Thursday, May 7, 2009 - FEEBAYS new user agreement - Part 2C. The Principles of Contract
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The mechanics of buying and selling products in the 18th and 19th centuries
# The above examples demonstrate four points about the method of buying and selling products in the 18th and 19th centuries. First, goods and services were mass-marketed based on pre-printed forms fixed by the producer. Ben Franklin's book catalog business in 1744 differs in no material respect from Amazon's on-line book catalog business. Second, the standard method of purchasing services did not involve a pre-contract time period during which seller and buyer negotiated the terms of the transaction. The North American Steamship Company and the Central Pacific Railroad Company specified the conditions of passage required for doing business with that firm. The conditions were already typed on pre-printed tickets. Neither the railroad company nor the steam ship company negotiated these terms with purchasers prior to selling the ticket. The producer dictated the term. Virtually all transport systems today follow the same practice.[49]
# Third, "pay now terms later" transactions, that have provoked heated debate in contemporary litigation based on their supposed novelty, were established business practices in the 19th century. The ticket buyer specified the destination, paid the ticket price and then received the ticket containing the limitation of liability. Fourth, the buyer did not need to sign a document to signal acceptance of the terms. Rather, the buyer manifested assent to the terms by conduct, such as payment or use.
# Mark Twain's trip on the Overland Stage Coach in 1861, recounted in the book Roughing It, provides anecdotal evidence of the effects fixed terms had on buyers. Twain's ticket from St. Joseph, Missouri to Carson City, Nevada cost $1[50] approximately $2660 in today's dollar, or the equivalent of taking the Concord from New York to Paris. After purchasing his ticket and arriving at the location to board the coach, Twain learned that passengers were limited to 25 pounds of baggage. Twain had to shed much of his luggage. The book does not tell whether Twain's ticket contained the limitation, and he failed to read it, or whether the term was a "surprise" learned only when he boarded the coach. In any event, the unexpected loss of luggage did not result in litigation.
# Even at this early stage, firms treated pre-printed conditions as contracts enforceable between the seller and buyer. This perception persisted even though these terms were unilaterally imposed and non-negotiable, unlike the ordinary contract as a process of bargain. For example, the North American Steamship Company ticket stated in pre-printed language, "For value received, on the conditions herein, hereby mutually agreed to, the North American S.S. Co. contracts to furnish to M (space for person's name) who by accepting this contract agrees to its limitations." The ticket did not contain any line for the signature of the buyer, but only the blank space for the steamship's agent to complete the ticket by writing in the buyer's name. The buyer's act of paying for the ticket and using it, signaled the buyer's acceptance of the "mutually agreed to" terms. Acceptance of terms by payment of the product deviated from the standard paradigm of acceptance - the signature of the party - thereby foreshadowing acceptance signaled by opening a box containing the written term inside.
The validity of pre-printed terms in the 19th century
# Courts as well as firms treated pre-printed terms as contracts in the 19th century. The judicial treatment of standardized terms as contracts was a matter of presumption not the product of analysis. The facts that pre-printed terms: (1) were not produced during a bargain, (2) did not reflect a "meeting of the minds" and (3) did not reflect trade-offs in benefits and burdens between the parties did not cause the courts to question whether pre-printed terms were properly parsed under contract law.50 In the above examples: Franklin's catalog, the North American Steamship and Central Railroad tickets, and Western Union telegraphs, the buyer focused upon the product with a few other considerations, such as price and quantity. The seller also focused upon the product, with the regularization of conditions. While the focus of the transaction was the product for both seller and buyer, the seller used pre-printed standardized terms to treat all buyers alike and to limit liability. The limitation of liability logically reduced the cost of the good or service for buyers. Though the producer dictated the limitation of liability, the courts upheld them under a variety of theories, mainly under the view that the allocation of risk was reasonable. While legal historians of contract law, such as Atiya and Horowitz, have argued that these unenlightened decisions reflected the pro-business climate of the time, the opinions are not that facile and their logic of holding product costs down permeates contemporary court decisions.[51]
# For example, in Primrose v. Western Union, the United States Supreme Court enforced a term limiting consequential damages printed on the reverse side of the Western Union Telegraph Company's standard form for telegraphic messages.[52] Primrose, a citizen of Pennsylvania, sued Western Union, a New York corporation, to recover losses in the amount of $20,000 attributable to a mistake in the transmission of a ciphered message. Primrose, a national wool dealer, wrote a message to Toland, his agent in Kansas, on "one of a bunch" of Western Union blank forms he kept in his office. He did not remember reading the reverse side of the form, and he paid $1.15 to transmit the message. Previous messages sent to Toland in the same code were transmitted without incident. However, this time, due to an error in transcription, Toland bought 300,000 pounds of wool and Primrose lost $20,000.
