- 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.
- 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.
- 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]
- 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.
- 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]
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- The standard form contracts cited in Chapters One and Two are based on historical research and the journalistic method of collecting samples of contracts from various industries to draw general conclusions about them. This method follows inductive reasoning. While the collection of sample documents does not adhere to statistically valid procedure, the journalistic method substantially improves methods used in the literature: conclusory remarks unsubstantiated by reference to documents, general condemnations about standardized contracting practices, or reliance upon contracts reported in isolated cases. For example, the decision in Williams v. Walker-Thomas Furniture, Co. is disproportionately represented in the American literature.[22]
Building theories without adequate data impugns their validity. A substantial number of standard form terms in the market are not predatory. However, some standardized terms pose issues over which reasonable people can disagree, while others are patently abusive, the product of sharp practices. Scholars have called for empirical studies. The EU Commission has subsidized market studies in consumer contracts. The market study in Chapter Two is a start in the process of predicating legal rules on commercial reality.
"A market is a process by which households' decisions about consumption of alternative goods, firms' decisions about what and how to produce, and workers' decisions about how much and for whom to work are all reconciled by
adjustment of prices."[23]
- In a market, buyers and sellers exchange goods and services. Buyers want products and sellers wants money. Buyers typically focus upon the price, the product's quality and quantity, and a few other considerations like warranties. Sellers focus upon payment. If payment is not simultaneous with the product's transfer to the buyer, then the seller also may focus upon the buyer's credit rating. Buyers typically obtain knowledge about products from several sources: word of mouth, browsing through stores and comparing prices, reading reviews of products in magazines and newspapers, doing research, and through advertisements. Individual levels of knowledge vary, depending, for example, upon the buyer's sophistication or upon the purchase price. Expensive purchases induce most buyers to educate themselves. The common aim of buyers, whether consumer or merchant, is to get the best product at the best price.[24]
This model explains several types of market transactions: (1) the consumer who buys products off the shelf in a retail store, (2) an importer who places a purchase order with an exporter, and (3) an Internet user, whether merchant or consumer, who buys products on-line.[25]
- In the market, parties generally are not "talking" about contract terms, save for those few terms already mentioned.[26]
The parties' economic objective is to exchange money for a product, not elaborate fine points of law. The mechanics of buying and selling also prevent legal debate and push contract terms into the background. In the retail store, the buyer selects the product and pays for it at the cash register. In an international sale of goods, the buyer and seller fax purchase orders and invoices containing price, quantity and description. The buyer pays by funds transfer or documentary credit. In an electronic store, the buyer selects items in a shopping cart and typically pays by credit card. Similar methods are used when buying over the telephone or by catalog. In each transaction, the seller and buyer never meet face to face to negotiate contract terms. In each transaction, possibly excepting the international sale of goods, the buyer never deals directly with the seller authorized to set contract terms. When a purchase is made by catalog or in a retail or electronic store, the seller's agent usually lacks authority to change uniform terms. Even if the seller were present, he is not going to deviate from company practice and customize a single transaction for a buyer.
- However, law accompanies a product whether the parties like it or not. The law is either publicly or privately made. The public law is the common and statutory law regulating the transaction by default. The public law is neither printed on the product nor the product's packaging. Most parties are likely to have no idea what the public law is, as it sits in the background roused to action only in disputes. However, parties may replace public law with private terms. Then, the law consists of the parties' private terms and any law the parties cannot displace by contract such as mandatory statutes or "public policy." In contemporary commerce, private regulation is accomplished by standard form contracts. A standard form contract is a pre-established record of legal terms regularly used by a business entity or firm in transactions with customers.[27]
The record specifies the legal terms governing the relationship between the firm and the other party. The firm requires the other party to accept the record without amendment, and without expecting the party to know or understand its terms. These contracts generally are delivered with the invoice or the product. Sometimes, the contract is printed on the invoice, the reverse side of receipts, the outside of the package, a pamphlet or displayed on a computer screen.
- In stark contrast to the market, traditional contract law presumes a customized and negotiated agreement between two parties.[28]
The terms of the agreement, including price, are shaped and settled during a pre-contract period in which the parties engage in give and take to find mutually acceptable rules to govern their conduct. Traditional contract law also presumes relative parity between the parties to the transaction, even though the law enforces bad bargains.[29]
Artificial and formal categories of offer, acceptance and consideration are superimposed on the untidy reality of the market to determine the existence of contracts. When the parties have reached agreement and manifested their consent, traditionally by signature, the parties proceed to discharge their respective obligations to pay and deliver. The resulting contract is enforced, except for illegal or unconscionable terms because the contract is an expression of the parties' "will" or a "meeting of their minds."[30]
Traditional contract law hence is grounded in agreed-on promises in an environment where the parties have authority to set the terms of their bargain.[31]
Consent is the core principle of contract law.[32]
- The problem is twofold. First, buyers do not know the cost of terms contained in standardized contracts and therefore may overpay for the product.[33]
It does not matter whether that contract is delivered before or after the purchase. Ignorance of the price of risk characterizes most transactions in the marketplace because the cost of obtaining that information often would exceed the transaction's value. In addition, the buyer's ignorance creates an incentive for sellers to shift more risk, and hence cost, upon buyers.[34]
Second, the public law of contract resembles a grid used to mark a standardized test such as the SAT. The grid is placed over the gritty events of the market transaction to determine whether those events fill the elements of the required rules. If they do, there is an enforceable contract. If an element is missing, there is no contract. Since the law derives its validity merely by definition, the enterprise begs the question. The freedom of contract principle also fails to resolve the problem of standard form contracts. That principle was never contemplated to cover them, resting upon assumptions totally absent from the way the market works.
- The problem is not limited to conventional standard form contracts contained in paper documents, but extends to standardized terms found in electronic documents referred to under various rubrics such as "shrink-wrap," "click wrap" and "browse wrap." New business models are bound to emerge as businesses use different practices to conclude contracts in the market. Contrary to statements in the literature and case law, these methods are not fundamentally novel.[35]
Despite the nomenclature, the method of contracting is familiar thereby justifying treatment of paper based standardized terms and of electronic standardized terms under a single set of rules. The creation of new rules to fit developing business models mistakenly multiplies legal categories by failing to see the similarity of the underlying structure of these contracting methods.
