Wednesday, May 6, 2009 - FEEBAYS new user agreement - Part 2A. The Principles of Contract
http://www.murdoch.edu.au/elaw/issues/v10n2/burke102_text.html
Reinventing Contract
Author: John J A Burke BA, JD, PhD
Professor, Riga Graduate School of Law
Subjects: Contracts - Economic aspects
Contracts - Social Aspects
Contracts Law and Legislation (Other articles)
Issue: Volume 10, Number 2 (June 2003)
Category: Refereed Articles
Contents:
* Preface
* A Note on Methodology
* Chapter One - The Problem
* Chapter Two - The Early Origin and Use of Standard Form Contracts
o Early Examples of Standardized Terms
o The mechanics of buying and selling products in the 18th and 19th centuries
o The validity of pre-printed terms in the 19th century
o The business purpose role of standardized terms
* Chapter Three - Market study: Standard Form Contracts
o Location of contract
o Manner of acceptance
o Limitation of warranty
o Limitations of Damages
o Return and refund
o Litigation terms
o Other terms
o Business to Business Contracts
o Conclusions
* Chapter Four - The Great Schism: Reality and Law
o The Paradigm
o Resort to legal fictions
o Conclusions
* Chapter Five - Contracts of Adhesion
o Origins
o Case law
* Chapter Six - Covert Tools of the Judiciary
o Unconscionability
o The reasonable expectations test: unfair surprise
o Restatement (Second) of Contract
o Infirmities of private litigation
o Conclusion
* Chapter Seven - Proposed Solutions
o Demogue (1911)
o Prausnitz (1937)
o Llewellyn (1960)
o Slawson (1971)
o Rakoff (1983)
o Meyerson (1990)
* Chapter Eight - The European Union Position
* Chapter Nine - Back to the Future
o Four Case Examples
o Conclusion
* Chapter Ten - Reinventing Contract
o Formation requirements
o Consent as the basis for enforcing standardized terms
o Unnecessary legal categories
o Image of buyer and firm
o Existing law
o Content control
o International transactions
o Other tactics
* Conclusion
* Appendix - Standard Form Contracts In Use In Selected Sectors
* Notes
Preface
1. Contract law no longer explains the dynamics of the overwhelming majority of contracts used to complete transactions in the market. Business models have rendered to historical curiosity the principal codifications of contract law and their counterparts in the common law. These works belong in museums, not in civil codes, statutes or cases. The cause of contract law's undoing is the standard form contract. Once considered the exception to the general rule, that contracts require minds to meet on terms, the standard form contract now is the general rule. There is not, never was, and never will be a "meeting of the minds" in the forum of standard form contracts. Consent is irrelevant to make a contract effective. It is time to accept reality and to reinvent the law of contract.
2. Standard form contracts are ubiquitous.[1] They are used in commercial and consumer transactions, spanning the range from the international purchase of multi-million dollar equipment to the domestic purchase at trivial cost of dry cleaning services.[2] Standard form contracts are the document sans pareil for information technology license agreements, particularly end user contracts. Prestigious arbitral institutions that provide services to resolve contract disputes use them in dealings with parties to disclaim liability for damages.[3] Non-profit organizations use them to conduct business worldwide.[4] There is no exit from the domain of standard form contracts.
3. The reason is expediency. Parties, no matter how sophisticated and soundly capitalized, cannot afford to waste time, money and effort negotiating details of ordinary transactions. The speed of transactions is essential to the efficient delivery of products in the market. Custom contracts produced after rounds of negotiations are a minority of today's contracts limited to transactions where the cost of legal advice is justified in terms of the net "price" of the contract.[5] Even when lawyers customize contracts, they start with standard forms; amendments made to these standard forms are likely to reflect standard "rider" clauses. The global market has increased the quantity of standard form contracts in commerce and vindicated their role of providing clarity to cross-border transactions that otherwise would be governed under opaque rules of private international law.[6]
4. The American legal system generally has allowed the use of standard form contracts and enforced their terms. This rule is virtually absolute for contracts between merchants. The assumption is that merchants know what they are doing and should be held accountable for their business judgments. The rule is slightly variable for consumers. Depicted as victims of large enterprise, consumers benefit from judicial devices designed to defeat terms that courts find "unconscionable" or surprising, and hence to circumvent the general rule that persons are bound by contracts they make. Federal and state legislatures have enacted statutes to protect the consumer against aggressive contracting and his own ignorance in certain transactions.