# The Supreme Court limited his remedy to $1.15, the price he paid to send the message under a mixed theory of tort and contract law. Treating the dots and dashes of telegraph messages as goods, the Supreme Court noted, "common carriers of goods or passengers cannot, by any contract with their customers, wholly exempt themselves from liability for damages caused by the negligence of themselves or their servants."[53] But, common carriers can restrict the sum for which they will be liable for ordinary negligence by "special contract." The "contract will be upheld as a proper and lawful mode of securing a due proportion between the amount for which the carrier may be responsible and the freight he receives, and of protecting himself against extravagant and fanciful valuations."[54] The court observed, "The message cannot be the subject of embezzlement; it is of no intrinsic value; its importance cannot be estimated, except by the sender, and often cannot be disclosed by him without danger of defeating his purpose."[55] In other words, Western Union could not divine its value and act with the corresponding level of care.
# Whether Primrose read the standardized term or not was irrelevant to the ruling. The Supreme Court concluded, "There can be no doubt, therefore, that the terms on the back of the message, so far as they were not inconsistent with law, formed part of the contract between him and the company under which the message was transmitted."[56] Because Primrose did not pay for a repeated message, which might have detected the error, "he could not recover more than the sum which he paid for sending the single message."[57]
# The bottom line of the case was cost. The Supreme Court was not going to stick Western Union with a $20,000 bill for making a mistake in transcribing a $1.15 ciphered message sent from Pennsylvania to Kansas, even if Western Union committed an error.[58] Hence, the Supreme Court couched its holding under the rule of Hadley v. Baxendale.[59] The Court stated:
Under any contract to transmit a message by telegraph, as under any other contract, the damages for a breach must be limited to those which may be fairly considered as arising according to the usual course of things from breach of the very contract in question, or which both parties must reasonably have understood and contemplated, when making the contract, as likely to result from its breach.[60]
# If Primrose had made Western Union aware of the special circumstances of his message and the consequences that would follow if transmitted with error, the breach of the special contract would have made Western Union liable for the damages within the contemplation of Primrose and Western Union. Since Primrose failed to inform Western Union of the damages likely to follow from error, Primrose could not recover the "foreseeable" damages, that is, his $20,000 loss in the wool market. Imposing liability would increase the cost of sending messages thereby disrupting the public communication system.
# The contra-fact assumption is that additional information would have made a difference in the outcome of the case. But the Hadley v. Baxendale rule of putting a party on notice of "special circumstances" to allow recovery of consequential damages had no place even in 19th century mass-market business. One cannot seriously imagine Primrose walking into his local Western Union office and telling a clerk, untrained in the commodities market, about the possible consequences of an erroneously transmitted message, and then negotiating a marked-up fee. Even if Primrose had educated the clerk, the clerk had no authority to change the firm's pre-printed limitation on its blank form nor did the clerk have a formula to calculate a fee based on the increased risk of transmitting a commodity order in code. Primrose was in the best position to avoid the loss by paying for a repeated message.[61]
# The 19th century Supreme Court also upheld pre-printed limitation of liability terms on bills of lading used by railroads. For example, in Hart v. Pennsylvania R. Co., Hart shipped five horses and other property on one railroad car. [62] By the negligence of the railroad company, one of the horses was killed, others were injured and additional property was lost. Hart claimed the horse killed was a racehorse worth $15,000. However, the form bill of lading contained several paragraphs of dense text, one of which specified that the value of a horse was $200. The Supreme Court limited Hart to the remedy provided in the bill of lading. According to the Court, Hart had accepted as "just and reasonable" the "valuations" stipulated in the bill of lading by the railroad company because he paid the specified rate of freight. However, the case does not contain any evidence that Hart had another choice, that is, to negotiate a different rate based on his claimed value of the horse, $15,000. The bill of lading was pre-printed Form No. 39 entitled "Limited Liability Live-stock Contract for United Railroads of New Jersey Division." Nevertheless, the Supreme Court stated, "The valuation named was the 'agreed valuation,' the one on which the minds of the parties met."[63] Similar to the logic in Primrose, the Court reasoned, "It is just to hold the shipper to his agreement, fairly made, as to value, even where the loss or injury has occurred through the negligence of the carrier. The effect of the agreement is to cheapen the freight and secure the carriage, if there is no loss; and the effect of disregarding the agreement, after a loss, is to expose the carrier to a greater risk than the parties intended he should assume."[64] Where one of many identical transactions in the ordinary course of business fails and produces a loss disproportionate to the cost of the product, sellers may limit their liability so long as they do not efface their obligation to pay damages.
