[Ecommerce] reminder about meeting and article about contracts of adhesion?

[Manon Ress]

Reminder: today public meeting at ALA about progress of the Hague
Convention on jurisdiction and enforcement of judgments
from 12 to 2pm.
ALA Washington Office,
1301 Pennsylvania Ave. NW, Suite 403
Washington, DC

Bring your lunch

Call in number is 800-377-8846, password
33662591.


 From "The dark side of the law" an article by Paul Carrington in
Association of Trial Lawyers of America publication.

QUOTE:
The contemporary fashion is not to require the weaker party to surrender
substantive rights, but to require him or her to surrender procedural
rights needed if the substantive rights are to retain their value-a
device to which trial lawyers should be the first to object.

One long-familiar practice has been to exact an agreement that the
transaction will be governed by the laws of a jurisdiction more
favorable to the party drafting the form than the laws that would
normally apply to protect the weaker party. The Uniform Commercial Code
speaks to that practice,6 as does the Restatement (Second) of Conflict
of Laws.7 Both invalidate choice of law provisions that are not
reasonable, such as those having the intended effect of preventing
enforcement of laws that protect the weaker party.

Variations on this older technique of law evasion are now in vogue. They
have the same purpose and effect as an abusive choice of law clause but
are more subtle. One variation is to require the weaker party to agree
to litigate claims (as either a plaintiff or a defendant) in a remote
and inconvenient public forum. The Restatement (Second) of Conflict of
Laws also restrains the use of "unfair or unreasonable" choice of forum
clauses.8

Another variation is to require the weaker party to submit any dispute
with the party drafting the form to a private forum that is
inconvenient, costly, biased, and even lawless. Another is to require
the weaker party to waive the right to trial by jury or to forgo
participation in any class action. Yet another is to require him or her
to agree to a reversal of the American rule leaving legal costs where
they fall.
END of QUOTE

Association of Trial Lawyers of America May 2000

Courts are increasingly validating standard form contracts that
eviscerate people's rights. Trial lawyers must fight the trend.

The dark side of contract law



Paul D. Carrington

Trial lawyers have long been active, in litigation and through
legislation, in promoting tort law that protects individuals from the
efforts of corporate interests to "create wealth" at the risk or expense
of the powerless. And trial lawyers have always resisted "reforms"
shielding corporations from the claims of individuals whose only
recourse for harms done them is the law.


However, not all trial lawyers are aware of the relocation of the
theater in which that struggle continues. For the time being at least,
corporate efforts to protect businesses from accountability in the civil
justice system have been in large part redirected to the law of contracts.


Contract law is being modified to facilitate the use of standard form
contracts to strip individuals of many rights=96rights arising in tort and
rights provided by state and federal statutes enacted to restrict the
misuse of economic power, constrain fraud on individual investors, deter
discrimination, and protect workers from corporate attempts to secure
their labor at the least possible cost. If this process of change in
contracts law is not reversed, much of the legal framework for
protecting powerless people will be rubble.


The change of which I write is the courts' enlarged tolerance for
onerous provisions in contracts of adhesion. Standard form contracts are
useful instruments when employed to express the reasonable expectations
of parties who lack the time, the wisdom, or the occasion to negotiate a
reasonable bargain. However, when they are used as a weapon to force a
party to waive rights, they can be the instruments of grave injustice.
That form of injustice is becoming commonplace.


The U.S. Supreme Court in 1889 recognized the problem of standard form
contracts and refused to enforce an unjust provision in a bill of
lading.1 Congress long ago prohibited the use of such bills or passenger
tickets as a means of requiring passengers and shippers to forfeit their
substantive rights against carriers. Insurance companies have long been
regulated with respect to the content of the contracts they can make
with individual buyers of their products.2


On the authority of the 1889 Supreme Court decision and many other
decisions by other courts, the American Law Institute long ago expressed
as black-letter law the doctrine that provisions in standard form
contracts must be reasonable and just.3 Almost every state has enacted
the section of the Uniform Commercial Code invalidating unconscionable
provisions of contracts for the sale of goods.4 That provision reflects
an overlapping doctrine of equity long recognized by the English Court
of Chancery.5 What needs to be done by enacting legislation is to revive
these long-established principles.