- In his seminal work, The Standardization of Commercial Contracts in English and Continental Law published in 1937
Otto Prausnitz traces the development of standardized terms from the formulary work of lawyers in medieval Europe, mainly but not exclusively related to the conveyance of land.[36]
Noteworthy is his 13th century example of a debtor waiving defenses he would have had under the general law.[37] Primitive forms of mass-market contracts appeared in England and some European countries during the 16th century in the marine insurance, shipping and sale of goods industries, though at that time contracts were concluded before notaries. However, in "ancient seafaring nations," such as Italy, Spain and the Netherlands, the insurance industry had pre-set terms in their policies. Prausnitz remarks, "Insurance practice had attracted the lawyer's and what is more, the statesman's attention."[38]
Contracts of affreightment and bills of lading, in common form and several languages, contained written standardized terms dating from the early Middle Ages. The use of standardized terms exponentially increased when businesses entered into a substantial number of identical contracts with individuals.[39]
- However, the phenomenon of mass-market contracts is independent of any particular time. Prausnitz stated:
Indeed, it crops up as early as the twelfth and thirteenth centuries with regard to the transport of pilgrims to the Holy Land in connection with, and after, the crusades. The conditions under which these persons sailed from Arles to Marseilles to Palestine surpass imagination. For instance, very strict conditions must have been made concerning space. The contracts themselves no longer exist. Their contents can only be guessed at by reading the bye-laws of Arles (twelfth century) and Marseilles (thirteenth century).[40]
A more modern and illuminating example is the 1755 business practice of the East India Company disclaiming liability for damages to ships, standardized terms drafted by the company's lawyers and not variable by private agreement.[41]
- Other scholarship is in accord. In 1895, J.H. Beale Jr. examined the nature of tickets where the customer has no opportunity to see the conditions before making the contract.[42]
In 1917, Edwin W. Patterson examined the "pay now terms later" nature of the delivery of insurance contracts.[43]
He observed, "It is all but universally conceded by American Courts that a contract of life insurance may be formed before the contemplated delivery of the policy."[44]
It follows that the insured did not have any opportunity to haggle for terms prior to making a decision to purchase insurance. In 1971, W. David Slawson began his influential article by making the claim, "Standard form contracts probably account for more than ninety-nine percent of all the contracts now made."[45]
No person today seriously disputes that proposition. Standardized contracts have completely displaced ordinary contracts.
- Firms in the 18th and 19th centuries in the United States used standardized terms in mass-market transactions. These terms are found in pre-printed railroad tickets, bills of lading, telegraph blank forms and mail order catalogs.[46]
These firms did business with the general public across state and national borders and established uniform conditions of sales. Transportation and telegraph firms employed intermediary carriers to deliver the passenger, good or information to its destination. Remote buyers paid for goods and services by sending cash or money instruments by mail. The buyer and seller never physically met. Rather, the seller's agent, who had no authority to alter terms, dealt with the buyer. The dealings between seller and buyer often were reduced to order and payment by mail and delivery by freight. The physical infrastructure supporting this commerce consisted of railways, steamships, the federal postal system, and local banks.
- These early examples show how a firm used standardized terms to package transactions on identical conditions thereby treating all customers alike. The mail order firms of Montgomery Ward and Sears Roebuck illustrate the counter-intuitive fact that 19th century firms conducted national and international business on terms virtually identical to contemporary commerce including the Internet. The 19th century history of these firms proves that the method of buying and selling products is virtually identical to that method used by most firms today. The structure of a transaction between an Oregon farmer buying goods from the 1897 Sears Roebuck catalog is identical to an Oregon consumer buying goods from the 2002 Eddie Bauer on-line catalog. Firms have sold to remote buyers in the mass market for more than 100 years based on standardized business and legal terms governing their transactions.
- The standardized terms here are not taken from reported cases but selectively drawn from historical documents. This approach differs significantly from the scholarly literature that generally discusses only terms resulting in litigation and reported in judicial decisions, or makes conclusory remarks about types of terms without citing actual examples. While the scholarly literature is short on specifics, it is long on theoretical musings defending or opposing the use of standardized terms. Reproducing actual terms used in standardized contracts identifies concretely the politics and nature of this war. A study of actual terms demonstrates that the diametrically opposed views about standard form contracts are a tempest in a teapot.
- In 1744, Benjamin Franklin mailed a pre-printed Catalogue of Choice and Valuable Books to a mailing list of potential customers. The catalog contained the terms of the sale and stated, "TO BE SOLD for Ready Money only, by Ben J. Franklin at the Post-Office in Philadelphia, on Wednesday, the 11th of April 1744 at Nine o'Clock in the Morning; And, for Dispatch, the lowest Price is mark'd in each Book." The catalog also contained the following additional term: "Those Persons that live remote, by sending their Orders and Money to said B. Franklin, may depend on the same Justice as if present."[47]
- In 1860, the North American Steamship Company printed blank ticket forms providing passage from San Francisco to New York. The ticket included the following pre-printed language: "the dangers of the Seas, Lakes, Rivers and Harbors, restraint of Governments, collision, detention, discomforts and ailments arising therefrom, Fire and Accidents to Machinery, Boilers and Vessel, of every kind, EXCEPTED." The passenger was entitled to travel on the S.S. Nebraska from San Francisco to Panama City, then by the Panama Railroad overland to Aspinwall, and then to New York by another steam ship.
- In 1878, the Central Pacific Railroad Company issued pre-printed first class passenger tickets containing the following fixed term:
"Acting for itself over its own line, and as agent for each line named in this ticket and accompanying checks, but assuming no responsibility beyond its own line. This company assumes no risk on baggage - except for wearing apparel - and limits its responsibility to one hundred dollars in value, unless taken by special contract. This ticket is void unless officially stamped and dated and the checks belonging to this ticket will be void if detached."
The Central Pacific Railroad Company conducted its transportation business on that condition.[48]
- In 1890, the Western Union Telegraph Company used pre-printed blank forms on which customers wrote messages to be transmitted by telegraph. The blank form consisted of one page, the front and the reverse side. The front page contained the following disclosure, "Send the following message subject to the terms on back hereof, which are hereby agreed to." The reverse side stated, "All messages taken by this company are subject to the following terms:"
To guard against mistakes or delays, the sender of a message should order it REPEATED; that is, telegraphed back to the originating office for comparison. For this, one half the regular rate is charged in addition. It is agreed between the sender of the following message and this Company, that said Company shall not be liable for mistakes or delays in the transmission or delivery, or for non-delivery of any UNREPEATED message, whether happening by negligence of its servants or otherwise, beyond the amount received for sending the same; nor for mistakes or delays in the transmission or delivery, or for non-delivery of any REPEATED message, beyond fifty times the sum received for sending the same, unless specially insured; nor in any case for delays arising from unavoidable interruption in the working of its lines, or for errors in cipher or obscure messages. And this company is hereby made the agent of the sender, without liability, to forward any message over the lines of any other company when necessary to reach its destination."
Three paragraphs later, the terms continued, "The Company will not be liable for damages or statutory penalties in any case where the claim is not presented in writing within sixty days after the message is filed with the Company for transmission."
- 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.
- 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.
- 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.
- Standard form contracts now are greater in quantity than their historical precedents but the terms found in them are similar. Pre-printed documents containing standardized terms are found in business and consumer contracts for the disposition of goods, services and intellectual property.[77]
Because these standardized terms appear in contemporary documents encountered everyday, they appear to be novel business practices. That perception, however, is error as the pre-Twentieth century evidence has demonstrated. In the 18th and 19th centuries, the average merchant or consumer no more bargained for the terms of his purchase than do you today. Memory is short and knowledge of history is minimal.
- The contemporary use of standardized terms does not represent a quantum leap in displacing default legal rules. Rather, firms or trade associations rely upon lawyers to write their contracts. Because lawyers represent sellers, many standard form contracts shift risks to buyers.[78]
The language of some documents also is not straightforward like the "set of business rules" set forth in the 1897 Sears Roebuck catalog. The complexity of terms derives partially from the complicated structure of certain transactions, such as long-term car leases and distribution agreements, but also from legalese.