The business purpose role of standardized terms
# Standardized terms had purposes beyond fixing legal rights and obligations. Firms used standardized terms to set rules of doing business. If a buyer wanted to do business with a particular firm, any transaction between buyer and firm had to follow a fixed set of rules. Uniformity arose from the firm's scale and the distance that separated the remote buyer and seller. Firms also had to make blanket guarantees to assure buyers that they could trust a start-up company physically located thousands of miles away. The story of Montgomery Ward and Sears Roebuck after the Civil War illustrates these points. Their story also provides compelling evidence of early mass marketing of goods and services to consumers across state and national borders, the common use of standardized terms to do business and the development of novel forms of payment permitting remote buyers to pay for purchases through the mail. But, cross border transactions between merchants and consumers did not originate with Montgomery Ward or Sears Roebuck. Catalog businesses date back to the 17th century.[65]
# Aaron Montgomery Ward and Richard Sears "started in mail order as moonlighters with tiny, precarious and obscure ventures."[66] Ward started first in 1872, while Sears followed in 1886, first selling only watches. Both companies focused upon the American farmer who, at that time, bought supplies, tools and clothing from local stores at substantially marked-up prices due to intermediaries between manufacturer and retailer. The American farmer lacked the option to buy at large department stores, such as Macy's, due to distance; the large department store, such as Bloomingdales, also did not cater to the needs of the farmer for tools and special clothing, but focused on over the counter sales to city residents. The marketing innovation behind each firm was low price. That price was achieved by eliminating the middlemen ordinarily occupying space between the manufacturer and ultimate consumer. Montgomery Ward and Sears Roebuck were the lowest priced merchant houses in America. Low prices built the original customer base.
# Montgomery Ward and Sears Roebuck both established businesses in Chicago, Illinois. The dilemma faced by each firm was how to get customers who lived enormous distances from the physical location of the firm to send cash in the mail before getting the product. The buyers could not see or talk to Ward or Sears personally, nor could they talk to or see their agents. Examining the product prior to purchase was out of the question. To solve this dilemma, each firm produced catalogs depicting the merchandise and explaining the terms of the business. The Sears Roebuck catalog No. 104 of 1897 "was 770 pages and out-circulated virtually all other books published that year."[67] Seven pages contained pre-printed business terms explaining the business and setting forth non-variable terms of doing business with Sears. The section captioned "Rules, Conditions of Shipment, Terms, Etc." stated:
PLEASE READ THE FOLLOWING RULES AND CONDITIONS VERY CAREFULLY:
To conduct our business in a gratifying, prosperous and beneficial manner, it is necessary that we establish certain rules to govern our movements so as to enable us to handle all orders and correspondence in a successful and satisfactory way. To prevent any misunderstanding we therefore ask your careful attention to the following rules and conditions from which we cannot deviate under any circumstances.
The Prices we Quote for Goods in Our Store.