5. The European legal system generally has disapproved - if not disdained - the standard form contract. The European Union Council Directive on Unfair Terms in Consumer Contracts invalidates standardized terms that are unfair and result in a significant imbalance of obligations between the parties to the detriment of the consumer.[7] It also contains a grey list of presumptively invalid terms.[8] The proposed Principles of European Contract Law (PECL), the product of the Commission on European Contract Law, do not distinguish between merchant and consumer transactions.[9] The PECL incorporate the EU Directive to standardized terms and, under independent provisions, permit parties to avoid contracts marked by excessive benefit or unfair advantage.[10] The individual member states of the European Union have national consumer legislation as the EU Directive sets only a minimum baseline. The tenor of individual EU state legislation protects the adherent of standardized terms, mainly consumers but sometimes merchants.[11]
6. The international legal system has reduced the question of standard form contracts to an aberration of contract law. The United Nations Convention on Contracts for the International Sale of Goods treats standard form contracts only in its "battle of the forms" provision.[12] The International Institute for the Unification of Private Law's UNIDROIT Principles, a self-proclaimed lex mercatoria applicable to any international business transaction, invalidate "surprising" standardized terms and permit parties to escape obligations under theories of inequality of bargaining power. [13] In addition, the Principles contain a robust doctrine of good faith jeopardizing the legitimacy of any single term in a contract.[14] For commercial contracts, this approach is an astounding deviation from the baseline that merchants do not need the patronage of government. Applied to standard form contracts, the "Principles" are an attempt to restore an anachronism. The traditional rules of contract law are outmoded and fail to track contemporary commercial realities.
7. The great debate about standard form contracts stems from the fact that they deviate from the elementary principle of contract law, false probably from the time it was first articulated, that contracts are based on freedom to choose terms and represent the bargain of the parties. Standard form contracts do not represent a bargain at all. Nor do they represent a freedom to choose terms. In consumer and some business transactions, one party, generally the seller, writes the majority of, if not all, the contract terms and the other party, generally having no chance to dicker for different terms and without reading the terms, accepts the contract to get the product. In other business transactions, the parties exchange standard forms that often are inconsistent. The elementary principle of contract law - the bargain - is undercut. The parties did not engage in a process of give and take over contract terms. Rather, one party produced terms that if not accepted, foreclose the deal. Or, both parties used inconsistent terms that, at the contract's conclusion, were outside the parties' real agreement.
8. Predictably, actors in the market have drawn the battle lines. Consumers, and businesses incapable of imposing their terms, oppose the validity of standard form contracts.[15] They argue that it is wrong to allow one party to set terms to the transaction without the real consent of the other party. Large and small sellers having the power to impose their terms support the use and enforcement of standard form contracts. These companies want the ability and flexibility to design standardized terms the way they design their products. Standardized terms regularize transactions, logically, if not empirically, reduce costs and facilitate the exchange of products. Each side has deployed experts - legal, economic and political - to support their position in the competition for legislative capital.
9. The scholarship, the case law and the legislation are based on misplaced ideas about standard form contracts. First, standard form contracts are not ordinary contracts fitting within the universally accepted model of contract law based on party autonomy.[16] Second, there is nothing new about standard form contracts even including the business model of "pay now terms later" transactions.[17] Third, no significant difference exists between standard form contracts printed on paper or displayed as graphics on computer screens. Using zeros and ones, instead of ink, is a factor of no significance for the regulation of standard form contracts. Fourth, licenses are species of contracts. The legal rules that apply to standard form contracts should apply equally to software licenses.[18] Fifth, the description of standard form contracts as "contracts of adhesion" is no longer useful, and the different treatment of merchants is no longer justified, since merchants do not meaningfully consent to standardized terms.
10. Producers inevitably will specify conditions to sale of products. Contrary to convention, producer imposed terms are not invariably abuses of economic power. Even if they are, the political economy of standardized terms does not provide a useful construct to determine their validity. Rather, that view results in a mud-slinging match between industry and professional representatives of consumers. Standardized terms regularize business practices, guarantee that producers treat every purchaser identically and derive from the mass marketing of goods and services. Many standardized terms are not predatory, but beneficial, for example those terms that concretize abstract or general default rules. Several beneficial terms are the result of market forces not legal rules. The question is how to legitimate the use of standardized terms while limiting the range of conditions producers may impose on products.
11. The critical insight: standardized contracts are commodities. Where the product is a license, the contract is the commodity. Where the product is a hard good, the contract is part of the commodity. Producers have a general obligation to place non-defective products into the stream of commerce. By analogy, producers have an obligation to place non-defective standardized terms into the stream of commerce. Consequently, a standardized term destroying the economic value of the product would be unenforceable as the product liability equivalent to a defect. However, the analogy to tort law need not result in the death of contract. Allowing producers to specify conditions of products is preferable to other alternatives: (1) enforcement or non-enforcement of all terms, (2) bureaucratic administration of contracts, and (3) the random striking down of terms based on judicial instinct.
12. Consequently, a promising approach to standardized terms is based on identifying their underlying principles, examining problem terms in the market and creating provisions to exercise "direct content control" of select terms. Importantly, with increasing cross-border transactions, "content control" provisions must be the product of comparative law study to enable sellers to predict the validity of terms in foreign jurisdictions.[19] This book lays the groundwork for a solution to the validity of standardized terms without reliance upon existing doctrine.[20] The effectiveness of the approach may be measured against its consequences.[21] Treating standardized terms as commodities sets straight the legal basis of contract and deals head-on with policy issues underlying the replacement of negotiated terms.
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