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Imagine a situation where an employer offers an employee a contract that stipulates that all disputes should be resolved by some arbitration panel in a tax haven. I don't know about America but I am pretty sure that most/all Western European courts would ignore such a clause and apply the local labour laws in case of a dispute because it would be considered unreasonable that a strong part (the employer) could force a weak part (the employee) to enter a contract that favoured the strong part (it is usually very expensive and difficult to engage a arbitration panel in a foreign country).

Another similar situation would be that a big company, like Apple or Google, in their terms and conditions for a consumer service prescribed that all disputes should be resolved as in the previous example. Again, I think most courts would ignore such a clause and instead apply the local consumer laws for the same reasons as in the previous example.

A third example could be parents and their minor children. I have some difficulties coming up with a good example but say that a grandparent willed a large amount of money to a minor grand child and that in the current jurisdiction A, the parent's aren't allowed to access this money. The parents therefore decide to move to another country B that allows them free access to their children's money (and waste it while the child still is a minor).

Finally the child returns to A and seeks compensation. I reckon a court in A would apply A's laws to the situation and conclude that the move to B benefited the parents in an extremely one-sided and unfair way since the child had no means to object to the decision to move, and as a consequnce was robbed on her/his money.

If the situation had been a married couple (or soon-to-be married couple) where one party X had a lot of money that the other party Y had no access to in A but free access to in B and the couple voluntarily and consensually moved from A to B, I doubt that X could seek compensation from Y for spending the money because they are both adults with full legal rights and responsibilities and if they decide to marry and live in B rather than A, X can't afterwards return to A and demand that the courts in A should overrule the laws in B.

The third example(s) is quite artificial so no need to nitpick on details...

But back to the question. If I generalize the examples above there is one strong party and one weak party. The strong party, more or less, forces the weak party to enter an agreement that heavily benefits the strong party. Such a contract would in many cases not be upheld by a court because it is considered unfair. Is this "principle" called something?

I am interested in answers that go all the way back to the Roman legal system and up to current "Western" legal systems.

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  • Great and interesting answers. It would be very appreciated if someone could chime in on how it works in e.g., France or Germany, as well, since they have a different legal tradition than the Anglo-Saxon world. – d-b Apr 14 at 6:19
  • See this URL for a discussion of how arbitration clauses apply to consumers in the EU and UK. arbitrationblog.practicallaw.com/… – Paul Johnson Apr 14 at 16:33
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You're thinking of "unconscionability."

In the United States, the general rule is that a contract provision will not be deemed unenforceable for unconscionability unless it is both procedurally and substantively unfair.

A provision is considered procedurally unfair if it results from some sort of unfair asymmetry in bargaining positions. This could include situations where a party was acting under duress, had a diminished mental capacity, or unequal experience in the .

A provision may be considered substantively unfair if it imposes disproportinately unfavorable terms on one party, perhaps by imposing costs far out of line with market prices, or by allocating all risk to that party.

If the agreement is not both procedurally and substantively unconscionable, it won't be voided. So the Google TOS may be procedurally unfair because Google's market position gives it disproportionate bargaining power, but because they don't really impose any serious costs on you, they aren't unconscionable. Similarly, a contract provision requiring you to give me your house if you ever forget to turn off the porch lights at night wouldn't be unconscionable if it was agreed to after lengthy negotiations between our lawyers.

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  • How is the latter example (house for forgetting to turn lights off) not substantively unconscionable? Because our lawyers agreed so? Because they took long time to agree? Both? – Greendrake Apr 14 at 3:37
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    The lawyers' involvement makes the agreement not procedurally unfair/unconscionable. Because it is not procedurally unfair/unconscionable, substantive unfairness/unconscionability becomes irrelevant. The provision will not be nullified as unconscionable unless it is both procedurally and substantively unfair. – bdb484 Apr 14 at 7:06
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    It's hornbook contract law. Let me see if I can find a representative case. – bdb484 Apr 14 at 16:08
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    Shamoun & Norman, LLP v. Yarto Int'l Grp., LP, 398 S.W.3d 272, 294 (Tex. App. 2012) ("YIG contends that the agreement regarding venue was unconscionable at the time it was made. We disagree. All parties to the December 9, 2010 agreement were sophisticated business entities and were represented by competent counsel throughout the settlement negotiations."). – bdb484 Apr 14 at 16:20
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    Also: Askinuk Corp. v. Lower Yukon Sch. Dist., 214 P.3d 259, 268–69 (Alaska 2009) ("The superior court held that the lease in this case was not unconscionable. It concluded that, because Askinuk was represented by counsel and was experienced in the art of negotiation, no disparity of bargaining power was present. ... Askinuk has not demonstrated that the superior court's conclusion was erroneous."). – bdb484 Apr 14 at 16:22
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General Principles