- This chapter sets forth the results of a market study based on journalistic methods of document collection and analysis. Comparing the earlier documents to the current ones leads to the conclusion that standardized terms are still used to limit liability like their predecessors, but also to control warranties. Some businesses use terms solely related to anticipated litigation such as arbitration, choice of law and choice of forum. The empirical data used to draw these conclusions consisted of 57 standard form documents drawn from five sectors of the economy: (1) automobiles, (2) goods, (3), non-financial services, (4) financial services and (5) software and information.[79]
The number of contracts respectively per sector was: (1) eight for automobiles, (2) 17 for goods, (3) 13 for non-financial services, (4) eight for financial services, and (5) 11 for software and information. A total of 959 terms were examined: 175 (goods), 190 (non-financial services), 257 (financial services), 129 (software and information), and 208 (automobiles).
- The sample was drawn from various jurisdictions and included consumer and business standard form contracts. With few exceptions, none of the 959 terms were exceptionally objectionable if viewed from the perspective of provider and user. Only 10 terms excluded warranties entirely: two were final sellers referring the user to the manufacturer's warranty; one dealt with beta software; four dealt with the reliability of Internet or cellular telephone services; and one dealt with legal information.[80]
The remaining warranty terms defined the duration and the nature of the warranty. Following the same pattern, only five terms excluded all liability for damages. The remaining damage terms excluded consequential, incidental, and special damages. Several firms capped their liability for damages to the cost of the product. Only a minority of contracts, mainly limited to financial service agreements, contained arbitration and choice of law or venue clauses. Return and refund policies for ordinary goods and services were the norm. For purposes of analysis, the following classification system is used: (1) location of the contract, (2) manner of acceptance, (3) limitation of warranty, (4) limitation of damages, (5) return and refund, (6) litigation terms, (7) other terms and (8) business to business contracts. The most striking conclusion to be drawn from the sample is the unremarkable nature of the terms in comparison to the remarkable nature of the debate surrounding them.[81]
- Contracts covering goods, non-financial services and information or software were located on the receipt in 11 cases, inside the box in 13 cases, and on-line in six cases. With one exception, the remaining contracts were located, more precisely delivered, at the purchase point or located in multiple formats such as on-line, inside the box and CD-ROM disks. The single exception was the Lot Polish Airline ticket. Part of that contract was attached to the ticket. However, the full contract was available only at the airline office available free of charge upon request. Contracts covering financial services were located at the purchase point in one case, with the application to open the account or access the service in five cases, on-line in one case and stuffed inside an envelop containing the account statement in one case.[82]
With respect to bank accounts, the depositor opened the account by signing a signature card. Bank practice varied as to whether, after signing the signature card, the bank delivered the rules and regulations governing the account to the depositor without his specific request. Contracts covering automobiles were delivered at the purchase point. The full contract, including the manufacturer's warranty, was found in separate documents not presented simultaneously to the buyer.
- In the majority of cases, the time of contract delivery occurred at the time of purchase or subsequent to purchase. For example, dry cleaners and film developers delivered the contract by issuing a receipt after the buyer had transferred personal property to the merchant, but prior to payment of the service. Merchants of hard goods delivered the contract usually in a box containing the product subsequent to payment of the purchase price. Kenmore Camera was a notable exception. The content of the contract was available on-line prior to purchase. End user license agreements generally followed the practice of hard good merchants by delivering the contract subsequent to purchase. However, in some cases, for example Microsoft's operating systems and ICANN's domain name registration, the contract was available for viewing on-line prior to purchase. In addition, unlike hard good merchants, the language of the EULA invariably informed the user of his right to reject and return the product for the full purchase price if the end user objected to its terms prior to copying the program.
- With the exception of financial service and automobile purchase or lease contracts, the manner of acceptance was not the buyer's signature. Rather, the manner of acceptance was based on the buyer's conduct, or the seller's contract never addressed the issue. In a case of mixed hard goods and software, Turtle Beach specified that opening the box constituted acceptance of the contract. In hard goods cases, the contract never specified the manner of acceptance of the terms. Other sellers used a variety of mechanisms to equate conduct with acceptance. In non-financial service contracts, such as film development, the receipt stated that submission of the film constituted acceptance of the limitation on damages. In financial service contracts, the initial manner of acceptance was signature on a paper document. However, financial service contracts invariably contained a term giving the financial service company the authority to change any term of the original contract upon notice to the buyer. In those instances, the buyer signaled acceptance of the amended term by continued use of the financial service. If the buyer objected to the amendment, the contract gave the buyer the right to terminate the original agreement. Automobile merchants also relied upon acceptance by signature. However, no contract in the automobile sector contained the authority of the merchant to unilaterally change a term of the original contract.
- By contrast, contracts involving the license of software or information relied upon different types of buyer's conduct to establish consent to the terms. The four major types were: (1) open the box, (2) click the "agree" button on screen, (3) install, download or copy the program, or (4) use or access the program. In addition, some contracts, for example the Microsoft operating system, specified that the printed EULA superseded any on-line EULA. Microsoft was the sole merchant that, in addition to providing the "agree" or "disagree" options when installing the program, provided the additional option of letting the user print a copy of the contract. In other cases, to obtain a printed copy of the EULA, the user had to copy the text of the contract, and then paste it in a word editing program. However, there was no instance where the EULA merchant prevented printing of the agreement prior to use and installation of the product.
- Limitations on warranties appeared mainly in four sectors: (1) goods, (2) non-financial services, (3) software and information, and (4) automobiles. The findings showed that, with few exceptions, sellers did not exclude warranties but limited their duration and nature. For example, most sellers set a time limit of the duration and specified remedies for failure of the warranty. The standard period of warranty for goods and non-financial services was one year and the standard remedies were repair, replacement or return for a refund price. For example, Western Digital provided a one-year warranty, and offered an extended, optional three-year warranty for an additional fee of $9.95. The warranty stated that the product was free from defects in material and workmanship for a period of one year. The remedy for defective products was return them to the manufacturer for repair or replacement of the product. The Motorola cellular telephone was warranted free from defects in material and workmanship for a period of one to three years depending upon the serial number of the telephone. The PC Power Supply was warranted free from defects in material and workmanship for two years. The standard warranty found in EULA was 90 days. The standard warranty did not depend upon the size or culture of the firm. For example, the monopolist Microsoft and the main complainant, Netscape, in the anti-trust action against Microsoft, offered identical warranties. Small companies, such as WebTrends, excluded warranties entirely. In the software and information sector, neither size nor market dominance mattered to the content of terms.
- By contrast, the final sellers of automobiles and providers of financial services offered the stingiest warranties, but these warranty disclaimers derived mainly from the nature of the business. For example, lessors and dealers of new automobiles disclaimed all warranties referring the buyer to the standard manufacturer's warranty covering the automobile. Banks, brokerage firms and credit card companies took either no position on warranties or provided that the service was "as is," for example in the case of DLJ Direct's on-line brokerage account where the contract stated that use of the data and software were at the user's risk. The American Express On-line Wallet also disclaimed warranties on the use of its software and the Internet to make financial transactions, warning the user of the Internet's security risks. In addition, the majority of contracts acknowledged that limitations of warranty might be unenforceable under local law.
- The following examples illustrate these approaches. The Express Shoe Repair receipt No. 10967 stated, "NOT RESPONSIBLE FOR GOODS LEFT OVER 30 DAYS." Three different dry cleaning receipts: Stella Dry Cleaners, Open-Vue Cleaners - Shirt Launderers and Glassman Cleaners contained similar terms disclaiming responsibility for items left more than 30 days, relying on the ticket for the official company count of items and limiting liability against certain damage. For example, the back of the Open-Vue receipt stated under the word Conditions:
In undertaking the processing of articles for customers, we do not shirk any justifiable responsibility. We will exercise care in the treatment of goods entrusted to use.
