How-to guide: What makes a consumer contract invalid (USA)

Introduction

This guide will assist in understanding the various factors that can make a consumer contract invalid under US consumer protection laws. Avoiding invalid contracts not only promotes fairness and prevents legal disputes but also builds trust between parties, ultimately safeguarding both consumer rights and business reputations. It is aimed at in-house counsel, private practice lawyers, and compliance personnel.

This guide covers:

1. What is a consumer contract?
2. Unconscionability
3. Illegal subject matter
4. Duress
5. Lack of capacity
6. Contracts of adhesion
7. Statute of frauds
8. Misrepresentation

For further information, see How-to guide: How to effectively incorporate standard terms and conditions in a commercial agreement or transaction and Checklists: What to consider when terminating a contract and What to consider to ensure a contract is valid.

Section 1 – What is a consumer contract?

The definition of ‘consumer contract’ varies from jurisdiction to jurisdiction, but a consumer contract is a legally binding agreement between a business and a consumer for the purchase of goods or services. These contracts are governed by state and federal laws to protect consumers from unfair practices.

There is no national law for consumer contracts, although there are federal laws that regulate specific aspects of consumer transactions and each state has its own individual contract laws such as the Uniform Commercial Code (UCC), which governs sale of goods transactions, or the Uniform Deceptive Trade Practices Act, which proscribes a range of business practices, including advertising. Identifying which jurisdiction’s law applies is essential to ensure compliance with state-specific provisions. As a general rule, the governing law will be the law of the state in which performance is to take place; however, there are other factors that may mandate the application of another jurisdiction’s laws. For example, it is common for credit card agreements to state that the applicable law is the law of the state in which the bank issuing the card is incorporated, even if the consumer who holds the card is not a resident of that state. Such provisions are upheld if there is some relationship between the chosen jurisdiction and the parties to the transaction.

1.1 Federal law

At the federal level, there are statutes that regulate specific aspects of consumer transactions. These include the following:

• The Federal Trade Commission Act (15 USC sections 41 – 58) regulates fair commercial practices, especially regarding advertising and marketing, and also grants the Federal Trade Commission broad authority to enforce the law. 

• The Federal Arbitration Act (Title 9 of the USC) makes arbitration agreements enforceable, reflecting a stated national policy of encouraging arbitration. 

• The Magnuson-Moss Warranty Act (15 USC Chapter 50), sometimes referred to as the federal ‘Lemon Law,’ covers warranties on consumer products.

• The INFORM Consumers Act was enacted in 2023 and is enforced by the FTC. The Act requires online marketplaces to obtain specific information from certain ’high-volume third party sellers’ and to ensure that information about those sellers is clearly disclosed to consumers. 

Because INFORM Consumers Act is relatively recent, businesses should examine the advisory ‘What Third Party Sellers Need to Know About the INFORM Consumers Act’ which has been released by the FTC to guide third party marketplaces.

1.2 State law

These laws provide a definition of ‘consumer’ and typically a consumer is an individual entering into a transaction for their own benefit. Under the Ohio Consumer Sales Act (Ohio Rev Code section 1345.01), for example, a ‘consumer’ is an individual who enters into a transaction for the:

sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, a franchise, or an intangible . . . for purposes that are primarily personal, family, or household, or solicitation to supply any of these things.

In Connecticut, however, the state laws regulating buying clubs (ie, entities offering memberships to consumers for a fee) define ‘consumer’ as ‘any person who purchases a consumer good or service other than for resale,’ with ‘consumer goods or services’ being defined as ‘goods or services purchased or leased primarily for personal, family, leisure, entertainment or household purposes.’ See, Conn Gen Stat section 42-310. California has a myriad of consumer protection laws, with several new provisions taking effect in 2025.

Section 2 – Unconscionability

The doctrine of unconscionability is a defense to an action for a breach of contract. To prevent unjust outcomes, courts will decline to enforce a contract that is found to be unconscionable. The doctrine has its origin in English common law and equitable practice and was accepted in US law in the early 19th century.

