From a Gasp to a Gamble: A Proposed Test for Unconscionability

Abstract

This article takes a comparative approach to propose an improved test for the doctrine of unconscionability in American contract law, by borrowing relevant concepts from Islamic law. Section 2-302 of the Uniform Commercial Code (U.C.C.) identifies "unconscionability" as ground for invalidating a contract, but the legal definition of "unconscionable" in common law and American case law has long been imprecise and unclear, sometimes even as vague as that which would make one "gasp." In this article, I take inspiration from Islamic legal doctrine on oppressive and unfair contracts and, with this in mind, review American case law on unconscionability, noting several common themes about what makes dealings fundamentally unfair. Specifically, I look at Islamic jurisprudence on riba (usury, lit. "increase") which invalidates contracts in which one party receives an undeserved profit at the expense of the other. Riba is of two types: riba al-fadl, in which a contracting party acquires an excess profit, and riba al-nasi'a, in which a party gain an unfair advantage by speculating on uncontrollable risks. In this article, I borrow from these Islamic legal principles, along with some concepts of unfair bargaining power found in American case law, and propose a two-prong test for "unconscionability." The first prong focuses on whether one party achieved a potentially unjust enrichment under the contract, and the second looks to whether there was an oppressive relationship between the contracting parties. A court applying this test must find that a contract meets both prongs in order to declare the contract unconscionable.

Keywords: doctrine of unconscionability, Uniform Commercial Code, Islamic law, oppressive and unfair contracts, riba, unjust enrichment

JEL Classification: K12