In dry cleaning, we will use such processes which, in our opinion, are best suited to the texture and condition of the articles. We cannot be responsible for weak, tender defective or adulterated materials, or such other conditions that could not be determined prior to processing. We cannot assume responsibility for trimmings, buckles, beads, buttons, sequins, suedes, or leathers.
In laundering, we cannot guarantee colors, shrinkage, or synthetic materials. Errors in bundle count must be reported to the company within 48 hours. This ticket must be presented in case of claim. The company count will apply unless a list accompanies the bundle. Unless specifically agreed, liability for any articles shall not exceed ten times its processing charge.
The Stella Dry Cleaners and Glassman Cleaners receipts contained virtually identical language on the back of the receipt.
- Standardized terms limiting warranties varied in length and method of delivery. For example, the Nokia 638 "One Year Limited Warranty" consisted of a 14 paragraph validation card, a 13 paragraph "Lifetime Limited Warranty," and was delivered in the box with the telephone after payment for the product was made. Paragraph 10 of the "Lifetime Limited Warranty" was representative of the field and provided:
ANY IMPLIED WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OR USE, SHALL BE LIMITED TO THE DURATION OF THE FOREGOING WRITTEN WARRANTY. OTHERWISE, THE FOREGOING WARRANTY IS THE PURCHASER'S SOLE AND EXCLUSIVE REMEDY AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED.
Paragraph 11 provided that some states do not allow limitations of time to be placed on warranties, and forbid the exclusion or limitation of incidental or consequential damages. The limited warranty extended to the original purchaser and ran for the lifetime of the telephone starting from the date of purchase. The consumer bore the cost of shipping a defective product to Nokia; Nokia paid for the return shipment. The "Lifetime Limited Warranty" also did not apply if the product was subject to abnormal abuse or conditions or if the serial number on the product was effaced.
- A BMW Financial Services Motor Vehicle Lease Agreement (Closed End) - New Jersey dated 2001 applied to a 3-year term lease for a new 2001 BMW 325I with a gross capitalized cost of 33,247.85. The Agreement consisted of 36 terms covering four legal sized pages. The first 18 terms, covering two pages, were laid out in clearly demarcated "boxes." The signature line for the lessee appeared on page two; hence an additional 18 terms followed the signature line, although they were categorized by subject matter, numbered and labeled. Many of the first 18 terms consisted of disclosures required by federal and New Jersey law and covered: (1) itemization of amount due at lease signing, (2) a 13 item explanation of the monthly payment and (3) the total cost of the lease. Paragraph 17 entitled "Warranties," though noting the standard manufacturer's warranty contained in a separate document applied to the lease, nevertheless provided:
LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EITHER EXPRESSED OR IMPLIED AS TO THE VEHICLE OR ANY OF ITS PARTS OR ACCESSORIES. LESSOR MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS OF THE VEHICLE FOR ANY PARTICULAR PURPOSE OR ANY OTHER REPRESENTATION OR WARRANTY, UNLESS REQUIRED BY LAW. YOU ACKNOWLEDGE THAT YOU ARE LEASING THE VEHICLE FROM THE LESSOR "AS IS."
In large, bold type the following language appeared above the place for the lessee to put his initials: "NOTICE: THE LESSEE AND THE LESSOR SHALL BE ENTITLED TO REVIEW THE CONTRACT FOR ONE BUSINESS DAY BEFORE SIGNING THE CONTRACT."
- The most prevalent term governing damages limited but did not exclude damages. The contracts mainly excluded consequential, incidental, special and lost profit damages, though the vocabulary of terms was diverse. Many sellers set their maximum liability to the purchase price of the product. For example, FedEx limited its maximum liability to $100 per package or actual loss whichever was less, unless the shipper declared a higher value, in which case the maximum liability was extended to $25,000 per shipment, excluding items of exceptional value. Out of 57 contracts only five disclaimed all liability for damages: (1) PointCast's beta software, (2) Verizon's DSL service, (3) CMC's computer equipment, (4) AT&T equipment lease where AT&T did not select or provide the equipment, and (5) DLJ Direct on-line brokerage account. Contracts used on the financial services and automobile sectors did not address the issue of limitation of damages. Rather, those contracts specified the liability of the buyer for breach of the contract. For example, in the automobile leasing sector, the main damage term was early termination liability. In the financial services sector, the main damage term was holding the financial institution not responsible for losses sustained in the account through failure to report errors or unauthorized access attributable to customer negligence. Letters of credit required the applicant to indemnify the bank against error in payment provided the documents matched the terms of the letter on its face.
- Most terms covering exclusion of damages were transparent. Film receipt No. 291618 had printed on its right hand corner the following limitation of liability:
Submitting any film, print, slide or negative to this firm for processing, printing or other handling constitutes an AGREEMENT by you that any damage or loss by our company, subsidiary, or agents, even though due to the negligence or other fault of our company, subsidiary or agents, will only entitle you to replacement with a like amount of unexposed film and processing. Except for such replacement, the acceptance by our company, subsidiary and/or agents of the film, print, slide or negative is without other warranty or liability, and recovery for any incidental or consequential damages is excluded.
- Other receipts for the processing of film similarly limited the company's liability for errors in development. One exception was the early termination penalty in contracts for the lease of automobiles as the following language in paragraph 22 of the BMW lease contract illustrates:
For the purpose of figuring your Early Termination Liability (Section 21), the Early Termination Cost is:
(a) any unpaid Monthly Payments due; plus
(b) any official fees and taxes assessed or billed in connection with this Lease and any other charges to satisfy your obligation under this Lease, including repair charges, at termination; plus
(c) an early termination fee of $250.00; plus
(d) the Disposition Fee (Section 8, A); plus
(e) the actuarial payoff; minus
(f) the Estimated Value of the Vehicle (Section 23).
You may be liable for any excess wear and use charges and excess mileage charges upon the return of your Vehicle which will be billed to you. Your actuarial payoff is the total of Base Monthly Payments remaining until the end of your Lease, plus the Residual Value, minus the unearned Rent Charges during your Lease on a constant yield method based upon your declining Lease balance, assuming your Base Monthly Payments have been received on their scheduled due dates. We may use some or all of your security deposit to pay what you owe.
Paragraph 34 defined what constituted a "default" under the lease agreement and explained BMW's alternatives in case of default:
You will be in default under this Lease if:
(a) you fail to make a Monthly Payment when due; or
(b) you fail to keep any of your promises under this Lease; or
(c) you or your guarantor becomes insolvent or die, provided, however, if there is a surviving Co-Lessee or the Lessee is survived by a spouse, the Co-Lessee or the spouse shall have the right to continue to make the payments to us and comply with all other obligations in accordance with terms of this Lease; or
(d) if any information in your credit application or a guarantor's credit application is false or misleading.
If you are in default, we may do any or all of the following: (i) take any reasonable measures to correct the default or save us from loss, and you must pay us our cost and expenses; or
(ii) subject to your right to reinstate your Lease for failing to make a payment, when it is due, terminate this Lease and your rights to possess and use the Vehicle, and if you do not return the vehicle to us voluntarily, take possession of the Vehicle by any method permitted by law;
(iii) determine your Early Termination Liability (Section 21) which you must pay when we bill you; or
(iv) pursue any other remedy permitted by law.