The black-letter law expressed in the Restatement (Second) of Contracts
is supported by a compelling justification. It is understood by both
parties to a standard form contract that its terms will not be read or
discussed. The party who drafted and proposed the form asks and receives
trust that the instrument contains no traps for the unwary, that a
reasonable and well-advised person would have submitted to its terms. If
the terms are not reasonable and just, there has been a breach of trust
and no meeting of the minds that can properly be regarded as a contract.


Sound as this principle is, the oppressive contract of adhesion has
acquired new life. The contemporary fashion is not to require the weaker
party to surrender substantive rights, but to require him or her to
surrender procedural rights needed if the substantive rights are to
retain their value-a device to which trial lawyers should be the first
to object.


One long-familiar practice has been to exact an agreement that the
transaction will be governed by the laws of a jurisdiction more
favorable to the party drafting the form than the laws that would
normally apply to protect the weaker party. The Uniform Commercial Code
speaks to that practice,6 as does the Restatement (Second) of Conflict
of Laws.7 Both invalidate choice of law provisions that are not
reasonable, such as those having the intended effect of preventing
enforcement of laws that protect the weaker party.


Variations on this older technique of law evasion are now in vogue. They
have the same purpose and effect as an abusive choice of law clause but
are more subtle. One variation is to require the weaker party to agree
to litigate claims (as either a plaintiff or a defendant) in a remote
and inconvenient public forum. The Restatement (Second) of Conflict of
Laws also restrains the use of "unfair or unreasonable" choice of forum
clauses.8


Another variation is to require the weaker party to submit any dispute
with the party drafting the form to a private forum that is
inconvenient, costly, biased, and even lawless. Another is to require
the weaker party to waive the right to trial by jury or to forgo
participation in any class action. Yet another is to require him or her
to agree to a reversal of the American rule leaving legal costs where
they fall.


Any of these provisions will diminish the settlement value of an
individual's meritorious claim. A combination of them will in many
situations reduce its settlement value to zero.


Many cases litigated in the last decade illustrate the use of these
devices. A few examples can be drawn from the work of the Supreme Court.


=95 A Seattle passenger on a cruise ship slipped and fell, then found that
in the fine print of her ticket, she had agreed to litigate any personal
injury claim only in Florida.9


=95 A Montana sandwich shop franchisee found that he had agreed to assert
any claim against the franchisor in a costly forum in Bridgeport,
Connecticut, the franchisor's hometown.10


=95 An Alabama homeowner disappointed by the work of a termite removal
firm found that he had agreed to forgo use of the small claims procedure
provided by his state court in favor of a more costly private forum.11


=95 A shipper of a supply of fruit from Morocco to Massachusetts that
spoiled in transit found that he had agreed to present his spoilage
claim only in Japan.12


In all these cases, the weaker party retained substantive rights but was
put at so grave a procedural disadvantage by the Court's decisions that
these rights lost much or all of their value.


Other examples can be found in recent decisions of lower federal courts
and some state courts.13 A new ploy of sellers of goods is to put a
dispute resolution clause waiving procedural rights in a package insert
purporting to be a standard warranty. This renders the warranty
unenforceable as a practical matter, or nearly so, with the result that
the settlement value of a claim for breach of warranty is reduced to
peanuts. If the purchase is made over the Internet, the buyer does not
even receive a printed copy of the clause to which he or she agreed by
clicking as directed on a specified spot on the computer screen.


A debtor borrowing money is now often required to sign a loan agreement
in which the lender retains full access to the judicial process to
assert its rights, but the borrower is bound not to participate in a
class action to enforce the federal Truth in Lending Act, a statute that
as a practical matter can be enforced no other way. The same condition
is imposed on credit card users by a fine-print insert accompanying the
monthly bill. Examining one I have with a magnifying glass, I see that
the user agrees to forgo joining a class action, to pay the bank's legal
fees if he or she loses, and to arbitrate any claim in an expensive
private forum.


At the hospital at my university, and I presume many others, a patient
checking in is asked to sign an admission form giving the hospital the
choice of whether any dispute in which he or she might later engage
should be resolved in court or by arbitration. Many lawyers have
mindlessly signed it.


