(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.
History: 1953 Comp., § 50A-2-302, enacted by Laws 1961, ch. 96, § 2-302.
ANNOTATIONSOFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
Prior uniform statutory provision. — None.
1. This section is intended to make it possible for the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract. This section is intended to allow the court to pass directly on the unconscionability of the contract or particular clause therein and to make a conclusion of law as to its unconscionability. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection (2) makes it clear that it is proper for the court to hear evidence upon these questions. The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and not of disturbance of allocation of risks because of superior bargaining power. The underlying basis of this section is illustrated by the results in cases such as the following:
Kansas City Wholesale Grocery Co. v. Weber Packing Corporation, 93 Utah 414, 73 P.2d 1272 (1937), where a clause limiting time for complaints was held inapplicable to latent defects in a shipment of catsup which could be discovered only by microscopic analysis; Hardy v. General Motors Acceptance Corporation, 38 Ga.App. 463, 144 S.E. 327 (1928), holding that a disclaimer of warranty clause applied only to express warranties, thus letting in a fair implied warranty; Andrews Bros. v. Singer & Co. (1934 CA) 1 K.B. 17, holding that where a car with substantial mileage was delivered instead of a "new" car, a disclaimer of warranties, including those "implied," left unaffected an "express obligation" on the description, even though the Sale of Goods Act called such an implied warranty; New Prague Flouring Mill Co. v. G. A. Spears, 194 Iowa 417, 189 N.W. 815 (1922), holding that a clause permitting the seller, upon the buyer's failure to supply shipping instructions, to cancel, ship, or allow delivery date to be indefinitely postponed 30 days at a time by the inaction, does not indefinitely postpone the date of measuring damages for the buyer's breach, to the seller's advantage; Kansas Flour Mills Co. v. Dirks, 100 Kan. 376, 164 P. 273 (1917), where under a similar clause in a rising market the court permitted the buyer to measure his damages for non-delivery at the end of only one 30 day postponement; Green v. Arcos, Ltd. (1931 CA) 47 T.L.R. 336, where a blanket clause prohibiting rejection of shipments by the buyer was restricted to apply to shipments where discrepancies represented merely mercantile variations; Meyer v. Packard Cleveland Motor Co., 106 Ohio St. 328, 140 N.E. 118 (1922), in which the court held that a "waiver" of all agreements not specified did not preclude implied warranty of fitness of a rebuilt dump truck for ordinary use as a dump truck; Austin Co. v. J. H. Tillman Co., 104 Or. 541, 209 P. 131 (1922), where a clause limiting the buyer's remedy to return was held to be applicable only if the seller had delivered a machine needed for a construction job which reasonably met the contract description; Bekkevold v. Potts, 173 Minn. 87, 216 N.W. 790, 59 A.L.R. 1164 (1927), refusing to allow warranty of fitness for purpose imposed by law to be negated by clause excluding all warranties "made" by the seller; and Robert A. Munroe & Co. v. Meyer (1930) 2 K.B. 312, holding that the warranty of description overrides a clause reading "with all faults and defects" where adulterated meat not up to the contract description was delivered.
2. Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.
3. The present section is addressed to the court, and the decision is to be made by it. The commercial evidence referred to in Subsection (2) is for the court's consideration, not the jury's. Only the agreement which results from the court's action on these matters is to be submitted to the general triers of the facts.
Definitional cross reference. — "Contract". Section 1-201.
This section is part of the Code applicable to sales, and by its terms does not apply to security transactions. Hernandez v. S.I.C. Fin. Co., 1968-NMSC-192, 79 N.M. 673, 448 P.2d 474.
Comparative liability is not part of the Uniform Commercial Code under this section. Bowlin's, Inc. v. Ramsey Oil Co., 1983-NMCA-038, 99 N.M. 660, 662 P.2d 661, cert. denied, 99 N.M. 644, 662 P.2d 645.
Common-law doctrine of unconscionability. — This section sets out what should be the rule under the common-law doctrine of unconscionability as applied to all contracts, including real property leases. Therefore, a court in which a portion of a contract, including a lease, is challenged as unconscionable should receive evidence, if relevant, as to its commercial setting, purpose and effect in ruling on unconscionability. State ex rel. State Hwy. & Transp. Dep't v. Garley, 1991-NMSC-008, 111 N.M. 383, 806 P.2d 32.
Unconscionability. — Unconscionability is an affirmative defense to contract enforcement. It is an equitable doctrine, rooted in public policy, which allows courts to render unenforceable an agreement that is unreasonably favorable to one party while precluding a meaningful choice of the other party. Peavy v. Skilled Healthcare Group, Inc., 2020-NMSC-010, aff'g No. A-1-CA-35494, mem. op. (N.M. Ct. App. Oct. 22, 2018) (non-precedential).
Procedural and substantive unconscionability. — Procedural unconscionability considers the factual circumstances of a contract's formation. Substantive unconscionability concerns the legality and fairness of the contract terms themselves. Peavy v. Skilled Healthcare Group, Inc., 2020-NMSC-010, aff'g No. A-1-CA-35494, mem. op. (N.M. Ct. App. Oct. 22, 2018) (non-precedential).