We may use some or all of your security deposit to pay what you owe. If we get back the Vehicle we may dispose of it by public or private sale. We will add to the amount you owe all related expenses, fees, and legal costs including attorney's fees we incurred to repossess, store, restore and/or dispose of the Vehicle.
Nevertheless, with the exception of the automobile lease, the language of disclaimer of damages in the remaining contracts was in plain English.
- The Microsoft end user license agreement (EULA) for the sale of a mouse and license of the corresponding driver software stated that there is "No Liability for Consequential Damages" even if Microsoft had knowledge of the possibility of consequential damages. That paragraph provided:
To the maximum extent permitted by applicable law, in no event shall Microsoft or its suppliers be liable for any special, incidental, indirect or consequential damages whatsoever (including, without limitation, damages for loss of business profits, business interruption, loss of business information, or any other pecuniary loss) arising out of the use of or inability to use the SOFTWARE or accompanying Input Device, even if Microsoft has been advised of the possibility of such damages. Because some states and jurisdictions do not allow the exclusion or limitation of liability for consequential or incidental damages, the above limitation may not apply to you.
Other EULAs contained similar exclusions of liability for damages.
- Contracts in the goods, non-financial services and information and software sectors contained return and refund policies. Virtually every seller had a return, repair and refund policy; the differences consisted in the liberal or conservative nature of the policy. For example, Banana Republic had individual policies for return with the sales receipt and return without the receipt. A return with the receipt made within 14 days of the purchase entitled the buyer to a full refund. A return without the receipt, or beyond the 14-day period, entitled the buyer to a price adjustment based on the current value of the merchandise. Casio provided a repair or replace policy for the scientific calculator within the warranty period at no charge to the buyer. Bell Atlantic provided repair of the telephone service without charge provided the claim was made within the warranty period of 90 days. Many merchants followed similar policies toward return, repair or replacement, though in many cases the merchant reserved its discretion to choose the remedy. By contrast, other merchants offered a stingier policy. For example, BauHaus required the buyer to complete and send the registration card as a prerequisite to triggering the warranty including the merchant's obligation to repair or replace the product. However, in that case, the warranty was substantial - a limited lifetime warranty on the frame of the furniture and five years on the fabric.
- Contracts in the software and information sector contained terms for return and refund if the buyer objected to the terms of the license, and did not use, copy or install the program. While no company guaranteed perfect operation of its program, most contracts contained terms providing the buyer with a right to repair or replacement of defective products without additional payment The Hewlett Packard contract indirectly defined defect by warranting that its program "will not fail to execute instructions." Contracts in the automobile and financial services sector did not contain terms governing return, repair or replacement. In the former, the manufacturer's warranty specified the rights of the buyer for defective products. In the latter, the remedy is inapposite.
- One other term warrants discussion: restocking fees. A restocking fee is a charge assessed against the buyer for return of the product presumably to cover the administrative expenses of the seller. The term appeared exclusively in contracts for the sale of goods. For example, CMC charged a restocking fee of 15% of the purchase price for return of computer equipment. Madison Plumbing charged a 15% handling fee for returns. Kenmore Camera charged a restocking fee of 15%. While restocking fees sometimes are charged for the return of software, they are not terms contained in the EULA. Rather, they are the result of policies established by retail sellers. However, the imposition of restocking fees was not the norm.
- Litigation terms appeared in contracts for the license of software and the provision of financial services. The two types of terms were choice of law and arbitration. In the sample, the only contracts imposing arbitration were brokerage account agreements and bank accounts. For example, the First Union deposit agreement for non-personal accounts, the DLJ Direct brokerage account, the PaineWebber RMA account contained arbitration clauses. Choice of law clauses appeared in contracts not only for financial services but also for software and information. For example, the Home Depot commercial revolving charge and the Netware EULA specified the law of Utah. PaineWebber and DLJ Direct specified New York. Anawave Software, Inc. specified the law of California, while Creative Technology, Ltd. specified the law of California for sales within the United States and the law of Ireland for sales within the European Union. The sample demonstrated that approximately 10% of the contracts contained litigation terms.[83]
- Paragraph 28 of the PaineWebber Resources Management Account contract typified the use of an arbitration clause. It provided, "Arbitration is final and binding on the parties." In bulleted points, additional language set forth:
- THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY TRIAL.
- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM COURT PROCEEDINGS.
- THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
- THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
While paragraph 28 let the account holder select any arbitration forum where PaineWebber is legally required to arbitrate disputes, that selection must be made by "registered mail or telegram" within five days after receipt of PaineWebber's notice to arbitrate a dispute.[84]
- The phrase "other terms" refers to miscellaneous terms that did not fit within the classification system. Terms prohibiting assignment of rights appeared only in contracts related to goods, automobile leases and software, though the term was not uniform across all contracts. For example, four automobile leases prohibited assignment; two leases allowed assignment with the permission of the lessor. In the goods sectors, the contracts were non-uniform. Some prohibited assignment of the warranty while other contracts explicitly allowed for it. For example, Nokia prohibited the original owner of the product from assigning the warranty to a third party, while General Electric allowed the original owner to assign the five year limited warranty covering the air conditioner to a third party. Contracts for the license of information and software followed the same checkerboard pattern. For example, the WebTrends, Creative Technology and American Express contracts prohibited assignment; two Hewlett Packard contracts permitted transfer provided the original owner did not keep a copy of the program. Other EULAs did not address the issue.
- Contracts for the license of software and information also contained three other terms: (1) export restrictions, (2) anti-reverse engineering except as provided by law, (3) prohibitions against commercial use if the product was bought for personal use, and (4) restrictions on copy making. Some EULAs also contained warnings against risks of the product. For example, the Netware EULA contained warnings against using the operating system in critical systems such as air traffic control. Contracts in the automobile and banking sectors often contained indemnification clauses requiring the buyer of the product to indemnify the seller against claims brought against the seller based on the buyer's use of the product. Bank and automobile lease contracts also contained acceleration clauses in case of default. Several contracts defined the event of default, for example the AT&T business equipment lease and all automobile lease contracts. In addition, banks and brokerage firms reserved the right to unilaterally change the terms of the original agreement on notice of the amendment. The customer had the right to terminate the contract if the customer objected to the amendment.
- Firms use standard form contracts to conduct business with other firms. These contracts contain non-negotiable, producer-imposed terms. For example, AT&T Capital Leasing Services, Inc. uses a standard finance lease agreement to supply office equipment to businesses. The "lease" dated May 13, 1997 consisted of two pages. The first page identified the parties, the equipment and the price terms. It also contained a section entitled "Terms and Conditions" notifying the lessee that by signing the lease, the lessee agrees to the 16 fine print terms contained on page two of the lease. The price term of the lease was approximately $58,000. The AT&T lease is a finance lease whereby AT&T bought the equipment and then leased it to the business. The "Terms and Conditions" on page 1 provided:
By signing the lease:
(i) you acknowledge that you have read and understand the terms and conditions of the front and back of this lease,
(ii) you agree that this lease is a net lease that you cannot terminate or cancel, you have an unconditional obligation to make all payments due under this lease, and you cannot withhold, set off or reduce such payment for any reason,
(iii) you will use the equipment only for business purposes,
(iv) you warrant that the person signing this lease for you has the authority to do so and to grant the power of attorney set forth in section 7 of this lease,
(v) you confirm that you decided to enter into this lease rather than purchase the equipment for the total cash price, and
(vi) you agree that lease will be governed by the laws of the Commonwealth of Massachusetts and you consent to the jurisdiction of any court located within Massachusetts. You and we expressly waive any rights to a trial by jury.