It may be that this trend toward using standard form contracts to strip
people of their rights was stimulated by the teachings of certain
lawyer-economists. These academics argue that consumers benefit from
such clauses because they make it possible to secure more favorable
prices or wages than would have been possible if employers, lenders,
suppliers, carriers, or franchisors had to reckon that people would be
able to enforce their rights.14



This reasoning assumes that the market works. It assumes that a
competitor of the cruise line would offer a less restrictive ticket for
a similar cruise at a higher price if passengers really wanted one, or
that another employer would offer a worker a job where his or her
statutory rights would be enforceable and the worker would receive a
lower salary reflecting the cost to employers of being exposed to the
risk of judicial enforcement of the worker's rights. Or that patients
could go to another, slightly more expensive hospital for treatment. Or
that borrowers could find a credit card company willing to risk the
chance that they might assert a right against it in exchange for a
slightly higher rate of interest.


This is a false assumption. The party drafting the standard form is
betting with extremely favorable odds that there will be what=96in the
jargon of economists=96is denoted a "market failure." There is a jibe
economists perpetuate against themselves that they solve problems by
making unrealistic assumptions: If you need to open a can, assume a can
opener. The market that assures fair value to those who buy tickets,
bills of lading, new computers, hospital services, or sandwich shop
franchises is a virtual can opener. It doesn't work.


It doesn't work for a reason that even an economist might be expected to
notice. There is a profound disparity of information between parties
when a dispute resolution clause is inserted into a standard form
contract made with a consumer, worker, patient, borrower, or the like.
The corporate party writing the contract knows that out of every 1,000
passengers, shippers, workers, customers, patients, or borrowers, there
will be one who will sue. It is desirable for the company to write a
dispute resolution clause that will disarm the one unidentified future
plaintiff, and it hires lawyers to draft a ticket having that effect.
Indeed, corporate management failing to do that might be at risk of a
mismanagement claim by shareholders.


On the other side, no one buying a cruise line ticket (save perhaps a
lawyer) is thinking about his or her future slip-and-fall case. People
expect disasters to happen to others. If we thought the bank was going
to violate the Truth in Lending Act, we would go elsewhere to bank, but
individuals do not think that way. Life is too short to measure such risks.


Moreover, even if a prospective passenger were well advised about the
legal consequences of the clause, it is impossible to assign a realistic
value to the right of access to an effective forum for presenting a
claim that has not yet arisen and whose dimensions and gravity are
unknowable.


This latter point was well understood until the 20th century, for it was
almost universal law in the United States that a promise to arbitrate a
future dispute was revocable. That rule was abrogated in the Federal
Arbitration Act of 192515 and in much state legislation16 to accommodate
contracts for the sale of goods between distant merchants.17 No one
envisioned the use of dispute resolution clauses to strip workers,
consumers, borrowers, and other powerless people of rights that were
enacted for their protection.


State solutions


While the Supreme Court has clearly developed a weakness, even a
sentimentality, favoring private dispute resolution,18 it has wisely
left the problem of standard form contracts within reach of state courts
and legislatures.


The Court has repeatedly explained that the federal law of arbitration
preempts any state law hostile to arbitration per se. But it has always
emphasized that the law of contracts is state law, and arbitration
clauses can be held to the same standards of contract formation as are
other clauses, such as choice of law or choice of judicial forum clauses.


What is needed, therefore, is consideration by state courts and
legislatures of the problem of standard form contracts whose provisions
are unreasonable and unjust with respect to procedural disadvantages
imposed on the powerless individual.


The Restatement principles have no application to contracts between
merchants or to other situations in which there is a reasonable
likelihood that both parties are well advised about the content of the
form. There is no need to protect highly paid executives from their
imprudence in agreeing to a disadvantageous dispute resolution clause in
their employment contracts or to protect a chain store dealing with a
wholesaler of goods.


As the Supreme Court acknowledged several decades ago, between "big
boys" who know what they are doing, even a contract authorizing a
confession of judgment may be just and reasonable.19


There is nothing inherently unjust or unreasonable about arbitration
provided that the private forum is indeed less expensive and equally
effective in enforcing the weaker party's rights, especially rights
enacted for his or her protection. A state cannot discriminate against
private dispute resolution, and there is no good reason why one should
want to do so.


