# Bargaining power

Bargaining power is the relative power of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched monopoly and monopsony.

There are a number of fields where the concept of bargaining power has proven crucial to coherent analysis: game theory, labour economics, collective bargaining arrangements, diplomatic negotiations, settlement of litigation, the price of insurance, and any negotiation in general.

## Calculation

Several formulations of bargaining power have been devised. A popular one from 1951 and due to American economist Neil W. Chamberlain is:[1]

We may define bargaining power (of A, let us say) as being the cost to B of disagreeing on A's terms relative to the costs of agreeing on A's terms ... Stated in another way, a (relatively) high cost to B of disagreement with A means that A's bargaining power is strong. A (relatively) high cost of agreement means that A's bargaining power is weak. Such statements in themselves, however, reveal nothing of the strength or weakness of A relative to B, since B might similarly possess a strong or weak bargaining power. But if the cost to B of disagreeing on A's terms are greater than the cost of agreeing on A's terms, while the cost to A of disagreeing on B's terms is less than the cost of agreeing on B's terms, then A's bargaining power is greater than that of B. More generally, only if the difference to B between the costs of disagreement and agreement on A's terms is proportionately greater than the difference to A between the costs of disagreement and agreement on B's terms can it be said that A's bargaining power is greater than that of B.

In another formulation, bargaining power is expressed as a ratio of a party's ability to influence the other participant, to the costs of not reaching an agreement to that party:

BPA(Bargaining Power of A) = (Benefits and Costs that can be inflicted upon B)/(A's cost of not agreeing)
BPB(Bargaining Power of B) = (Benefits and Costs that can be inflicted upon A)/(B's cost of not agreeing)
If BPA is greater than BPB, then A has greater Bargaining Power than B, and the resulting agreement will tend to favor A. The reverse is expected if B has greater bargaining power instead.

These formulations and more complex models with more precisely defined variables are used to predict the probability of observing a certain outcome from a range of outcomes based on the parties' characteristics and behavior before and after the negotiation. One potential application is in patent infringement lawsuits, when the jury must determine for the patent holder and the potential licensee a mutually-agreeable royalty for use of the patent holder's proprietary technology. One economist suggests a methodology to calculate the royalty whereby the total surplus of the transaction (or, the gains from trade generated when the patent holder successfully licenses its technology to the licensee) is calculated first, then split among the negotiating parties based on, in part, their relative bargaining power.[2] The model explains that a patent holder with more bargaining power—for example, a patent holder that licenses its patents on an exclusive basis or that owns a commercially-successful technology—would capture a larger share of the total surplus than the licensee, and vice versa, as well as shows how that insight could guide a court's determination of a reasonable royalty in a patent infringement lawsuit.

## Example

Here is an example in layman's terms of one party displaying large amounts of bargaining power over the other:

Stephanie is applying for a job at Company, Inc. Only one position is available, and there are 100 different people applying for that same position. Stephanie will not have choice between employers since Company, Inc is the only company hiring in her area. On the other hand, Company, Inc. will have a lot of choice, and will be in a position to offer Stephanie a standard form contract for employment, complete with minimum wage pay, nothing but workers compensation and unemployment as benefits, and the possibility for termination at any time, per the doctrine of at-will employment.

Buying power is a specific type of bargaining power relating to a purchaser and a supplier. For example a retailer may be able to dictate price to a small supplier if it has a large market share and or can bulk buy.[3]

## Economic theory

In modern economic theory, the bargaining outcome between two parties is often modeled by the Nash Bargaining solution.[4][5] Suppose that party A and party B can collaborate in order to generate a surplus of 100. If the parties fail to reach an agreement, party A gets a payoff X and party B gets a payoff Y. Suppose that X+Y<100, so reaching an agreement yields a larger total surplus. According to the generalized Nash bargaining solution, party A gets X+π(100-X-Y) and party B gets Y+(1-π)(100-X-Y), where 0 < π < 1. There are different ways to derive π. For example, Rubinstein (1982) has shown that in a bargaining game with alternating offers, π is close to 1 when party A is much more patient than party B, while π is equal to ½ if both parties are equally patient.[6] Note that party A’s payoff is increasing in π as well as in X, so both parameters reflect different aspects of party A’s power. To clearly distinguish between the two parameters, some authors such as Schmitz (2013) refer to π as party A’s bargaining power and to X as party A’s bargaining position.[7] A prominent application is the property rights approach to the theory of the firm. In this application, π is often exogenously fixed to ½, while X and Y are determined by investments of the two parties.[8]