With regard to default, term 9 on page two captioned "remedies" provided:
If a default occurs, we may do one or more of the following:
(a) we may cancel or terminate this Lease or any or all other agreements that we have entered into with you;
(b) we may require you to immediately pay us, as compensation for loss of our bargain and not as a penalty, a sum equal to (i) the present value of all unpaid Lease Payments for the remainder of the term plus the present value of our anticipated residual interest in the equipment, each discounted at 5% per year, compounded monthly, plus
(ii) all other amounts due or that become due under the Lease;
(c) we may require you to deliver the equipment to us as set forth is Section 3;
(d) we or our agent may peacefully repossess the Equipment without court order and you will not make any claims against us for damages or trespass or any other reason; and
(e) we may exercise any other right or remedy available at law or equity. You agree to pay all of our costs of enforcing our rights against you, including reasonable attorney's fees.
The 15 additional terms on page two contain equally dense provisions.
- The use by ICANN of standard form contracts dispels the notion that only profiteering enterprises do business based on standardized terms. ICANN is a technical coordination body for the Internet created in 1998. ICANN assumed responsibility for a set of technical functions previously performed under U.S. government contract by other groups. Specifically, ICANN coordinates the assignment of Internet domain names, IP address numbers, protocol parameters and port numbers that must be globally unique for the Internet to function. It is a non-profit, private-sector corporation dedicated to preserving the operational stability of the Internet; promoting competition; achieving broad representation of global Internet communities; and developing policy through private-sector, bottom-up, consensus-based means.
- ICANN uses a standard registration agreement with any person seeking to register a domain name. The agreement does not distinguish between multi-national companies and individuals. Each registration agreement requires the applicant to agree to use the Uniform Domain Name Dispute Resolution Policy to resolve claims of bad faith registration. Parties select "Providers" authorized by ICANN to settle these disputes. There are presently four authorized providers of dispute resolution services. The policy contains detailed rules governing submission of documents discovery and methods of decision-making.
- The mechanics of contracting for standardized terms in the sample contracts demonstrates that contracts are delivered with products and rarely does the buyer acknowledge consent to terms by signature or conduct. The terms are pre-printed prior to the buyer entering into the transaction and are not negotiable. In addition, the merchant's agent does not have authority to modify terms. The Edison Park Fast Car Stub No. 0365426 provides, "No employee has authority to make exceptions to rules." The purchase normally is completed prior to the buyer getting the contract. Nokia's practice of placing terms in the box with the product presaged the practice adopted by software companies to transfer products to buyers subject to specific restrictions on use. In some cases, software licenses are contained in the box and consent is based on opening the package. This practice does not differ in any material respect from the long-standing practice of hard goods merchants. In both cases, the buyer pays for the product prior to receiving terms and purportedly manifests consent to the terms by keeping the product.
- The standard procedure for closed end automobile lease contracts is to sign a one-page "order" document first and then, after the "ordered" vehicle has arrived at the dealer, sign the lease agreement at the desk of the sales person.[85]
While the BMW agreement specifically provided for a one-day review period, many customers do not exercise this option because they go to the dealership to get the new car, not to parse a legal instrument. Even if the lessee had read the terms, the meaning of the terms, never mind the contract as an entire agreement, may not be readily accessible as demonstrated by paragraph 22 in the BMW lease that required knowledge of actuarial methods to determine the early termination cost.
- Standard form contracts used by banks and brokerage firms introduce new standardized terms. For example, brokerage firms and banks predicate assent to future contract changes by the account holder's continued use of the product. Second, the contracts expand the range of terms beyond the product and into the field of litigation by specifying dispute resolution procedures. Brokerage firms typically require arbitration of disputes and rely upon a privately financed as opposed to tax payer financed dispute resolution system. By signing the contract, the account holder may waive a constitutional right to trial by jury.
- A depositor opens a bank account generally by signing a signature card. The bank's desk manager then delivers the handbooks to the account holder after the account has been opened and the depositor is ready to leave the bank. The longstanding assumption that, because a depositor has signed an account card, he has agreed to account terms often contained in separate documents is a fiction. The sheer length of the handbooks precludes the account holder from reading them, especially if read sitting in a chair next to a small desk in a busy bank. Likewise, the account holder of a brokerage account does not give real consent to standardized terms. The account holder's focus is on trading fees, minimum balances and margin requirements. For example, the account holder in New York would likely not realize, nor want to learn, the significance of being governed by the "laws of the State of Ohio." The account holder also does not really waive his jury trial right when opening an account. The waiver is a pre-condition to opening the account.
- The EULA is not a new use of the institution of contract. Any person who has bought a radio, coffee maker, or toy has found warranty cards and other written contract terms inside the box. These terms are available for review only after the product has been bought and then opened, usually at a location distant from the point of sale. Though these "hard goods" are contained in cellophane-wrapped boxes, the contracts governing them were treated as sales contracts, not "shrink wrap." The same method of contracting applied to insurance contracts, a practice dating from the 19th century. Similarly, airline tickets often are purchased and paid for by telephone. The tickets and certain contract terms then are delivered to the buyer, with the complete contract located at the air carrier's place of business.
- The commercial buyer, like his consumer counterpart, does not have any authority to bargain for terms contained in standard form contracts for the acquisition of ordinary products to be used in business. Equally, the terms set forth in the AT&T contract are likely to be no more transparent to the average business person than similar terms contained in consumer contracts would be transparent to the average consumer. In addition, small firms are in no better position than consumers to handle the burdens imposed by the standardized terms. For example, the choice of law and choice of forum clauses contained in the "Terms and Conditions" probably are enforceable because AT&T Capital Leasing, Inc. is headquartered in Massachusetts. However, for a firm located in Ohio, the burden of litigating in Massachusetts may be costly and onerous. The distinction between commercial and consumer transactions for purposes of determining the validity of standardized terms is artificial. The distinction purportedly reposes on the greater sophistication of the firm and the bald assertion that firms have the power to negotiate different terms. However, the nature of the transaction, not the status of the party, predetermines the selection of standardized terms found in standard form contracts. The AT&T lease is not an aberration but is the norm for firms conducting business with other firms in the mass market.[86]
- Firms use a variety of business models to sell products to buyers based on standardized terms.[87]
One business model, such as that used in the automobile industry, provides the buyer with standardized terms prior to delivery of the product. A second model, such as that used in tickets and intellectual property, provides the buyer with the product and delivers the terms later. A third business model, such as that pioneered by Priceline.com, provides the buyer first with terms and delivers the product later. The novelty of the third model is that the buyer neither knows the exact product nor its exact price prior to making the purchase. Second, firms neither expect buyers nor do buyers ever read the standardized terms governing the transaction. Even if they were read, buyers, without professional counsel, would not understand many terms. Third, contracts function like extensions of the product they underlie.