However, an arbitration clause may be merely a disguised provision
requiring the weaker party who asserts a future claim to


=95 bear additional costs, such as those associated with contesting a
matter in a distant forum or paying the salary of the neutral or of the
institutional service provider;


=95 risk paying the stronger party's legal fees if the claim fails;


=95 forgo access to evidence needed to prove a claim;


=95 present evidence to a "neutral" who is likely to be biased against him
or her;


=95 have no recourse to correct a decision disregarding his or her legal
rights; or


=95 forfeit participation in a class action that may be the only effective
means of asserting those rights.


If this is in fact the case, it is not contrary to federal law if state
law treats the arbitration clause just as it would treat a clause
assigning a future dispute to a public court having those same
deficiencies. All such provisions in contracts with consumers, workers,
patients, passengers, shippers, borrowers, and the like should be void,
as indeed they were until the current wave of "reform."


Surely trial lawyers can appreciate the need to correct this trend. If
they speak out and litigate against it, others can be made to understand
that standard form contracts are with increasing frequency being used by
powerful interests to deny individuals their rights. If trial lawyers
will not speak up about these provisions, it appears likely that courts
will continue to sustain the erosion of individual rights afforded not
only by tort law, but by many state and federal laws enacted for the
protection of relatively powerless individuals.


Notes

1. Liverpool & Great W. Steam Co. v. Phenix Ins. Co., 129 U.S. 397, 441
(1889).

2. Edwin W. Patterson, The Delivery of a Life Insurance Policy, 33 HARV.
L. REV. 198 (1919).

3. RESTATEMENT (SECOND) OF CONTRACTS =A7211 (1997).

4. U.C.C. =A72-302 (1998).

5. Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (Ch. 1750).

6. U.C.C. =A71-105 (1998).

7. RESTATEMENT (SECOND) OF CONFLICT LAWS =A7187 (1988).

8. Id. =A780.

9. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991); see also
Vessel Owner Liability Act of 1992, 46 U.S.C. app. 183c (1994).

10. Doctors' Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996).

11. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995).

12. Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995)=
.

13. See, e.g., Equal Employment Opportunity Comm'n v. Kidder, Peabody &
Co., 156 F.3d 298 (2d Cir. 1998); Hill v. Gateway 2000, Inc., 105 F.3d
1147 (7th Cir. 1997); Thompson v. Illinois Title Loans, Inc., No. 99 C
3952, 2000 U.S. Dist. LEXIS 232 (N.D. Ill. Jan. 6, 2000); see also
Richard E. Speidel, Consumer Arbitration of Statutory Claims: Has
Pre-Dispute [Mandatory] Arbitration Outlived Its Welcome? 40 ARIZ. L.
REV. 1069 (1998).

14. See, e.g., Richard A. Epstein, Unconscionability: A Critical
Reappraisal, 18 J. L. & ECON. 293 (1975); James A. Brickley et al., The
Economic Effects of Franchise Termination Laws, 34 J. L. & ECON. 101 (1991)=
.

15. 9 U.S.C. =A72 (1994).

16. E.g., UNIF. ARBITRATION ACT =A71 (1955), 7 U.L.A. BUS. & FIN. L. 6 (199=
7).

17. IAN R. MACNEIL, AMERICAN ARBITRATION LAW: REFORMATION,
NATIONALIZATION, INTERNATIONALIZATION 15-133 (1992).

18. See generally Paul D. Carrington & Paul H. Haagen, Contract and
Jurisdiction, 1996 SUP. CT. REV. 331.

19. E.g., D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 187-88 (1972).

Paul D. Carrington is Chadwick Professor of Law at Duke University in
Durham, North Carolina. He is the author of Stewards of Democracy: Law
as a Public Profession (1999).










--
Manon Anne Ress
Consumer Project on Technology
www.cptech.org
PO Box 19367, Washington, DC 20036
manon.ress@cptech.org, voice: 1.202.387.8030, fax: 1.202.234.5176