Judge-Made Contracts: Reconstructing Unconscionable Contracts

Abstract

Although unconscionability is thought to be a nearly exhausted topic, there are still some disputed issues regarding its remedies. This paper discusses one of these issues, namely the judicial reconstruction of unconscionable contracts or unreasonable contract clauses. More concretely, in many legal systems the judge is granted, at least in some cases, the power to revise the terms of unconscionable contracts: he may substitute "reasonable" terms for the "unreasonable" ones so that the contract remains valid. Nevertheless, an attempt by the judge to adjust an "unreasonable" term will create opportunism from both sides and will lead to arbitrary judicial decisions, thus upsetting the security of transactions and inevitably leading to higher transaction costs. Hence we argue that, with a few exceptions pertaining to monopoly or collusion situations, the judge should only decide between enforceability and non-enforceability of the contract or the clause. If the parties want their void contract to be enforced they can always renegotiate after the court decision and modify it themselves.

Keywords: economics of contract law, unconscionability, judicial revision of contracts, modification of contracts, severance of contract clauses, comparative law

JEL Classification: K12