Chapter 24 UNCONSCIONABILITY: PROCEDURAL UNCONSCIONABILITY AND SUBSTANTIVE UNCONSCIONABILITY

JurisdictionNew York

Chapter Twenty-Four

Unconscionability: Procedural Unconscionability and Substantive Unconscionability

I. Unconscionability: Christian v. Christian

A. Public Policy Favors Upholding Agreements

New York has a strong public policy favoring individuals ordering and deciding their own interests through contractual arrangements.3476 However, this right is not and has never been without limitation. The State is deeply concerned with marriage and takes a supervisory role in matrimonial proceedings. Indeed, in numerous contexts, agreements addressing matrimonial issues have been subjected to limitations and scrutiny beyond that afforded contracts in general.3477 It should be noted that, while the Second Department, in Kessler v. Kessler,3478 offers instances of "numerous contexts, [where] agreements addressing matrimonial issues have been subjected to limitations and scrutiny beyond that afforded contracts in general", these instances address substantive matters rather than traditional wrongdoing such as fraud, duress, overreaching, etc.

Christian v. Christian,3479 a landmark decision regarding contractual relationships between husband and wife, is concordant with the history of precedent authority that firmly placed spouses in a confidential relationship.3480 The enactment of the Divorce Reform Act in 1966 ended approximately 176 years of legislation in the state where divorce was available exclusively on the grounds of adultery. In 1970, in Gleason v. Gleason,3481 the Court of Appeals stated:

(I)mplicit in the statutory scheme (N.Y. Domestic Relations Law § 170(5) (DRL)) is the legislative recognition that it is socially and morally undesirable to compel couples to a dead marriage to retain an illusory and deceptive status and that the best interests not only of the parties but of society itself will be furthered by enabling them "to extricate themselves from a perpetual state of marital limbo." 3482

The Court of Appeals, through Christian, acknowledged the new role of agreements in marital dissolutions:

This case is of moment. Important it is, because separation agreements have assumed a new and greater legal dimension. Not only may they serve as "evidence of the authenticity and reality of the separation" which is a basis for absolute divorce but, even though a portion of the agreement, such as one dealing with the economics or property of the marital parties, be declared void because of overreaching in bringing about its execution, the separation agreement still retains vitality as an essential ingredient in such an action for dissolution of the marriage. 3483

Christian underscored that, generally, a separation agreement which is regular on its face is binding on the parties unless and until it is put aside.3484 Judicial review is to be exercised circumspectly, sparingly and with a persisting view to the encouragement of parties settling their own differences in connection with the negotiation of property settlement provisions.3485 Furthermore, Christian added the element of "contextual significance" when there has been full disclosure3486 between the parties, not only of all relevant facts but also of their contextual significance, and there has been an absence of inequitable conduct or other infirmity which might vitiate the execution of the agreement, courts should not intrude so as to redesign the bargain arrived at by the parties on the ground that judicial wisdom in retrospect would view one or more of the specific provisions as improvident or one-sided.

Nevertheless, in the same breath, Christian cautioned:

Separation agreements subjected to attack are carefully tested. A court of equity does not limit its inquiry to the ascertainment of the fact whether what had taken place would, as between other persons, have constituted a contract, and give relief, as a matter of course, if a formal contract be established, but it further inquires whether the contract was just and fair, and equitably ought to be enforced, and administers relief where both the contract and the circumstances require it. 3487

Most significantly, Christian engrafted the notion of unconscionability into the law of interspousal contractual relations3488 and also emphasized the additional element of wrongdoing in the execution of the agreement as a predicate to a finding of manifest unfairness, discussed below. Overreaching, or some wrongdoing, and manifest unfairness comprise a two-tier test to be satisfied conjunctively; absent a predicate finding of overreaching, or some wrongdoing by the proponent of the agreement, a court may not reach manifest unfairness.3489

1. Facts in Christian

In Christian, the Court of Appeals reviewed a petition for divorce under DRL § 170(6), wherein the husband alleged that the parties had lived separate and apart for over a year pursuant to a separation agreement and that he had substantially complied with the agreement. The wife denied his allegations and asserted affirmative defenses that the agreement was procured by fraud, misrepresentations, concealment, coercion, duress, lack of consideration, and violations of public policy.