Unconscionability is largely a matter of state contract law. It is a common law doctrine that has also been incorporated into the UCC. See UCC section 2-302:

If the court as a matter of law finds the contract  or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. Any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

2.1 What is unconscionability?

In US law, ‘unconscionable’ actions refer to situations that are unscrupulous, or are so unjust that they shock the conscience. This term is often used to refer to situations in contract law either where a contract or a contract term within a contract is oppressive and unfair to one party. Unconscionability in consumer contracts often arises when the terms are so unfairly one-sided that they shock the conscience of the court (see 2.3 below). This occurs when there is a significant disparity in information or bargaining power between the parties.

There are two main types of unconscionability:

• procedural unconscionability; and
• substantive unconscionability.

The two types of unconscionability are described below, and how they are applied by legal authorities may vary. For example, in California, it has been held that a waiver on the grounds of unconscionability is enforceable only if the waiver is both procedurally and substantively unconscionable. See Shroyer v New Cingular Wireless Servs, Inc, 498 F.3d 976, 981 (9th Cir. 2007).

2.1.1 Procedural unconscionability

Procedural unconscionability relates to inequities, improprieties, or unfairness in the bargaining process and the formation of a contract. Procedural unconscionability deals with the various inadequacies that prevent a genuine and voluntary ‘meeting of the minds’ between the parties. Such inadequacies, include, but are not limited to, factors such as:

• the age, literacy, or lack of sophistication of a party; 

• hidden or unduly complex contract terms; 

• the adhesive nature of the contract; and 

• the manner and setting in which the contract was formed, including whether each party had a reasonable opportunity to understand the terms of the contract. 

The doctrine of procedural unconscionability is a means of ensuring that the contracting party knows what they are agreeing to do or not do.

2.1.2 Substantive unconscionability

This focuses on the terms of a contract that are excessively one-sided or harsh such that they would effectively ‘shock the conscience’ of a reasonable person. See Sanchez v Valencia Holding Co, LLC, 61 Cal 4th 899, 935, 353 P3d 741, 748 (2015).

In assessing substantive unconscionability, courts examine the specific terms of the contract and consider the circumstances that prevailed when the contract was formed. This evaluation also considers the prevailing norms and business practices of the relevant time and place.

The key takeaway from this case is that courts can refuse to enforce a contract that is deemed unconscionable if it is excessively unfair or oppressive to one party, especially in situations in which there is a significant imbalance in the parties’ bargaining power. This allows the integrity of contractual agreements to be upheld while at the same time protecting parties from fundamentally unjust or oppressive terms.

2.2 Disparity of information or bargaining power

Unconscionability can be avoided by drafting a consumer contract in a way that allows both parties to access and understand all relevant information about the contract. Additionally, it is crucial to avoid taking advantage of a consumer’s lack of knowledge or unequal bargaining power. Clear disclosure of all the essential terms of a contract is necessary. For further information, see How-to guide: How to effectively incorporate standard terms and conditions in a commercial agreement or transaction.

2.3 ‘Shock the conscience’

The doctrine of unconscionability also includes contractual terms that are excessively harsh, one-sided, or oppressive. Contracts should be drafted without terms that overwhelmingly favor one side to the detriment of the other. The key word here is ‘overwhelmingly.’

In Jones v Star Credit Corp 59 Misc 2d 189 (1969), the New York Supreme Court in Nassau County found a sales contract unconscionable because the price was grossly excessive compared to the value of the goods. In this case, the plaintiffs purchased a home freezer unit for $900. With the addition of the time credit charges, credit life insurance, credit property insurance, and sales tax, the purchase price totaled $1,234.80. By the time the case reached the court, the plaintiffs had paid $619.88, but with various added credit charges, they still owed $819.81. The unchallenged evidence at the trial showed that the freezer unit had a maximum retail value of approximately $300 at the time of purchase.

Determining what shocks the conscience is a case-by-case decision based on the particular facts of each case. There is no ‘bright line’ rule that sets a maximum acceptable price to value ratio.

2.4 Implied duty of fairness and good faith

Implied fairness and good faith are essential elements in every contract agreement between two parties. Most US jurisdictions impose a common law duty of good faith and fair dealing in all contracts. This common law duty is reflected in statutory law. The UCC (UCC 1-304) states that ‘[e]very contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.’

In the context of the UCC, at UCC 1-201, ‘good faith’ means ‘honesty in fact and the observance of reasonable commercial standards of fair dealing.’ For contracts involving the sale of goods, the UCC at UCC 2-103 further specifies that the good faith of a merchant (ie, a person engaged in the business of selling goods of a particular kind) means ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.’