## References

1. ^ Kuhn, James W.; Lewin, David; McNulty, Paul J. (July 1983). "Neil W. Chamberlain: A Retrospective Analysis of His Scholarly Work and Influence". British Journal of Industrial Relations. 21 (2): 143–160. doi:10.1111/j.1467-8543.1983.tb00127.x.
2. ^ J. Gregory Sidak, Bargaining Power and Patent Damages, 19 STAN. TECH. L. REV. 1 (2015), https://www.criterioneconomics.com/bargaining-power-and-patent-damages.html.
3. ^ John Allen (2009). "Chapter 2 One-stop shopping". Making Social Lifes. Milton Keynes: The Open University. p. 66.
4. ^ Muthoo, Abhinay (1999). Bargaining Theory with Applications. Cambridge University Press.
5. ^ Binmore, Ken; Rubinstein, Ariel; Wolinsky, Asher (1986). "The Nash Bargaining Solution in Economic Modelling". The RAND Journal of Economics. 17 (2): 176. doi:10.2307/2555382. ISSN 0741-6261. JSTOR 2555382.
6. ^ Rubinstein, Ariel (1982). "Perfect Equilibrium in a Bargaining Model". Econometrica. 50 (1): 97–109. CiteSeerX 10.1.1.295.1434. doi:10.2307/1912531. JSTOR 1912531.
7. ^ Schmitz, Patrick W. (2013). "Bargaining position, bargaining power, and the property rights approach" (PDF). Economics Letters. 119 (1): 28–31. doi:10.1016/j.econlet.2013.01.011. ISSN 0165-1765.
8. ^ Hart, Oliver (1995). "Firms, Contracts, and Financial Structure". Clarendon Press.
Agricultural Fair Practices Act of 1967

The Agricultural Fair Practices Act of 1967 (P.L. 90-288) was enacted to protect farmers from retaliation by handlers (buyers of their products) because the farmers are members of a cooperative. The act permits farmers to file complaints with USDA, which can then institute court proceedings, if they believe their rights under the law have been violated. Several bills have been introduced in recent years on behalf of producers (among them, some poultry growers who have contracts with large companies) to give them more bargaining power under the Act, which, some producers contend, lacks adequate enforcement authorities.

Autoclenz Ltd v Belcher

Autoclenz Ltd v Belcher [2011] UKSC 41 is a landmark UK labour law and English contract law case decided by the Supreme Court of the United Kingdom, concerning the scope of statutory protection of rights for working individuals. It confirmed the view, also taken by the Court of Appeal, that the relative bargaining power of the parties must be taken into account when deciding whether a person counts as an employee, to get employment rights. As Lord Clarke said,

the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part. This may be described as a purposive approach to the problem.

Contra proferentem

Contra proferentem (Latin: "against [the] offeror"), also known as "interpretation against the draftsman", is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning should be the one that works against the interests of the party who provided the wording. The doctrine is often applied to situations involving standardized contracts or where the parties are of unequal bargaining power, but is applicable to other cases. The doctrine is not, however, directly applicable to situations where the language at issue is mandated by law, as is often the case with insurance contracts and bills of lading.The reasoning behind this rule is to encourage the drafter of a contract to be as clear and explicit as possible and to take into account as many foreseeable situations as it can.

Additionally, the rule reflects the court's inherent dislike of standard-form take-it-or-leave-it contracts also known as contracts of adhesion (e.g., standard form insurance contracts for individual consumers, residential leases, etc.). The court perceives such contracts to be the product of bargaining between parties in unfair or uneven positions. To mitigate this perceived unfairness, legal systems apply the doctrine of contra proferentem; giving the benefit of any doubt in favor of the party upon whom the contract was foisted. Some courts when seeking a particular result will use contra proferentem to take a strict approach against insurers and other powerful contracting parties and go so far as to interpret terms of the contract in favor of the other party, even where the meaning of a term would appear clear and unambiguous on its face, although this application is disfavored.