The economic provision at the core of the contest called for an equal distribution of the Christians' respective stock portfolios, whether held jointly or in their individual names as of a particular date. The wife contended that the husband was aware that his stocks listed in the schedule were worth $200,000 while those of the wife had a value of $800,000 to $900,000. The wife alleged that she had no idea of the relative values of the securities, the husband had cleverly maneuvered the retention of the attorney who drew the agreement, and neither party informed the attorney of the values of the stock being split. The trial court concluded that the husband's conduct constituted fraud as to vitiate the agreement in its entirety and also dismissed the husband's counterclaim of divorce.3490

The Appellate Division granted the husband's counterclaim for divorce based on procedural compliance with the statute but upheld the trial court's finding that the agreement was null and void.3491 The Appellate Division found that the record did not support a finding that the husband was guilty of fraud or overreaching, but rather, that the agreement was unconscionable because the wife had not been represented by an attorney acting solely in her interests, coupled with her lack of sophistication in financial matters and the fact that she had been prevailed upon by her husband for her signature.3492

The Court of Appeals twice emphasized the legislative agenda behind DRL § 170(6): to provide no-fault grounds for dead marriages; that it is morally and socially desirable to society and to the parties to enable them to extricate themselves from a perpetual state of marital limbo as long as the vital and operative fact in the statute, to wit, the actual living apart of the parties, has been satisfied and authenticated via agreement.3493 Once compliance of separate living has been met, there remain no further statutory restrictions to a conversion divorce.3494 Accordingly, a tainted agreement may retain its vitality3495 conditioned upon the inclusion of a severability clause.3496 The intent of the parties regarding severability must be gleaned from within the context of the agreement and the particular circumstances in which the agreement arose. 3497

The Court of Appeals made four significant pronouncements, all expressed in broad terms without defined parameters:3498

1. "There is a strict surveillance of all transactions between married persons, especially separation agreements." 3499
2. "Agreements between spouses, unlike ordinary business contracts, involve a fiduciary relationship requiring the utmost of good faith." 3500 It is critical to note that in April 2016, in Etzion v. Etzion, 3501 the Second Department made a groundbreaking ruling that is inconsistent with this element of Christian. Etzion affirmed the granting of those branches of the husband's motion to dismiss two causes of action of the wife's second amended complaint, which alleged that the husband breached his fiduciary duties he owed to her arising from their marital status and as co-shareholders of a certain marital business since "a fiduciary relationship ceases when parties become adversaries in litigation." The implications of this ruling await testing.
3. "Equity is so zealous in this respect that a separation agreement may be set aside on grounds that would be insufficient to vitiate an ordinary contract." 3502
4. These principles in mind, courts have thrown their cloak of protection about separation agreements and made it their business, when confronted, to see to it that they are arrived at fairly and equitably, in a manner so as to be free from the taint of fraud and duress, and to set aside or refuse to enforce those born of and subsisting in inequity." 3503
5. Although Christian reminds us that while Courts may probe an agreement's purported invalidity by looking at the terms of the agreement to see if there is "an inference, or even a negative inference, of overreaching in its execution," it, nevertheless, contradictorily underscores that the first step involves an examination as to the execution of the agreement and "if the execution of the agreement, however, be fair, no further inquiry will be made." 3504

Manifest unfairness, under Christian, does not, in and of itself, constitute a basis for vacatur; the manifest unfairness must be attributable to the wrongdoing of the proponent of the agreement. While Christian does not define "manifest unfairness," it means something other than "unconscionability."3505 The bold language in the four pronouncements appears to have been the product of intense judicial sentiment. Although the tenor in Christian suggests a facilitation to vacate ill agreements, the additional burden of establishing manifest unfairness places a fresh hurdle in the path of the...

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