Academic

Horton on Unconscionability and Trusts

By Lawrence Solum

David Horton (Boalt Hall School of Law) has posted Unconscionability in the Law of Trusts (Notre Dame Law Review, Vol. 84, 2009) on SSRN.  Here is the abstract:

This Article claims that trust law should recognize the unconscionability defense. It begins by noting the symmetry between trust and contract defenses and the broad consensus among courts and scholars that trusts are contracts. It sketches the leading rationales for why courts enforce promises between private actors: the theories that free exchange allows parties to maximize welfare and exercise free will. It then argues that neither concept justifies upholding a contractual term if informational defects prevent one party from observing that it sharply deviates from her ex ante desires. It asserts that the unconscionability doctrine strikes down contractual terms that suffer from precisely that defect. 

The Article then explains how the unconscionability doctrine could serve the same purpose in trust law. It discusses why the policies underlying freedom of testation depart from those behind freedom of contract and provide less support for a laissez-faire regime. It then challenges the unarticulated but intuitive notion that controls in the trust-creation process are sufficient to align an instrument's text with a settlor's intent. It reveals that corporate fiduciaries, trust mills, and a revitalized do-it-yourself movement have spawned "procedurally suspect" trusts: those created without attorney involvement and laden with complex terms. It then examines three common but controversial "substantively suspect" terms - exculpatory, no contest, and arbitration clauses - and shows how a trust-specific unconscionability doctrine would improve outcomes in cases.

And from the article:

Under a behavorialist regime, courts would need to hear expert testimony and make a complex fact-sensitive determination about salience.99 By letting courts adjudicate ?gross unfairness? as a matter of law, the unconscionability doctrine approximates the same results with less expenditure of government resources. In addition, because empirical data indicates that only about five attributes will be salient to buyers,100 making non-salience the hallmark of unconscionability would effectively abolish modern contracting. The rule wisely does not do so. However, it is more permissive than it would be if autonomy reigned supreme. Terms that buyers neither read nor understand can only constitute the exercise of free will if they exactly replicate what informed buyers would have selected. Any term not concordant with buyers? reasonable expectations should be void. Thus, an autonomy-driven unconscionability defense would require little more than proof that a term is unreasonable. In contrast, the real defense hinges not just on ?unfairness,? but ?manifest unfairness.?

And:

If a court has determined that a term is procedurally unconscionable, it should void the term if it is also substantively unconscionable: grossly unfair. The principle here is that a clause that significantly limits rights or remedies is probably a clause that the settlor did not truly understand. Since trusts exist to benefit the beneficiaries,226 the fact that language works an unjustified hardship suggests that the settlor did not grasp its ramifications. Also, if a settlor is not fully aware of the effect of a clause, its value to her, if any, must be exceedingly small. Yet terms that erode beneficiaries? rights and remedies greatly diminish their utility. Arguably, if the settlor were aware of this discrepancy, she would voluntarily remove the provision. But because the settlor presumably is dead and cannot do so, substantive unconscionability fills the role. In its purest form, substantive unconscionability would apply to a term drafted by the trustee that enhances its power at the expense of the settlor or the beneficiaries. In such a case, the trust-specific unconscionability doctrine would be functionally identical to its contract law counterpart. By invalidating the clause, it aligns the instrument with what the settlor?s intent would have been if not for informational defects. Moreover, it penalizes the drafter for taking advantage of the settlor. In these circumstances, trust law could import the teachings of contract law wholesale. Judges in the trust milieu could even examine contract precedent to define the boundaries of gross unfairness.

I must admit that I know little about the state of current trusts scholarship.  I found this quite interesting.

Full post as published by Legal Theory Blog on October 17, 2008 (boomark / email).