The principle of good faith requires that neither party should be misled or coerced into agreeing to terms that are not mutually beneficial. Courts typically examine whether the contract was negotiated in a way that considers the interests of both parties fostering a fair and equitable relationship.

Section 3 – Illegal subject matter

‘Illegality,’ in the context of contracts, means agreements that contain elements violating statutory provisions or, more generally, public policy. A contract is illegal if its formation, subject matter, or performance involves prohibited activities. Illegal agreements are void and unenforceable.

Sometimes, a contract may have a legal subject matter but be intended for an illegal purpose. In such cases, the enforceability of the contract depends on the knowledge and intentions of the parties involved. If one party is aware of the illegal purpose, they may still have the right to enforce the contract if they do not participate in the illegal conduct.

To be valid and enforceable, a contract must adhere to all relevant federal and state laws. Contracts that violate these laws are considered illegal and void. This includes compliance with consumer protection and trade practice regulations, as well as with other statutory mandates.

Contracts that violate public policy are also deemed illegal even if there is no statute that necessarily makes the agreement. For example, agreements that restrain trade unreasonably, such as specific non-compete clauses, may be invalidated by a court if they are found to excessively limit an individual’s ability to work or conduct business even if the local law does not make all non-compete agreements invalid. Such contracts will be scrutinized to ensure they do not unfairly impede economic freedom or the competitive market environment. For further information, see How-to Guide: How to draft enforceable restrictive covenants for employees.

Section 4 – Duress

Duress occurs when someone is forced to enter a contract they would not otherwise agree to. This pressure can involve physical force, such as being held at gunpoint, or threats of force. More commonly, it involves economic pressure, such as threatening to destroy someone’s property unless they sign a contract. To prove economic duress, or ‘business compulsion,’ the threat must involve a serious business loss that is so urgent resolving it in court is impractical. The victim must show that the immediate pressure and their vulnerability to it were caused by the other party. See Nord v Eastside Ass'n Ltd, 34 WnApp 796, 798, 664 P2d 4 (1983).

Duress will rarely be found in consumer contracts. Contracts involving real threats of force or violence are almost never litigated. Economic duress claims usually involve claims arising from business relationships.

Section 5 – Lack of capacity

All parties must have the legal capacity to enter into a contract for it to be valid. Some individuals are legally unable to enter into contracts.

5.1 Minors

In most states, individuals under the age of 18 cannot enter contracts, except for necessities such as food and lodging, or equipment or supplies needed to conduct a trade or business to support themselves. A minor can choose to honor or void the contract at their discretion. However, in some states, the minor must void the contract before turning 18, or they lose that right. Only the minor can void the contract. The minor can enforce the contract, and the other party cannot raise the minor’s incapacity as a defense.

5.2 Mental incapacity

Individuals with mental deficiencies may lack the capacity to enter contracts, except for necessities (such as food, clothing and lodging). This includes those with a mental illness or cognitive impairment that means they do not have mental capacity to understand the terms and conditions or the implications of entering into a contract. They or their guardian can void the contract. States use different tests to assess mental capacity. Two examples of tests used to assess mental capacity are as follows:

• Cognitive test – this test considers whether a person understands the contract’s terms and implications. If they do, they are considered to have capacity to enter into a contract.

• Affective test – this test invalidates the contract if the other party was aware of the individual’s mental deficiency at the time of negotiating the contract and took advantage of that fact.

5.3 Intoxication

A party’s intoxication does not necessarily make a contract void. As a general rule, individuals under the influence of drugs or alcohol are considered capable of entering into contracts, as voluntary intoxication should not excuse a person from fulfilling their contractual obligations. However, if their intoxication prevented a person from understanding the nature and consequences of the agreement, and the other party exploited this, the intoxicated person may void the contract. This helps to protect people being taken advantage of if they are intoxicated when entering into a contract. The intoxicated person must disaffirm the contact within a reasonable time of sobering up.

Section 6 – Contracts of adhesion

6.1 What are contracts of adhesion?

A contract of adhesion, also known as a standard form contract or boilerplate agreement, is one where one party sets the terms, and the other party has little to no ability to negotiate. These contracts present a ‘take it or leave it’ situation and are common in high-volume consumer contracts such as leases, insurance, mortgages, and automobile purchases.

