Question

Between 2011 and 2016, Williams purchased a number of household items on credit from the Penguin Furniture Co., a retail furniture store. Penguine retained the right in its contracts to repossess an item if Williams defaulted on an installment payment. Each contract also provided that each installment payment by Williams would be credited pro rata to all outstanding accounts or bills owed to Penguin. As a result of this provision, an unpaid balance would remain on every item purchased until the entire balance due on all items, whenever purchased, was paid in full. Williams defaulted on a monthly installment payment in 2016, and Penguin sought to repossess all the items the Williams has purchased since 2011.

1. Is the bargaining power of Penguin too great to assume that the terms of the agreement resulted from a fair negotiation process?

2. Do the terms of this agreement appear fair and reasonable to both parties?

3. Has Penguin acted unethically?

Answer 1

1. Yes, the bargaining power of Penguin are too high. Williams would have had a better option of buying the products on EMI. The terms of the contract are not in favor of Williams because of the following.

• Williams missed only 1 monthly installment, meaning he paid everything correctly from 2011 – i.e. 5 years. Ideally one default, should not give right to Penguin to repossess the assets.
• Williams could have paid more in these 5 years than the value of the products bought in early periods such as 2011, 2012 and 2013. The terms are in Williams favor, otherwise the 1^st few items would have been paid already till now.
• There is not much information on the negotiation part, but I assess that there was no fair negotiation between parties.

2. As discussed above, the terms and conditions are not fair and reasonable. Few products would have been already owned by Williams. One default giving access to all assets bought in last 5 years etc. These points suggest that the agreement is in Penguin’s favor.
3. Yes, Penguin acted unethically. Imagine a situation that 1^st furniture Williams bought had a value of $100. Assume that the monthly installment is $5 per month. William could have already paid ~$300 so far. i.e., 3 times higher than 1^st furniture’s value. In this case, Penguin having a repossession right is not ethical on their part.