Question

In: Accounting

Between 2012 and 2017, Williams purchased a number of household items on credit from the Penguin...

Between 2012 and 2017, Williams purchased a number of household items on credit from the Penguin Furniture Co., a retail furniture store. Penguin 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 (proportional) 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 2017, and Penguin sought to repossess all the items that Williams had purchased since 2012.

Respond to the following questions:

Is the bargaining power of Penguin too great to assume that the terms of the agreement resulted from a fair negotiation process?
Do the terms of this agreement appear fair and reasonable to both parties?
Has Penguin acted unethically?

Solutions

Expert Solution

The terms of the agreement between Willian and Penguin certainly do not seem fair. The contract provides for Penguin to repossess all items should there be a default even in one installment. Besides, the methodology of application of the installment on a pro rata basis ins unjustified. This is because,at any point in time some amount of money will be outstanding on any item. This will give a perpetual right to Penguin to repossess all the items even though practically some of the items would have been fully paid.

Clearly,the terms of the agreement are not fair to William. William will be under a constant threat of losing all the furniture at any point of time. Penguin has probably taken advantage of William's lack of understanding about the terms of the contract.

If Penguin has taken advantage of William's lack of knowledge about the terms, clearly this is unethical. However, if Penguin is the sole seller of furniture in that area,and therefore has a huge bargaining power, then contractually it seems fair though the terms are one sided.   .


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