Contracts of adhesion are generally enforceable. Due to the unequal bargaining power, however, the courts scrutinize these contracts closely to ensure they are not unfair or unconscionable. The ‘reasonable expectation’ test is often applied by the court to determine enforceability, invalidating terms that exceed what the weaker party could reasonably expect or where it is unduly oppressive, unconscionable or against public policy.

6.2 Types of electronic contracts of adhesion

There are three types of electronic contracts of adhesion: browse-wrap, click-wrap, and sign-in wrap.

Browse-wrap contracts may require consumers to click through multiple hyperlinks to access and agree to the terms and conditions. Courts often do not enforce these contracts due to the procedural unconscionability of their hidden contractual terms. See Jerez v JD Closeouts, LLC, 36 Misc 3d 161 (2012).

On the other hand, courts generally enforce click-wrap and sign-in-wrap contracts when the terms of those contracts are presented clearly and when users have a reasonable opportunity to review them before signing. Click-wrap contracts require consumers to click ‘I agree’ via an immediately available pop-up box. See Caspi v Microsoft Network, 323 NJ Super 118 (1999), which considers the enforceability of a click-wrap contract. These contracts are enforceable if they are online agreements requiring users to click on a button to confirm acceptance of the terms. By doing so, they confirm consent to the terms. The court held the click-wrap agreement to be enforceable as there was sufficient opportunity presented to review the terms before accepting them. Most of the cases relating to this term are pre-trial procedural rulings, not final adjudications.

Sign-in wrap contracts feature a hyperlink labeled as ‘Terms of Service’ or ‘Terms and Conditions’ near the sign-up button. Users must electronically accept the terms by clicking ‘I accept’ or ‘I agree’ during the final step of the sign-up process before they can use the products or services.

Section 7 – Statute of frauds

Verbal contracts are considered as valid and enforceable as written ones, although there are often issues regarding proof of a verbal agreement. However, the Statute of frauds (the Statute) a legal doctrine that has its origins in the 1677 English Statute of Frauds requires certain types of contracts to be in writing to be enforceable.

7.1 Statewide adoption

The Statute has been adopted in almost every US jurisdiction, either by legislative enactment or by court decision. The Statute’s provisions have been formalized in most jurisdictions through specific legislation. To meet the requirements of the Statute, certain written contracts will be enforced only if they are in writing, and only of they include certain essential elements: the names of the contracting parties, the terms and conditions, and the subject matter. Furthermore, the contracting parties must sign the document to ensure its validity.

Examples of contracts that must be in writing include:

• agreements for the sale or transfer of land interests;
• contracts that cannot be completed within one year;
• promises by an executor to pay estate debts from personal funds;
• contracts made in consideration of marriage;
• suretyship contracts (where one party agrees to pay another’s debt);
• agreements for the sale of goods over $500 (see UCC section 2-201); and
• certain categories of contract terms, such as a disclaimer of warranties.

Ensuring contracts are in writing aims to prevent fraud and consumer misunderstanding by having clear, written evidence of what has been agreed.

7.2 Verbal contracts

There are some circumstances in which a verbal contract that would otherwise be unenforceable because it was not in writing will be enforced. Under the UCC, a verbal contract for the sale of goods that are specially made for the buyer is enforceable if the goods are not suitable for resale in the ordinary course of the seller’s business To be enforceable, the contract must not have been repudiated and the seller must have made either a substantial beginning of their manufacture or commitments for the procurement of the goods. A verbal contract will also be enforced if payment for the goods has been accepted by the seller. If a party admits in a court pleading or testimony that a contract was made, the contract will be enforced even if it is not in writing. UCC 2-201.

Section 8 – Misrepresentation

A misrepresentation is defined in the Second Restatement of Contracts, section 159 as an assertion that is not in accord with the facts. See Kim v Contractors License Bd, 88 Haw 264, 965 P2d 806 (1998). If the fraudulent misrepresentation induces a party to enter into a contract, and if that party’s reliance on the misrepresentation is justified, the contract is voidable by the person who is induced. It is crucial that the reliance was ‘reasonable.’ 

A voidable contract is enforceable unless the party to whom the misrepresentation is made disavows it.

Additional resources

Related Lexology Pro content

How-to guides:

How to effectively incorporate standard terms and conditions in a commercial agreement or transaction

Checklists:

What to consider when terminating a contract
What to consider to ensure a contract is valid

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