021, and 2022.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

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[1] Before September 1, 1995, the DTPA’s definition also included an act or practice that “results in a gross disparity between the value received and consideration paid.” Although this “gross disparity” is no longer part of the statutory definition, it may still be evidence of unconscionability under the current definition. Ketter v. ESC Med. Sys., Inc., 169 S.W.3d 791, 800 n.6 (Tex. App.—Dallas 2005, no pet.).