Question

Williams, as a regular customer of Walker-Thomas Furniture, would buy household goods on time payments. A clause in each installment contract indicated that an unpaid balance would affect all items ever purchased. This meant that if Williams ever missed a payment, the store could repossess all the items that Williams had ever bought from Walker, regardless of how long ago they were purchased. Williams missed one monthly payment, and Walker attempted to repossess everything that Williams had purchased over the last five years. Williams claimed that the default clause was unenforceable. What would be the legal basis for this argument? Would his argument be successful?

Answer 1

There are three arguments that Williams could use. The first is that there is a lack of consideration, the second is that the contract is unconscionable, and the third is that provision serves as a penalty (as per a liquidated damages provision) and is not based on any reasonable nexus as to damages.

The lack of consideration argument may hold some weight if Williams purchased the furniture in distinct intervals (for example, if Williams purchased some furniture one year, paid for all furniture, then went back to purchase more furniture a year later). Otherwise, this argument would likely fail.

The better argument is that such a contract is unconscionable. Indeed, many states have enacted statutory protections to protect consumers from buying furniture/appliances from "lease-to-own" companies that either charge unreasonable interest or have provisions such as the one described in this hypothetical. The courts would likely be hesitant to enforce such a clause.

This leads us to the next argument, which is that the provision in the contract is mean to serve as a "penalty", and is not in any way related to the consideration or bargain of the contract. This is one of the ways that courts strike unconscionable provisions of contracts, and just as the court would say a clause to give up your first-born child is void for public policy reasons, such an unreasonable penalty is also void for public policy reasons.