Contra proferentem also places the cost of losses on the party who was in the best position to avoid the harm. This is generally the person who drafted the contract. An example of this is the insurance contract mentioned above, which is a good example of an adhesion contract. There, the insurance company is the party completely in control of the terms of the contract and is generally in a better position to, for example, avoid contractual forfeiture. This is a longstanding principle: see, for example, California Civil Code §1654 (“In cases of uncertainty ... the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist"), which was enacted in 1872. Numerous other states have also codified the rule.

The principle has also been codified in international instruments such as the UNIDROIT Principles and the Principles of European Contract Law.

Deterrence theory

Deterrence theory is the idea that an inferior force, by virtue of the destructive power of the force's weapons, could deter a more powerful adversary, provided that this force could be protected against destruction by a surprise attack. This doctrine gained increased prominence as a military strategy during the Cold War with regard to the use of nuclear weapons and is related to, but distinct from, the concept of Mutual assured destruction, which asserts that a full-scale nuclear attack should be prevented to avoid total destruction of both the attacker and the defender otherwise ensuing. Deterrence is a strategy intended to dissuade an adversary from taking an action not yet started by means of threat of reprisal, or to prevent them from doing something that another state desires. The strategy is based on the psychological concept of the same name. A credible nuclear deterrent, Bernard Brodie wrote in 1959, must be always at the ready, yet never used.In Thomas Schelling's (1966) classic work on deterrence, the concept that military strategy can no longer be defined as the science of military victory is presented. Instead, it is argued that military strategy was now equally, if not more, the art of coercion, of intimidation and deterrence. Schelling says the capacity to harm another state is now used as a motivating factor for other states to avoid it and influence another state's behavior. To be coercive or deter another state, violence must be anticipated and avoidable by accommodation. It can therefore be summarized that the use of the power to hurt as bargaining power is the foundation of deterrence theory, and is most successful when it is held in reserve.In 2004 Frank C. Zagare made the case that deterrence theory is logically inconsistent, not empirically accurate, and that it is deficient as a theory. In place of classical deterrence, rational choice scholars have argued for perfect deterrence, which assumes that states may vary in their internal characteristics and especially in the credibility of their threats of retaliation.In a January 2007 article in the Wall Street Journal, veteran cold-war policy makers Henry Kissinger, Bill Perry, George Shultz, and Sam Nunn reversed their previous position and asserted that far from making the world safer, nuclear weapons had become a source of extreme risk. Their rationale and conclusion was not based on the old world with only a few nuclear players, but on the instability in many states possessing the technologies and the lack of wherewithal to properly maintain and upgrade existing weapons in many states:

The risk of accidents, misjudgments or unauthorised launches, they argued, was growing more acute in a world of rivalries between relatively new nuclear states that lacked the security safeguards developed over many years by America and the Soviet Union. The emergence of pariah states, such as North Korea (possibly soon to be joined by Iran), armed with nuclear weapons was adding to the fear as was the declared ambition of terrorists to steal, buy or build a nuclear device.

According to The Economist, "Senior European statesmen and women" called for further action in 2010 in addressing problems of nuclear weapons proliferation. They said: "Nuclear deterrence is a far less persuasive strategic response to a world of potential regional nuclear arms races and nuclear terrorism than it was to the cold war".

Economic power

Economists use several concepts featuring the word "power":

Market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost

Monopoly power is a strong form of market power - the ability to set prices or wages unilaterally. This is the opposite of the situation in a perfectly competitive market, in which supply and demand set prices.

Purchasing power, i.e., the ability of any amount of money to buy goods and services. Those with more assets, or, more correctly, net worth, have more power of this sort. The greater the liquidity of one's assets, the greater one's purchasing power is. Purchasing power parity is a way of adjusting exchange rate valuations to reflect the actual goods or services that can be purchased for a given amount of currency.

Corporate power, the landmark of corporate capitalism, in which with corporations and large business interest groups have power and influence over government policy, including the policies of regulatory agencies and influencing political campaigns.

Bargaining power, i.e., the ability of players in a bargaining game to influence the outcome, which is the players sharing rule for something (a prize, a cake, access to resources).. Information is a contributor to bargaining power. In the case of two agents entering into a contract; if one agent knows that their deal with turn out significantly better, or worse, than the other suspects, then they are exercising a form of informational economic power (see information asymmetry).

Managerial power, i.e., the ability of managers to threaten their employees with firing or other penalties for not following orders or for not giving in satisfying reports. This exists if there is a cost of job loss, especially due to the existence of unemployment and workers' lack of sufficient assets to survive without working for pay.