There is no general prohibition at law for a party with a better negotiating position to negotiate a better deal at the expense of the weaker party - that's just business and business is legal. There is a legal assumption that parties approach contracts as independent, rational actors who, while they may not have equal power, do have the power to refuse deals that they decide are not to their overall benefit.

However, coercion is not legal but coercion is more than just using power - it must involve the use of threats of or actual harm (physical, emotional or financial) to influence the coerced. A potential employee is free not to take a job, a potential customer is free not to use a company's service etc.

A court will rarely overturn a contract that is freely entered into even if some of the terms distinctly benefit one party over the other - it's not the job of the court to substitute its judgement what constitutes a good deal for the judgement of the parties. At common law, a court will only intervene if it is unconscionable - "particularly harsh or oppressive, and is beyond hard commercial bargaining." For example, an Australian court determined that a bank couldn't rely on a deed of guarantee signed by the borrower's elderly father in circumstances where the bank knew the father did not speak English and had not received independent legal advice - that's the sort of level you have to get to to be unconscionable, behaviour so bad that "it must be against conscience as judged against the norms of society."

Some jurisdictions have gone further and have outlawed "unfair" terms, particularly in consumer contracts. However, that is still not an easy bar to reach. For example, under the Australian Consumer Law (my emphasis):

  • if the contract term is one-sided and greatly favours the business over the consumer, and

  • there is no satisfactory commercial reason why the business needs such a term, and

  • the consumer will suffer financial loss, inconvenience or other disadvantage if the term is enforced, then it may be unfair.

Your specific examples

Imagine a situation where an employer offers an employee a contract that stipulates that all disputes should be resolved by some arbitration panel in a tax haven.

This would be unlawful. Employment disputes can be resolved through facilitating dispute resolution (e.g. negotiation, mediation) but only the Industrial Relations Commission has the power to make binding determinations for employment relations governed by the Commonwealth Fair Work Act (i.e. where the employer is a corporation or where the employment happens in a territory or Victoria). Other states have equivalent bodies to deal with issues under state law (i.e. where the employer is a sole trader or partnership or a State or Local government).

Another similar situation would be that a big company, like Apple or Google, in their terms and conditions for a consumer service prescribed that all disputes should be resolved as in the previous example.

There is no reason to believe this would not be upheld - arbitration is legal in and parties are free to agree the details (including venue) in the arbitration agreement. For example, Uber Australia has such a clause with its seat in Amsterdam, the Netherlands.

Australian Consumer Law prohibits unfair contract terms - here are the requirements for B2B transactions (B2C have broader application but the same measure of “unfairness”). An arbitration clause is not ipso facto unfair. Even Uber’s requirement that it have its seat in Amsterdam does not require anyone to actually go to Amsterdam- it can all be done remotely.

A third example could be parents and their minor children. I have some difficulties coming up with a good example but say that a grand parent willed a large amount of money to a minor grand child …

This creates a testimonial trust with (unless the will provides otherwise) the executor as trustee. The executor has control of the assets and is legally obliged to follow the rules of the trust for the best interest of the beneficiary. The trustee might be the parent(s) but it might also be someone else.

The laws that apply are where the trust is domiciled, not where the trustee or beneficiaries happen to be.

If the trustee breaches their duty the beneficiaries have a cause of action and can pursue the trustee for the loss, but, if the money’s gone, the money’s gone.

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  • It seems to me OP is not asking about the likely outcome of these disputes, but rather how the courts deal with the broader issue of allegedly unconscionable terms. – bdb484 Apr 14 at 0:43
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Imagine a situation where an employer offers an employee a contract that stipulates that all disputes should be resolved by some arbitration panel in a tax haven.