- Notwithstanding the variety of terms and contracts, several recurring terms raise policy issues of direct control: (1) limitations of warranty, (2) exclusion of damages, (3) return restrictions and conditions imposed on repair and replacement, (4) arbitration, choice of law and choice of forum, (5) indemnification and (6) unilateral change of terms. Rather than determine the validity of these terms by whether they are unfair, it is preferable to restrict their use based on the nature of the business using them, the nature and cost of the product, and effects of requiring insurance.
- The law taught in classrooms and tested on bar exams is based on a paradigm where parties, during a pre-contract phase, negotiate terms, allocate risk and define the parameters of their bargain.[88]
The paradigm presumes parties, often represented by counsel, conversant in commercial affairs. The final agreement embodied in the contract reflects a deliberate assignment of rights and obligations between the parties meant to be enforced unless prohibited by law. The validity of the contract derives from the parties' consent to terms.[89]
Consent is measured objectively by outward symbol such as signature or conduct; the parties' subjective understanding is irrelevant to whether any term is enforceable.[90]
The Uniform Commercial Code, the common law, the Convention on Contracts for the International Sale of Goods, the UNIDROIT Principles and the PECL are based on this paradigm.[91]
Prausnitz stated, "It is the undoubted rule of law, uniform throughout the world, that no contract is formed without the consent of the parties."[92]
- Standardized terms found in pre-printed documents, however, rest upon an entirely different dynamic. One party writes standardized terms for a vast and anonymous market. The parties neither negotiate nor agree to most pre-printed terms. There is no pre-contract time period during which the parties engage in give and take to reach compromises. Except for a few terms, such as price, product description and method of payment, standardized terms do not embody a fusion of the parties' wills or represent a "meeting of their minds." In short, standard form contracts are not contracts. A brief history of how this paradox arose follows.
- Contract by consent is a novelty in the history of the law. In Roman law, the normal way to create an obligation was the "stipulation." The "stipulation" involved ceremony and ritual, sometimes requiring the physical presence of the two parties and an exchange of questions and answers between them. Without ritual, the parties merely had a pact, or "convention," unenforceable at law. The pact was the parties' agreement shorn of ceremony. The "stipulation" eventually yielded to the oath developed by Canon Law. Swearing before a divine being replaced an oath given before a person qualified to administer them. In the middle of the 13th century, European law first recognized the consensual contract when the religious oath yielded to knowing and voluntary consent. With this development, consent to privately ordered obligations took the place of ritual and oath, and contracts became enforceable based on a simple agreement between the parties. Marcel Planiol stated, "Once entered into our law, this new principle could never leave it, and it produced a profound transformation: the ancient pact, the simple accord of wills, bare, without exterior forms, had taken the place of contract, the only one which up to then was considered as productive of obligation."[93]
- This theory of how contract law evolved from status to consent is well accepted. Sir Henry Maine in the Ancient Law stated:
There are few general propositions concerning the age to which we belong which seem at first sight likely to be received with readier concurrence than the assertion that the society of our day is mainly distinguished from that of preceding generations by the largeness of the sphere which is occupied in it by Contract.[94]
Tracking the development of contracts from the Roman law to the law of 19th century England, Maine showed how legal changes eventually obviated formalities for the creation of "Consensual Contracts," by far the largest and most significant group of contracts within Maine's taxonomy. Maine stated, "The Consensus, or mutual assent of the parties, is the final and crowning ingredient in the Convention, and it is the special characteristic of agreements falling under one of the four heads of Sale, Partnership, Agency, and Hiring that, as soon as the assent of the parties has supplied this ingredient, there is at once a Contract."[95]
The consent of the contracting parties made their agreement enforceable at law. External factors, such as signatures, served only to prove the existence of consent; the external factors were not required for making a legally effective contract. Civilization hence progressed from "status to contract." Each individual acquired a greater "liberty of contract." Government forbid fewer bargains and enforced more of them. Even Arthur Linton Corbin, who barely disguised his loathing for the "freedom of contract" principle, acceded to this view.[96]
- Oliver Wendell Holmes in The Common Law theorized that contracts were based on consent. The common element of all contracts is a promise supported by consideration.[97]
"Contracts are dealings between men, by which they make arrangements for the future."[98]
The law does not interfere with these "dealings" until a promise has been broken and cannot be performed according to its terms. Holmes maintained, "The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass."[99]
Significantly, however, Holmes observed that the law does not inquire into the subjective intent of the person making the promise. Rather, "The law has nothing to do with the actual state of the parties' minds. In contract, as elsewhere, it must go by externals, and judge parties by their conduct."[100]
In Holmes' day, the outward sign usually was the party's signature.
- The paradigm works as follows. First, the parties create a contract by an exchange of formal offer and acceptance, including consideration in common law jurisdictions. In that process, the parties define the terms of the contract. Second, the parties generally reduce their agreement to writing. Third, the parties express adherence to its terms by signing the document or expressing consent in another manner.[101]
The contract terms govern the parties' relationship during the period of the transaction and are enforceable in the absence of illegality, fraud, duress or mistake. The expression of consent binds the parties to the contract and produces the parties' obligations. The statutory law in the United States, Europe and the international community has adopted the contractual paradigm.[102]
The case law assumes the validity of the freedom of contract principle when determining whether to enforce ordinary contract terms.
- The consent of parties to contract terms generally is measured by the "meeting of the minds" rule. The meeting of the minds rule derives from the law of mutual mistake and mutual assent. It provides that each party to the contract must agree to identical terms contained in their contract. In other words, the rights and obligations of each party are mirror images of one another. The rule is so embedded in American jurisprudence that its provenance is never the subject of attribution and its validity is never questioned. For example, in 1874, the United States Supreme Court in Insurance Company v. Young's Administrator, a case involving inconsistent terms between the policy and application, stated, "The applicant assented to the proposition contained in the receipt, but the company did not. The company assented to the policy, but the applicant never did. The mutual assent, the meeting of the minds of both parties, is wanting. Such assent is vital to the existence of a contract. Without it there is none, and there can be none."[103]
State courts have adopted the same test. The New York Appellate Division has stated, "It is essential that the minds of the parties should meet in respect to the nature and extent of the obligations assumed."[104]
The court further stated, "To make a valid contract, the minds of the parties must meet, and both must intend to enter into the engagement expressed by the terms of the contract."[105]
- In his brilliant, but largely forgotten, article, Edwin Patterson dismantled the meeting of the minds rule.[106]
First, the mind is a metaphysical concept incapable of verification or measurement. In Patterson's words, it "does not possess the quality of extension in space."[107]
Courts cannot know what is in the mind of any party, especially the mind of a legal entity. The added requirement of "meeting" introduces a second impossibility. Meeting is predicated of tangible things, such as persons and objects, and is descriptive of real events. Minds do not meet in space and time. Even if the phrase "meeting of the minds" is metaphorical, it still refers to the parties' mental acts and is an unsatisfactory method for determining the validity of contracts. Despite Patterson's scathing analysis, courts continue to invoke the term "meeting of the minds" to identify contractual terms parties consented to. In the context of standardized terms, the meeting of the minds is an irrelevant act and misrepresents what actually takes place. Courts responded to the difficulty of knowing content of minds by adopting Holmes's positivist approach but still focused on consent.
- However, a signature on a form is a perfunctory act and, in most cases, there is not even a signature, a form is just given by one party to the other. However, the UCC, the preeminent codification of contract law in the United States, disregards these facts and perpetuates the contractual paradigm based on consent. Courts too evaluate the validity of standardized terms by looking for agreement and consent in transactions where both parties acknowledge that, for very good reasons, their deal is not based on consent. In doing that, the judiciary becomes a fiction factory.
