In many American jurisdictions, there are some contracts which can be voided at the discretion of one party. Under normal circumstances, contracts must be honored and the performance of contractual obligations is seen as an act which enhances societal welfare. However, not all contracts are welfare enhancing, and sometimes a contract can be seen as so unfair, exploitative, or improperly formed that the performance of contractual obligations by the exploited party is entirely optional from the perspective of; this is known as a voidable contract.
Common types of voidable contracts are contracts negotiated under duress, contracts or negotiations containing misrepresentation, contracts where one party is mentally incompetent, or contracts which are deemed to be unconscionable.
The Commonwealth of Virginia has a law which authorizes courts to refuse to enforce contracts that they find to be unconscionable, or to enforce part of a contract without enforcing an unconscionable section, or to limit the enforcement of an unconscionable portion of any contract. Furthermore, Virginia also allows courts to grant “appropriate relief” in situations where a contract was induced by unconscionable conduct.
Unconscionability is often associated with cases where there is significantly unequal bargaining power in negotiations, or standard form contracts which contain language that the average person is unable to understand; it is also associated with cases which involve exploitation of people with certain mental illnesses to induce them into contracts which the are not able to understand.
Some jurisdictions differentiate between procedural and substantive unconscionability. Procedural unconscionability relates to the circumstances leading up to the formation of a contract, and looks at things such as one party’s superior bargaining power or one party’s inability to negotiate or have meaningful choice. Substantive unconscionability relates to the terms of the contract itself. A substantively unconscionable contract is one with such obscenely one-sided terms that no sane, well-informed person could have possibly willingly entered the contract freely. This is different from a contract in which one party benefits much more than another party, or a contract with unequal bargaining power such that one party signs up to an imprudent deal. An unconscionable contract must go much further than a merely being bad deal.
Because courts can consider some types of contracts to be voidable, it is important for businesses to consider how fair their contracts are and how proper their methods of negotiation are. Businesses should consult with a local contract lawyer who can provide insight on how some of these principles could apply to their contracts.