Maxwell v. Fidelity Financial Services, Inc.

Supreme Court of Arizona, En Banc · 1995 · Contracts

ContractsUnconscionabilityNovationSummary JudgmentA.R.S. § 47-2302substantive unconscionabilityprocedural unconscionabilitygross price disparity

Facts

In 1984 Maxwell financed the purchase of a solar home water heater through Fidelity for $6,512 at 19.5 percent interest over ten years, producing a total time-price of nearly $15,000, and the loan documents also placed a lien on her house. The heater was never properly installed, never functioned properly, and was eventually condemned and disconnected by the City of Phoenix. After paying for about three and one-half years, Maxwell borrowed an additional $800 from Fidelity in 1988, and Fidelity required her to sign a new contract that rolled in the unpaid balance of the 1984 loan, a life insurance charge, and the new cash loan, again at 19.5 percent interest and secured by similar documents. Maxwell later sued, asserting that the 1984 contract was unconscionable, while Fidelity argued that the 1988 contract constituted a novation barring that claim.

Issue

Whether the trial court could grant summary judgment for Fidelity on the ground of novation without first determining whether the 1984 contract was unconscionable and therefore unenforceable. Also, whether Arizona law permits unconscionability to be shown by substantive unconscionability alone, and whether Taylor's contract-interpretation principles apply to these issues.

Rule

Under A.R.S. § 47-2302, unconscionability is for the court to determine as a matter of law, after giving the parties a reasonable opportunity to present evidence of the contract's commercial setting, purpose, and effect. Unconscionability may be established by substantive unconscionability alone, particularly where there is gross price-cost disparity or harsh remedial terms. A valid novation requires a previously valid and enforceable obligation, agreement to a new contract, extinguishment of the old debt, and validity of the new contract; thus an unconscionable and unenforceable obligation cannot be validated through novation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Tucson, Marisol Vega bought a home backup generator through financing arranged by Desert Mesa Credit. She later sued, alleging the contract was unconscionable because the financed price and security terms were extraordinarily harsh, and she demanded a jury trial on that issue.

Who should determine whether the contract was unconscionable?

Explanation. Under the majority opinion, unconscionability is determined by the court as a matter of law. The court may make incidental factual findings, but that does not convert the issue into one for the jury. The parties must be given a reasonable opportunity to present evidence concerning the contract's commercial setting, purpose, and effect before the court rules.