Worker power, i.e., the ability of workers to threaten their managers with resignation for not providing satisfying working conditions. This exists if there is a cost of hiring, especially due to the existence of low unemployment, recruiting costs, or training costs.

Class power in Marxian political economy: under capitalism this refers to a situation where a minority (the capitalists) in society controls the means of production and thus is able to exploit the majority (the workers).Scholars of international relations also refer to the "economic power" of a country as a factor influencing its power in international relations.

Employment contract

An employment contract or contract of employment is a kind of contract used in labour law to attribute rights and responsibilities between parties to a bargain.

The contract is between an "employee" and an "employer". It has arisen out of the old master-servant law, used before the 20th century. But generally, the contract of employment denotes a relationship of economic dependence and social subordination. In the words of the controversial labour lawyer Sir Otto Kahn-Freund,

"the relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power. In its inception it is an act of submission, in its operation it is a condition of subordination, however much the submission and the subordination may be concealed by the indispensable figment of the legal mind known as the 'contract of employment'. The main object of labour law has been, and... will always be a countervailing force to counteract the inequality of bargaining power which is inherent and must be inherent in the employment relationship."

Group insurance

Group insurance is an insurance that covers a defined group of people, for example the members of a society or professional association, or the employees of a particular employer. Group coverage can help reduce the problem of adverse selection by creating a pool of people eligible to purchase insurance who belong to the group for reasons other than the wish to buy insurance, which might be because they are a worse than average risk. Grouping individuals together allows insurance companies to give lower rates to companies, "Providing large volume of business to insurance companies gives us greater bargaining power for clients, resulting in cheaper group rates."Group insurance may offer life insurance, health insurance, and/or some other types of personal insurance.

Industrial action

Industrial action (Commonwealth English) or job action (North American English) is a temporary show of dissatisfaction by employees, especially a strike or slowdown or working to rule to protest against bad working conditions or low pay and to increase bargaining power with the employer and intended to force the employer to improve them by reducing productivity in a workplace. Industrial action is usually organized by trade unions or other organised labour, most commonly when employees are forced out of work due to contract termination and without reaching an agreement with the employer. Quite often it is used and interpreted as a euphemism for strike or mass strike, but the scope is much wider. Industrial action may take place in the context of a labour dispute or may be meant to effect political or social change. This form of communication tends to be their only means to voice their concerns about safety and benefits.

It is also a legal term used to refer to almost the opposite phenomenon, an action taken by an employer that affects an employee's terms of employment, especially adversely.

Strike

Occupation of factories

Work-to-rule

General strike (mass strike)

Slowdown (or Go-slow)

Overtime ban

Blue flu

Inequality of bargaining power

In law, economics and the social sciences, an inequality of bargaining power is where one party to a "bargain", contract or agreement, has more and better alternatives than the other party. This results in one party having greater "power" than the other to choose not to take the deal and makes it more likely that this party will gain more favourable terms and grant them more negotiating power (as they are in a better position to reject the deal). Some believe that an inequality of bargaining power undermines the freedom of contract, resulting in a disproportionate level of freedom between parties, and that it represents a place at which markets fail.

Where bargaining power is persistently unequal, the concept of inequality of bargaining power serves as a justification for the implication of mandatory terms into contracts by law, or the non-enforcement of a contract by the courts.

Intra-household bargaining

Intra-household bargaining refers to negotiations that occur between members of a household in order to arrive at decisions regarding the household unit, like whether to spend or save, whether to study or work.

Bargaining is traditionally defined in economic terms of negotiating conditions of a purchase or contract and is sometimes used in place of direct monetary exchange. Bargaining process within a family is one of the important aspects of family economics. Bargaining also plays a role in the functioning and decision making of households, where agreements and decisions do not often have direct monetary values and affect various members of the household.

L. Susan Brown

L. Susan Brown (born 1959) is a Canadian anarcho-communist, writer and theoretician.

Brown is best known for her book The Politics of Individualism (1993) and for her article "Does Work Really Work?". In The Politics of Individualism, she makes a distinction between existential individualism and instrumental individualism and examines how these forms are utilized in liberalism (particularly liberal feminism) and anarchism. She argues for a new vision of human freedom which incorporates the insights of feminism and liberalism into a form of anarchism based on what she calls existential individualism. The work focuses specifically on the similarities and differences of these political philosophies by critically examining the liberal feminist writings of John Stuart Mill, Betty Friedan, Simone de Beauvoir and Janet Radcliffe Richards, especially focusing on the issues of employment, education, marriage and the family and governmental politics. In turn, these works are compared to the anarcha-feminism of Emma Goldman.

