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    CONTRACTS: Virginia Unconscionability Decision Shows That Extreme Facts May Indeed Make Bad Law

    Posted by Paul A. Ferrer on Thu, Jun 25, 2020 @ 12:06 PM

    Paul Ferrer, Senior Attorney, National Legal Research Group

       The Virginia Supreme Court's recent decision in Flint Hill School v. McIntosh, No. 181678, 2020 WL 33258 (Va. Jan. 2, 2020), seems to provide some support for the old adage that "bad facts make bad law." In that case, the McIntoshes enrolled their minor child in Flint Hill School, a private school in Fairfax County, Virginia. The McIntoshes signed an enrollment contract in which they agreed to pay "all attorneys' fees and costs" incurred by the school "in any action arising out of or relating to this Enrollment Contract." Significantly, the provision did not require that the school be the prevailing party in order to recover its attorneys' fees. As the Virginia Supreme Court pointed out, the practical effect of such a provision, if applied as written, is essentially to foreclose all litigation on the contract.

       When the McIntoshes' child was allegedly injured at the school, Mrs. McIntosh filed a limited declaratory judgment action challenging the validity of the attorneys' fee provision. (The school waived its contractual right to claim attorneys' fees in that action.) The trial court held that the provision was unenforceable because it was both unconscionable and against Virginia public policy. The Virginia Supreme Court affirmed in an unpublished decision. The court concluded that the provision was, in fact, unconscionable, but did not address the public-policy issue.

         In so doing, the court missed a golden opportunity to define more precisely the common law of unconscionability in Virginia, which has received surprisingly little attention from the high court. Indeed, the court turned to a century-old case in defining an "inequitable and unconscionable bargain" as "one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other." Id. at *5 (quoting Smyth Bros.—McCleary—McClellan Co. v. Beresford, 128 Va. 137, 170, 104 S.E. 371, 382 (1920)). The court then indicated that a relevant factor in determining whether a contractual provision is unconscionable is whether the contract was an adhesion contract, that is, a standard-form contract prepared by a stronger party and presented to the weaker party to sign "with little choice about the terms." Id. (quoting Black's Law Dictionary 403 (11th ed. 2019)). The court found that the enrollment contract was a classic example of an adhesion contract, which was prepared by the school and presented to the McIntoshes, who "did not have any meaningful choice regarding the terms." Id. at *6 (emphasis added). In addition, no one in his or her senses would have signed the attorneys' fee provision, which would have required the signatories to pay the school's attorneys' fees "even if the [s]chool was the one to initiate a proceeding eventually found to be without merit." Id.

         While the court is right about the effect of the provision, its analysis of the adhesive nature of the enrollment contract may mislead lower courts, which can still look to the decision for guidance even if it was unpublished. See Va. S. Ct. R. 5.1(f). The problem is that all adhesion contracts, by definition, preclude the weaker party from exercising "meaningful choice regarding the terms" of the contract. But, as the lower court in McIntosh pointed out, "that a contract is one of adhesion is not in itself enough to establish procedural unconscionability." See McIntosh v. Flint Hill Sch., 100 Va. Cir. 32, 2018 WL 9393020, at *7 (City of Fairfax 2018). There are other important factors that should be considered, including the reasonable availability of meaningful alternatives in the market to entering into the one-sided contract offered by the stronger party. See, e.g., Beltran v. AuPairCare, Inc., 907 F.3d 1240, 1253 (10th Cir. 2018); Feldman v. Google, Inc., 513 F. Supp. 2d 229, 240 (E.D. Pa. 2007); E. Allan Farnsworth, Contracts § 4.28, at 313 (3d ed. 1999) ("A court will often buttress its conclusion that a provision in an adhesion contract is not unconscionable by stressing that the goods or services were not essential or could have been procured elsewhere."). That was certainly true in McIntosh, where the parents could have enrolled their child in a public school or in any number of other private schools in Fairfax County, one of the most affluent localities in the country, if they did not like the attorneys' fee provision in the school's enrollment contract.

         As it stands, the Virginia Supreme Court's decision suggests that an outrageously one-sided adhesion contract (that is, one that "no man in his senses" would make) is unconscionable for that reason alone, regardless of other alternatives available to the weaker party. Perhaps that was what the court intended, but other courts have generally not gone that far. Cf. Gillman v. Chase Manhattan Bank, 534 N.E.2d 824, 829 (N.Y. 1988) (suggesting, in dictum, that there may be "exceptional cases" where a contractual provision is "so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone"). If not, then the court might have waited to address unconscionability in a case with less extreme facts and instead refused the school's appeal or affirmed because the contract was against Virginia public policy for the reasons stated by the lower court.

    Topics: contracts, Paul A. Ferrer, contract of adhesion, meaningful alternatives, common law of unconscionability, procedural unconscionability

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