American Software v. Ali

Citation: American Software, Inc. v. Ali, 46 Cal.App.4th 1386, 54 Cal.Rptr.2d 477 (1st Dist. 1996)(full-text)

Factual Background
Plaintiff was hired to sell and market licensing agreements for software products to large companies. In exchange for her services, defendant agreed to pay plaintiff a base monthly salary plus a draw. The terms and conditions of employment were set out in a written contract prepared by the defendant. The contract included specific circumstances under which the plaintiff was to receive commissions after termination. The agreement stated that "commissions are considered earned when the payment is received by the Company" and "in the event of termination, the right of all commissions which would normally be due and payable are forfeited 30 days following the date of termination in the case of voluntary termination."

Plaintiff sued her former employer to recover unpaid sales commissions that she generated while employed but which were remitted by customers after she voluntarily terminated her employment. The trial court entered a judgment for the plaintiff on the grounds that the provision in her employment contract, which terminated her right to receive commissions on payments received on her accounts 30 days after the termination of employment was unconscionable, and thus, unenforceable. Defendant appealed.

Appellate Court Proceedings
The Court of Appeals held that provision was not unconscionable. Civil Code Section 1670.5 codified the established doctrine that a court can refuse to enforce an unconscionable provision in a contract. The basic test of unconscionability is whether, in the light of the general background and the needs of the particular, the clause involved are so one-side as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risk because of superior bargaining power.

Unconscionability of contract is ultimately a question of law for the court. Most California courts analyze unconscionability as having two separate elements &mdash; procedural and substantive. A showing of both procedural and substantive unconscionability at the time the contract was made is generally required.

Substantive unconscionability focuses on the actual terms of the agreement, while procedural unconscionability focuses on the manner in which the contract was negotiated and the circumstances of the parties. Substantive unconscionability is indicated by contract terms so one-sided as to “shock the conscience”.

Substantive unconscionability focuses on actual terms of agreement, while procedural unconscionability focuses on manner in which contract was negotiated and circumstances of parties. Indicia of procedural unconscionability include oppression, arising from inequality of bargaining power, the absence of real negotiation or meaningful choice, and surprise, resulting from hiding the disputed term in a prolix document. The critical junction for determining whether a contract is unconscionable is the moment when it is entered into by both parties—not whether it is unconscionable in light of subsequent events.

When the instant contract was executed, the contract provision with respect to compensation after termination was so unfair or oppressive in its mutual obligations as to “shock the conscience”. The plaintiff was aware of her obligations under the contract and she voluntarily agreed to assume them. The provisions of the employment contract are straightforward and the terms used are easily comprehensible to the layman.

There were no unclear or hidden terms in the employment agreement and no unusual terms that would shock the conscience, all leading to the conclusion that the contract accurately reflected the reasonable expectations of the parties. Overall, the evidence established that the employment contract was the result of an arm's-length negotiation between two sophisticated and experienced parties of comparable bargaining power, and was fairly reflective of prevailing practices in employing commissioned sales representatives with ongoing responsibilities to service the account once the sale was made. Therefore, the contract fails to qualify as unconscionable.