In both The Politics of Individualism and "Does Work Really Work?", Brown's conception of libertarian socialism is that all social bonds should be developed by individuals who have an equal amount of bargaining power because her view an accumulation of monetary wealth leads to the centralization of economic and political power in the hands of a small elite, reducing the bargaining power—and thus the liberty—of the other individuals in society. She provides an in-depth analysis of why the wage labor system is inherently corrupt and unreformable and why it must be abolished and replaced with a system in which people would be completely free to choose to perform (or not to perform) voluntary activities, a system that would encourage people to be creative and self-directed, that would celebrate enjoyment and fulfillment. Brown has published many articles on the political philosophy of anarchism and feminism and has had her work translated into Dutch, French, German and Finnish.

Brown works and lives in Toronto, Ontario and holds a PhD from the University of Toronto.

Lloyds Bank Ltd v Bundy

Lloyds Bank Ltd v Bundy [1974] EWCA 8 is a landmark case in English contract law, on undue influence. It is remarkable for the judgment of Lord Denning MR who advanced that English law should adopt the approach developing in some American jurisdictions that all impairments of autonomy could be collected under a single principle of "inequality of bargaining power."

Metropolis (painting)

Metropolis (German: Großstadt) is a 1928 painting by the German artist Otto Dix. It is a triptych with three nighttime city scenes from the Weimar Republic. The left panel shows a crippled war veteran approaching a group of prostitutes. The central panel shows the interior of a nightclub with a brass band, a dancing couple and scantily clad women with visible jewelry, as well as one person of ambiguous gender. The right panel shows a group of high-class prostitutes dressed in furs, ignoring the war cripple they walk by.

The themes of the painting are femininity, decadence and sexuality in the modern city. The art professor Marsha Meskimmon has written how the war veterans are "shown weakened in every way by the aggressive sexuality of Weimar women. Both the economic and sexual bargaining power rests with the demonized whores of modernity."The painting belongs to the Kunstmuseum Stuttgart since 1972.

Naked Capitalism

Naked Capitalism is an American financial news and analysis blog that "chronicles the large scale, concerted campaign to reduce the bargaining power and pay of ordinary workers relative to investors and elite technocrats".Under the pen name Yves Smith, Susan Webber, the principal of Aurora Advisors Incorporated and author of ECONned, launched the site in December 2006. She focused on finance and economic news and analysis, with an emphasis on legal and ethical issues of the banking industry and the mortgage foreclosure process, the worldwide effects of the banking crisis of 2008, the 2007–2012 global financial crisis, and its aftermath.

The site has had over 60 million visitors since 2007, and was cited as among CNBC's 2012 top 25 "Best Alternative Financial Blogs", calling Smith "a harsh critic of Wall Street who believes that fraud was at the center of the financial crisis".

National Labor Relations Act of 1935

The National Labor Relations Act of 1935 (also known as the Wagner Act) is a foundational statute of United States labor law which guarantees the right of private sector employees to organize into trade unions, engage in collective bargaining, and take collective action such as strikes. The act was written by Senator Robert F. Wagner, passed by the 74th United States Congress, and signed into law by President Franklin D. Roosevelt.

The National Labor Relations Act seeks to correct the "inequality of bargaining power" between employers and employees by promoting collective bargaining between trade unions and employers. The law established the National Labor Relations Board to prosecute violations of labor law and to oversee the process by which employees decide whether to be represented by a labor organization. It also established various rules concerning collective bargaining and defined a series of banned unfair labor practices, including interference with the formation or organization of labor unions by employers. The act does not apply to certain workers, including supervisors, agricultural employees, domestic workers, government employees, and independent contractors.

The NLRA was strongly opposed by conservatives and members of the Republican Party, but it was upheld in the Supreme Court case of NLRB v. Jones & Laughlin Steel Corp. The 1947 Taft–Hartley Act amended the NLRA, establishing a series of unfair labor practices for unions and granting states the power to pass right-to-work laws.