- Fictions are used to find consent where it has no basis in fact. If a "signature" appears somewhere on the face of the document containing standardized terms, this fiction works as follows. Persons are presumed to know the contents of documents they sign. If a person fails to read a document, but signs it anyway, that person has consented to the contract terms, even if the terms were fixed and even if reading them would not have led to understanding them. Courts do not inquire into the subjective mental acts of contract parties but rely on objective signs of consent like signatures. In a signed document, the parties minds have met on all terms even when courts know that conclusion to be utterly false.
- The 1902 case of Fivey v. Penna. R.R. Co. illustrates the use of signature as "constructive consent" of standardized terms contained in the document bearing a workman's signature.[108]
Fivey was a railroad employee injured on the job. He brought an action in negligence to recover damages for his physical injury. In defense, the railroad claimed that Fivey had released the company from liability for damages by becoming a member of the company's relief fund and taking payment from that fund in the aggregate amount of $82. Fivey signed the application containing the release at the close of a required physical examination. Fivey testified that the medical examiner "simply shoved it in front of me and told me to sign my name; that it was all a matter of form; that is all."[109]
The medical examiner neither explained the contents of the application nor the consequences of executing the release.
- The court asked Fivey whether he could read or write. Fivey answered, "Yes; there is plenty of words I didn't understand."[110]
He continued, "I commenced to look at the print out of curiosity to see what it contained, if I could possibly make it out." [111]
He also testified that the medical examiner would not give him time to read the document. The question for the court was: "Are there to be found in this testimony such elements of fraud or deceit as, under the law, are sufficient to discharge a person who can read and write from the binding force of a contract in writing, otherwise valid, which has been duly executed by him?"[112]
When put that way, the conclusion was inevitable. "Affixing a signature to a contract creates a conclusive presumption, except against fraud, that the signer read, understood and assented to its terms."[113]
- If the propositions of Fivey are accepted and if the reality of the transaction is completely ignored, the Fivey opinion is legally sound. As Holmes stated, "The law has nothing to do with the actual state of the parties' minds," and must go by "externals." The fact that Fivey, without reading or understanding the terms, signed the application containing the release is reason to enforce the contract against him in the absence of fraud. The evidence in Fivey did not demonstrate that the railroad engaged in fraud to obtain Fivey's signature on the application. Hence, the court did not have a legal reason to set aside the contract. A literate person is bound by signed contracts. Fraud is difficult to prove and seldom occurs in standardized transactions.
- The Fivey opinion is an affront to common sense. Fivey was an uneducated laborer who underwent a required medical examination to obtain employment. His testimony that he obeyed the request of the doctor to sign the application was plausible and uncontradicted. The court's use of his signature as proof of consent violently changed the facts to fit the paradigm. The court skirted the difficult issue of determining whether a non-negotiable standardized term, neither read nor understood, is an enforceable term. Dealing with that question would have required the court to question the very basis of the contractual paradigm. Changing the facts by artifice was easier than reconstituting contract law.
- Where there is not even a signature to support a finding of consent, courts find "constructive consent" based on what may be called "constructive signature." The term "constructive signature" refers to conduct functioning like signatures and representing consent to terms. The category of constructive signatures ranges from buying, using or failing to return a product; it also includes clicking an "I agree" button on a computer screen to accept licensing terms. Constructive signatures cover a broad variety of conduct. For example, the United States Supreme Court decision in Carnival Cruise Lines v. Shute is an example of "constructive signature by purchase and failure to return the product.[114]
The Shutes, residents of the State of Washington, bought tickets for a cruise on the Tropicale operated by Carnival Cruise lines, a resident of the State of Florida. The Shutes purchased the tickets through a local travel agent. The travel agent sent the payment and order to Carnival Cruise in Florida where the tickets were issued and mailed to the Shutes in Washington. The face of each ticket contained this admonition: "Subject to conditions of contract on last pages important! Please read."[115]
The contract consisted of three pages of fine print text. Term 3(a) provided that acceptance of the ticket constituted acceptance of the terms and conditions of the contract. Term 8 contained a forum selection clause naming the State of Florida as the forum to resolve disputes.
- After Ms. Shute slipped and fell on the deck of the ship, suffering an unspecified injury, the Shutes filed an action based in tort in the federal district court in the State of Washington. Carnival Cruise filed a motion for summary judgment based on the forum selection clause. The district court granted the motion on other grounds, namely the lack of personal jurisdiction by the State of Washington over the non-resident Carnival Cruise. The Court of Appeals for the Ninth Circuit reversed, finding that the State of Washington had jurisdiction and that the forum selection clause was unenforceable because it was "not freely bargained for." The United States Supreme Court reversed the Ninth Circuit. The Supreme Court enforced the forum selection clause because it was reasonable under the circumstances. That the term was imposed, not negotiated, was a fact of no importance. The Court noted, "the passage contract was purely routine and doubtless nearly identical to every commercial passage contract issued by petitioner and most other cruise lines."[116]
In this context, parties do not, nor could they, negotiate the terms of contracts. "Common sense dictates that a ticket of this kind will be a form contract the terms of which are not subject to negotiation, and that an individual purchasing the ticket will not have bargaining parity with the cruise line."[117]
Commercial realities prevented the parties from acting like business persons under the conventional contract paradigm.
- According to the Court, the forum selection clause produced the following economic benefits: (1) cruise lines have an interest in limiting the fora to which they are exposed to litigation given the multiple nationalities of their customers, (2) the ex ante clause clarifies the means of resolving disputes saving the parties the cost of determining the proper forum for litigation, and (3) the forum selection clause reduces the cost of tickets. The Court observed, "it stands to reason that passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued."[118]
- A similar result was reached in ProCD, Inc. v. Zeidenberg.[119]
Matthew Zeidenberg bought a consumer package of ProCD's product at a retail store in Madison, Wisconsin. The product was a computer database of more than 3,000 telephone directories developed at a cost of more than 10 million dollars. He walked into the store, took a box containing a consumer version of the software from the shelf, paid the price and left the store. Mr. Zeidenberg then formed a corporation to resell the information contained in the database from a Web site he created specifically to engage in the business of reselling the information contained in the database contrary to the product's license limited to consumer use.
- ProCD engaged in price discrimination between consumer and commercial users. ProCD sold to the general public for personal use at a price of $150. ProCD sold to commercial users at a substantially higher price. In effect, commercial users partially subsidized the cost of the consumer product. To control arbitrage, that is, to distinguish between commercial and consumer users, ProCD elected to use the institution of contract. The consumer package was covered in cellophane paper and contained a shrink-wrap license restricting the use of the product to non-commercial purposes. The box stated that the software came with restrictions found in the box. The restrictions also were encoded on the CD-ROM, set forth in the printed manuals and displayed on the screen each time the user ran the program.
- ProCD filed an action for injunctive relief in the federal district court of Wisconsin seeking to stop Zeidenberg from exceeding the license restrictions. The district court denied the relief because the terms of the contract were not printed on the outside of the box. Judge Frank Easterbrook of the Seventh Circuit reversed finding that the terms of the contract were enforceable under the common law and the Uniform Commercial Code. UCC §2-204(1) provides: "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." Judge Easterbrook reasoned: "A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance."[120]
In thi