This is likely to be upheld under U.S. law under the Federal Arbitration Act. It isn't an open and shut case, but maybe a 70%-80% chance or more that it would be upheld.

Another similar situation would be that a big company, like Apple or Google, in their terms and conditions for a consumer service prescribed that all disputes should be resolved as in the previous example.

This is very likely to be upheld under U.S. law under the Federal Arbitration Act. It isn't a completely open and shut case, but maybe a 85%-95% chance or more that it would be upheld.

A third example could be parents and their minor children. I have some difficulties coming up with a good example but say that a grand parent willed a large amount of money to a minor grand child and that in the current jurisdiction A, the parent's aren't allowed to access these money. The parents therefore decide to move to another country B that allows them free access to their children's money (and waste it while the child still is a minor).

Finally the child returns to A and seeks compensation. I reckon a court in A would apply A's laws to the situation and conclude that the move to B benefited the parents in an extremely one-sided and unfair way since the child had no means to object to the decision to move, and as a consequnce was robbed on her/his money.

Normally, jurisdiction and venue over trust disputes are governed by the situs of the trust and not the situs of the beneficiaries in U.S. law.

But assume for the sake of argument that Country B acquired jurisdiction over all parties (perhaps simply because no one raised a jurisdiction dispute in the litigation) and applied Country B law rightly or wrongly applying Country B's choice of law rules and that ruling was not timely appealed. In that case, the child would have no remedy. The child would also almost never have a claim against co-beneficiaries for something the trustee authorized.

If I generalize the examples above there is one strong party and one weak party. The strong party, more or less, forces the weak party to enter an agreement that heavily benefits the strong party. Such a contract would in many cases not be upheld by a court because it is considered unfair. Is this "principle" called something?

The main principle you are trying to articulate is unconscionability. But the bar to invoke that doctrines is very, very high. Generally speaking, no amount of stronger bargaining power argument will prevail in a case where a contract or other legal instrument established a forum, if the parties signing are competent to enter into contracts or execute legal instruments, and the legal documents are in a language that they can read.

I have seen these kinds of terms upheld in circumstances much more extreme than those in the OP.

Another kindred doctrine is called "economic duress", but claims of economic duress almost always fail.

The typical unconscionability fact pattern involves a grossly unfair substantive term coupled with some sort of deceit hiding an unrelated and unexpected term in a contract of adhesion (e.g. a shrink wrap agreement that signs over your first born child in the event that you make an unauthorized copy of the software), by using tiny print that can't be seen (for example, an online agreement that is black on black and can only be read in source code), by using a language not known to the person and misrepresenting in the translation what the challenged term says, or by manipulating someone who is a minor or feeble minded into agreeing to something.

Duress is typically available in cases, for example, of threatened physical force applied to someone or threatened illegal actions. It is usually overlapping with criminal extortion.

There are specific terms of agreements that can be void as against public policy on a per se basis (e.g. a waiver of claims for conduct of the other party intentionally harming you, or liquidated damages that don't reasonable approximate expected harm ex ante or don't reflect a situation where actual damages are hard to determine, interest rates above statutory usury rates, conditioning an inheritance on divorcing your current spouse, fee tail estates in real property in some jurisdiction, prenups resolving in advance child custody between coparent spouses), but there aren't many of them and the ones you mention aren't among them.

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  • Interesting that US courts will upheld contracts like this. I know for sure that at least some European courts wouldn't. I guess it depends on what is the "default rule" in e.g., consumer law. – d-b Apr 13 at 20:04
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    @d-b U.S. law tolerates more conduct that most developed countries would find unconscionable, especially with respect to dispute resolution, than almost any other developed country. – ohwilleke Apr 13 at 20:06
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In the UK its somewhat more complex. Much the same principles apply to "unconscionable" contracts, and its a high bar to reach. However for consumers there are distinct rules that apply to terms considered "unfair", and especially in "contracts of adhesion" where one party simply presents a page of fine print and does not permit any negotiation on the terms.

Employment contracts in the UK are quite tightly regulated. You have the right to take any dispute to an employment tribunal, for which there are no fees. There are a bunch of other rights you get as an employee, and you can't sign any of them away in a contract.

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