All expense of transportation of goods and Money MUST BE BORNE BY THE PURCHASER. All quotations are subject to fluctuation of the market without notice to the purchaser. IF THERE IS A DECLINE WE WILL GIVE YOU THE BENEFIT OF THE DECLINE and refund the difference. IF THERE IS AN ADVANCE, we will charge you for such advance. The prices quoted in this book are correct at the time of printing, and as a rule there is very little variation until the next following issue.[68]
# Three observations follow from these terms. First, the nature and scale of the business required the store to organize itself around a set of inflexible rules. The firms bought goods from manufacturers with cash and sold them to anonymous buyers in the market for cash. The fast and cheap delivery of products prohibited dickering over terms. The firms established blanket policies for placing orders, paying for them, examining them and returning them. The policies also stated that risk of loss shifted to the buyer once the product was delivered to the carrier unless the buyer paid for insurance. The terms of the transaction thus were non-variable, or "adhesive," not because Sears or Ward wanted to overbear the will of the buyer but because neither Sears nor Ward could serve its market and hold down prices by dealing on different terms with customers. Second, Sears shifted the risk of market fluctuations in the price of products to the buyer based on a non-negotiable pre-printed term. Third, the catalog, with remarkable prescience, employs the use of variable type font and face to call the reader's attention to key terms. But, given the lower rates of literacy during this time, many farmers probably bought from Sears or Ward, or any other mass merchandiser, based on pictures in the catalog or sales literature, and could not read the "terms and conditions" of the company. Yet, they were bound by them.
# More important, the dominant purpose of standardizing terms was to treat all customers alike regardless of race, status or class. In a section entitled "The Policy of Our House," the catalog stated, "Our Terms are Alike to All," and "Our Employees are Instructed to Treat Every Customer at a Distance Exactly as They Would Like to be Treated were they in the customer's place."[69] While this representation was advertisement designed to increase sales, nevertheless the method of doing business guaranteed the customer's anonymity and prevented the different treatment of orders.[70] Hence, standardized terms, now thought of as anti-consumer "big" business practices, helped democratize the market place.
# Critical to each firm's success was the money back guarantee. In 1873, the Chicago Tribune published an article claiming Ward was a charlatan keeping all the money sent to his post box for himself and sending shoddy products, if any, to his customers. In response, Ward had the Chicago Tribune investigate his firm and verify the firms' policy "whereby anyone shipped C.O.D. could refuse to pay the express company if not satisfied after seeing the goods."[71] Eventually, Ward adopted a simpler guarantee: "Satisfaction guaranteed or Your Money Back." Sears studied and expanded upon the Ward guarantee making it more specific and universal. It provided:
We guarantee that each and every article in this catalog is exactly as described and illustrated. We guarantee that any article purchased from us will satisfy you perfectly; that it will give the service you have a right to expect; that it represents full value for the price you pay. If for any reason whatever you are dissatisfied with any article purchased from us, we expect you to return it to us at our expense. We will then exchange it for exactly what you want, or will return your money, including any transportation charges you have paid.[72]
# Necessity thus was the mother of invention. Both firms had to make this promise to obtain the trust of customers. The money back guarantee was the product of economic necessity not the product of law. More than 100 years later, the "right to return" is probably the most widely held expectation of the American consumer. In the European Union, that right is the product of EU Directive and national laws.
# The legal system in the 19th century generally enforced standardized terms. In the telegraph and transportation cases, the decisions reduced the cost of production for the producer and reduced the cost of product for consumers. This conclusion logically follows from the passing of risk (cost) to customers. Had Western Union insured these risks, the costs of insurance would have been spread across the customer base, raising the price of the service. The United States Supreme Court in 1991 has used the correlation between reduced cost and fixed terms to validate a standardized term in a passenger ticket.[73] In 1898, Montgomery Ward received 1,400,000 orders and had $8,500,000 in sales.[74] In 1894, Sears had $500,000 in sales,[75] but by 1900 Sears Roebuck sales exceeded 10 million dollars.[76] Consumers, sophisticated and unsophisticated alike, believed they were harmed as demonstrated by the spate of lawsuits against Western Union in the 19th century based on failure to deliver money on time or to send a message exactly as requested. However, firms bore risks in cost of inventory, employees and real property and had to survive the cycles of boom and recession. More important, national businesses, like Sears Roebuck and Montgomery Ward, demonstrated that doing business in a mass market made using a single set of rules an administrative necessity. Standardized terms were a result of economies of scale. It is therefore unremarkable that their use became more widespread in the 20th century.
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