Someone recently shared with me a provision of a contract that they entered into with their bank for a security deposit box. The provision reads:
“The Bank shall not be liable to you for our performance or failure to perform our obligations under this agreement, except where we have failed to act in good faith, or for loss or destruction of or damage to the contents of your safe deposit box unless such destruction or damage was caused by our gross negligence or willful misconduct.”
As a consumer, these types of contracts offend my sense of justice. I think many people are similarly offended. The contract essentially says, “We promise to do things, but we aren’t liable for not doing those things unless we acted in bad faith.” I wonder if the bank would agree to giving me a loan if I promised to pay them back, but would only be liable for a failure to pay if that failure resulted from bad faith. How many “contracts” do you “agree” to each day that have terms that are grossly unfavorable—every time you click “I agree” on a website, every time you sign a standard form for anything, every time you swipe your debit/credit card.
The response of most people is that “The government should do something about this!” and as a libertarian, this presents me with a quandary. Obviously, unequal bargaining power leads to injustice, but is something like the Consumer Protection Agency really the right answer? We’ll come back to that later.
During contracts class, I was fascinated by the UCC Battle of the Forms. In a world where we are constantly buying and selling things, when we don’t always have time for carefully negotiated contracts, how are we going to determine the terms and conditions for the sale? How are we going to deal with the standardized forms that state terms and warranties? How can we really say that a contract containing these terms was agreed to when clearly no one took the time to read the form other than the lawyer who came up with it? How can I, as a libertarian who believes in the freedom to contract, reconcile the obvious incongruities between general contract principles, the use of standard forms, and the quite clear injustice that can result?
My contracts professor told us that efforts were under way to change the Battle of the Forms issue because of the ambiguity of what happens when the various forms presenting conflicting terms of conditions. Some courts have held that the conflicting terms cancel each other out and whatever is not covered in the contract (say by conflicting warranties) is covered under the other provisions of the UCC Article 2—notably the warranty conditions. This approach was the approach that the ALI adopted, but has not been adopted by any state and resulted in serious conflicts between consumer organizations and sellers of goods. (He also told me about a fellow professor who wears a t-shirt that says “everything I buy is subject to the warranties of the UCC.”)
The UCC warranty provisions are certainly very broad and open to a wide variety of interpretations (See UCC 2-314 and 2-315). Some professors think that these warranties were created to be overly broad and thus force manufacturers to have their own warranties. But any warranty displaces the UCC warranties, and so you end up with the warranty/no-warranty types of things as illustrated by the bank “contract.” Even though UCC Article 2 only covers sales of goods, this practice of declaring an essentially no-warranty warranty has extended to almost everything we buy.
The liberal response is the typical liberal response—WE MUST REGULATE! I cannot agree that additional government regulation will help. Even if the government does go after some of these large corporations for anti-consumer practices, do you really think that that is going to help my friend out with his bank? What actual substantive changes to your cell-phone abomination of a contract will actually result? Probably only changes that are illusory if any at all occur. The only change will result will be that politicians can point to their being “tough on business” to get elected.
So how is the practical libertarian who believes in freedom to contract going to deal with the problems of the fast-paced buying and selling of goods and services that is dominated by non-negotiated form contracts? Private law!
Instead of making business and industry the enemy, make them a partner. Engage them in the process. Business wants rules that are generally predictable, because they, like everyone else, don’t like getting sued. So why don’t we enlist their help in developing a body of private law. The problem with the new approach to the battle-of-the-forms isn’t that the conflicting terms cancel out, it’s the inherent uncertainty that results.
I would propose the following:
In a contract for sale of goods or services:(1) In the absence of terms or when terms in forms conflict, the terms are to be what is standard in that particular industry. Industry standards can be set by various trade associations etc. In the absence of a set of standards provided by industry, the terms are governed by the other provisions [perhaps the warranty provisions of the UCC Article 2 or some other overly broad conditions].(2) Industry standard terms and practices or terms and practices that are more favorable to the consumer than industry standard terms and practices are presumptively enforceable. This presumption may be challenged but requires a showing that the a term or practice is facially unconscionable.(3) Terms or practices that are less favorable to the consumer than industry standard terms are not enforceable unless explicitly agreed to by the consumer.
Let’s look at the advantages of this approach:
Industries would be encouraged to create their own standards for what is fair and reasonable and to put these in writing, or otherwise suffer the overly broad warranties of the UCC or similar provisions. Of course, each industry is different—that’s why the broad warranties don’t really make sense. (The warranty, terms, and practices for selling cell phones should obviously be different than for a piece of industrial machinery.) Both consumers and business would have a more predictable set of rules when buying and selling things, because the terms and practices would be set by a standard.
Creating the presumption of enforceability also further incentivizes industries to create standard terms and practices. Industry would have the benefit of predictable rules—their standards would be presumptively enforceable. However, allowing challenges to that presumption encourages business to set standards that are consumer friendly but also sets the standard for challenging them high enough so that responsible businesses don’t need to worry about having their standards constantly challenged. Consumers would truly be protected from predatory practices because those practices would be would certainly be facially unconscionable.
This approach also doesn’t preclude businesses from exceeding industry-standard terms: if a company really believes in its product it can offer a lifetime warranty and advertise that lifetime warranty to distinguish it from its competitors.
Lastly, this approach doesn’t preclude business from creating terms of sale that are below the industry standard, but relies on a traditional contract notion that parties actually agree on terms in order for those terms to be enforceable. For example, if a company wants to sell a returned item as is—all it has to do is clearly mark the item “SOLD AS-IS — no warranty no returns” and perhaps get the buyer to sign a specific statement declaring that they understand.
Not to mention that these rules at least make an attempt to adhere to traditional contract principles: when a consumer buys something, it can be more easily said that she is agreeing to certain terms and conditions if those terms and conditions are standard and well known (by virtue of becoming standard, they will become more well known).
We as lawyers take this approach. We have a trade association (the ABA) that sets out a set of standards (the Model Rules of Professional Responsibility). We self-regulate using private law through various Bar Associations. We don’t need a federal government agency to regulate. It’s time for business to do the same and for us to create rules that encourage self-regulation.
Libertarians love to talk about "blowback" when it comes to foreign policy, but the same principles apply here. One need only look at a case like Campbell's Soup Co. v. Wentz (172 F.2d 80) to see blowback in action. In Campbell's, the court ruled against Campbell's and declared the whole contract unenforceable even though only one term was unconscionable. Campbell's soup got too greedy in the contract, and they suffered blowback from the court. Business needs to be proactive here, or suffer the blowback that could result from politicians demonizing them to score points with voters. Business should be pushing for an approach similar to the one I proposed: better to have predictable rules that we set rather than suffer the whims of the political tide.
*Oliver Richards is a J.D. Candidate at Boston College Law School, Class of 2015.