Substantive unconscionability of an arbitration agreement. — Under New Mexico conscionability law, a presumption of unfair and unreasonable one-sidedness arises when a drafting party excludes its likeliest claims from arbitration, while mandating the other party arbitrate its likeliest claims. The presumption may be overcome by an evidentiary showing that justifies the one-sidedness of the arbitration agreement. Peavy v. Skilled Healthcare Group, Inc., 2020-NMSC-010, aff'g No. A-1-CA-35494, mem. op. (N.M. Ct. App. Oct. 22, 2018) (non-precedential).
Analysis in determining substantive conscionability of an arbitration agreement. — When confronted with the substantive conscionability of an arbitration agreement, a court should first analyze the arbitration agreement on its face to determine the legality and fairness of the contract terms themselves, and second, if the court determines the arbitration agreement is facially one-sided, the court should allow the drafting party to present evidence that justifies the agreement is fair and reasonable, such that enforcement of the agreement would not be substantively unconscionable. Peavy v. Skilled Healthcare Group, Inc., 2020-NMSC-010, aff'g No. A-1-CA-35494, mem. op. (N.M. Ct. App. Oct. 22, 2018) (non-precedential).
Arbitration agreements are substantively unconscionable when they are unfairly and unreasonably one-sided. — Where the estate of decedent filed a wrongful death lawsuit against defendant, a skilled nursing facility where decedent was a resident, and where, in response, defendant filed a motion to compel arbitration, citing an arbitration agreement that was attendant to decedent's admission agreement to the nursing facility, and where the arbitration agreement provided an exception stating that the agreement did not apply to either the facility or the resident in any disputes pertaining to collections, the district court did not err in denying defendant's motion to compel arbitration because the arbitration agreement was facially one-sided in that it excluded defendant's likeliest claim from mandatory arbitration, but required its residents to arbitrate their likeliest claims, and defendant failed to show that the arbitration agreement's collections exception was reasonable and fair. Peavy v. Skilled Healthcare Group, Inc., 2020-NMSC-010, aff'g No. A-1-CA-35494, mem. op. (N.M. Ct. App. Oct. 22, 2018) (non-precedential).
Determination of unconscionability in a contract clause is a matter of law. Bowlin's, Inc. v. Ramsey Oil Co., 1983-NMCA-038, 99 N.M. 660, 662 P.2d 661, cert. denied, 99 N.M. 644, 662 P.2d 645.
Requiring loss claims to be made within two days not unconscionable. — In general, a contract provision requiring claims of loss to be made within two days of delivery is reasonable, lawful and not unconscionable. Bowlin's, Inc. v. Ramsey Oil Co., 1983-NMCA-038, 99 N.M. 660, 662 P.2d 661, cert. denied, 99 N.M. 644, 662 P.2d 645.
Terms of written contract may carry over into substantially identical oral contract. — Where, after a written contract is terminated, an oral contract is entered into, and where there is a course of dealing for a number of years under the oral contract, which is identical in all respects other than to whom payment would be made, the provisions of which are fully known to and understood by the buyer, who has the obligation to give timely notice or waive any and all claims, the terms of the written contract carry over into the oral arrangement. Bowlin's, Inc. v. Ramsey Oil Co., 1983-NMCA-038, 99 N.M. 660, 662 P.2d 661, cert. denied, 99 N.M. 644, 662 P.2d 645.
Court may not modify otherwise legal language of contract. — It is not the province of the courts to alter or amend a contract freely made by the parties for themselves. The courts cannot change or modify the language of a contract, otherwise legal, for the benefit of one party and to the detriment of another. Smith v. Price's Creameries, 1982-NMSC-102, 98 N.M. 541, 650 P.2d 825.
Condemnation clause in lease agreement. — Lessor of condemned commercial premises was entitled to summary judgment in a dispute over a condemnation clause in the lease, where the lessee failed to carry his burden to support a contention that the commercial setting purpose and effect of the clause were such as to make it unconscionable. State ex rel. State Hwy. & Transp. Dep't v. Garley, 1991-NMSC-008, 111 N.M. 383, 806 P.2d 32.
Law reviews. — For survey, "The Uniform Owner-Resident Relations Act," see 6 N.M. L. Rev. 293 (1976).
For annual survey of New Mexico law relating to commercial law, see 13 N.M.L. Rev. 293 (1983).
For article, "Unconscionable Quandary: UCC Article 2 and the Unconscionability Doctrine," see 31 N.M.L. Rev. 359 (2001).
Am. Jur. 2d, A.L.R. and C.J.S. references. — 15A Am. Jur. 2d Commercial Code § 28; 68A Am. Jur. 2d Secured Transactions § 8.
Sufficiency of description of collateral in security agreement under UCC §§ 9-110 and 9-203, 100 A.L.R.3d 940.
Unconscionability, under UCC § 2-302 or § 2-719(3), of disclaimer of warranties or limitation or exclusion of damages in contract subject to UCC Article 2 (Sales), 38 A.L.R.4th 25.
"Unconscionability," under UCC § 2-302, of bank's letter of credit or other financing arrangements, 15 A.L.R.5th 365.
Validity, construction, and effect of statute or lease provision expressly governing rights and compensation of lessee upon condemnation of leased property, 22 A.L.R.5th 327.
77A C.J.S. Sales § 87; 81 C.J.S. Specific Performance § 40.