Porter's five forces analysis

Porter's Five Forces Framework is a tool for analyzing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.Porter refers to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low because the industry's underlying structure of high fixed costs and low variable costs afford enormous latitude in the price of airline travel. Airlines tend to compete on cost, and that drives down the profitability of individual carriers as well as the industry itself because it simplifies the decision by a customer to buy or not buy a ticket. A few carriers--Richard Branson's Virgin Atlantic is one--have tried, with limited success, to use sources of differentiation in order to increase profitability.

Porter's five forces include three forces from 'horizontal' competition--the threat of substitute products or services, the threat of established rivals, and the threat of new entrants--and two others from 'vertical' competition--the bargaining power of suppliers and the bargaining power of customers.

Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found both lacking in rigor and ad hoc. Porter's five-forces framework is based on the structure–conduct–performance paradigm in industrial organizational economics. Other Porter strategy tools include the value chain and generic competitive strategies.

Six forces model

The six forces model is an analysis model used to give a holistic assessment of any given industry and identify the structural underlining drivers of profitability and competition. The model is an extension of the Porter's five forces model proposed by Michael Porter in his 1979 article published in the Harvard Business Review "How Competitive Forces Shape Strategy". The sixth force was proposed in the mid-1990s. The model provides a framework of six key forces that should be considered when defining corporate strategy to determine the overall attractiveness of an industry.

The forces are:

Competition – assessment of the direct competitors in a given market

New Entrants – assessment in the potential competitors and barriers to entry in a given market

End Users/ Buyers – assessment regarding the bargaining power of buyers that includes considering the cost of switching

Suppliers – assessment regarding the bargaining power of suppliers

Substitutes – assessment regarding the availability of alternatives

Complementary Products – assessment of the impact of related products and services within a given marketAlthough there are a number of factors that can impact profitability in the short term – weather, the business cycle – an assessment of the competitive forces in a given market provides a framework for anticipating and influencing competitiveness and profitability in the medium and long term.

Unconscionability

Unconscionability (sometimes known as unconscionable dealing/conduct in Australia) is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

Unconscionability is determined by examining the circumstances of the parties when the contract was made, such as their bargaining power, age, and mental capacity. Other issues might include lack of choice, superior knowledge, and other obligations or circumstances surrounding the bargaining process. Unconscionable conduct is also found in acts of fraud and deceit, where the deliberate misrepresentation of fact deprives someone of a valuable possession. When a party takes unconscionable advantage of another, the action may be treated as criminal fraud or the civil action of deceit.

For the defense of unconscionability to apply, the contract has to have been unconscionable at the time it was made; later circumstances that make the contract extremely one-sided are irrelevant. There are generally no standardized criteria for determining unconscionability; it is a subjective judgment by the judge, not a jury, and is applied only when it would be an affront to the integrity of the judicial system to enforce such a contract. Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract against the party unfairly treated on the theory that they were misled, lacked information, or signed under duress or misunderstanding; it may refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.

Unconscionability in English law

Unconscionability in English law is a field of contract law and the law of trusts, which precludes the enforcement of consent-based obligations unfairly exploiting the unequal power of the consenting parties. "Inequality of bargaining power" is another term used to express essentially the same idea for the same area of law, which can in turn be further broken down into cases on duress, undue influence and exploitation of weakness. In these cases, where someone's consent to a bargain was only procured through duress, out of undue influence or under severe external pressure that another person exploited, courts have felt it was unconscionable (i.e., contrary to good conscience) to enforce agreements. Any transfers of goods or money may be claimed back in restitution on the basis of unjust enrichment subject to certain defences.

Considerable controversy is still present over whether "iniquitous pressure" must actually be exercised by a defendant in order for a consent based obligation to be voidable. While it seems clear that in cases of undue influence the pressure need not come from the person who may lose the contract it is open to debate whether circumstances exist where an obligation should be voidable simply because the person was pressured by circumstances wholly outside a defendant's control.

One of the most prominent cases in this area is Lloyds Bank Ltd v Bundy where Lord Denning MR advocated that there be a general principle to govern this entire area. He called the concept "inequality of bargaining power", while the American case espousing an equivalent doctrine, Williams v. Walker-Thomas Furniture Co. termed the issue one of "unconscionability". Note that even though it is accepted that an "inequality of bargaining power" is relevant to the doctrine of undue influence, Lord Denning's broader dictum on a general equitable principle of an "inequality of bargaining power" was later rejected by the House of Lords in National Westminster Bank plc v Morgan.

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