Author:	John J A Burke BA, JD, PhD Professor, Riga Graduate School of Law
Subjects:	Contracts - Economic aspects Contracts - Social Aspects Contracts Law and Legislation (Other articles)
Issue:	Volume 10, Number 2 (June 2003)
Category:	Refereed Articles

Contents:

• Preface
• A Note on Methodology
• Chapter One - The Problem
• Chapter Two - The Early Origin and Use of Standard Form Contracts
• Early Examples of Standardized Terms
• The mechanics of buying and selling products in the 18th and 19th centuries
• The validity of pre-printed terms in the 19th century
• The business purpose role of standardized terms
• Chapter Three - Market study: Standard Form Contracts
• Location of contract
• Manner of acceptance
• Limitation of warranty
• Limitations of Damages
• Return and refund
• Litigation terms
• Other terms
• Business to Business Contracts
• Conclusions
• Chapter Four - The Great Schism: Reality and Law
• The Paradigm
• Resort to legal fictions
• Conclusions
• Chapter Five - Contracts of Adhesion
• Origins
• Case law
• Chapter Six - Covert Tools of the Judiciary
• Unconscionability
• The reasonable expectations test: unfair surprise
• Restatement (Second) of Contract
• Infirmities of private litigation
• Conclusion
• Chapter Seven - Proposed Solutions
• Demogue (1911)
• Prausnitz (1937)
• Llewellyn (1960)
• Slawson (1971)
• Rakoff (1983)
• Meyerson (1990)
• Chapter Eight - The European Union Position
• Chapter Nine - Back to the Future
• Four Case Examples
• Conclusion
• Chapter Ten - Reinventing Contract
• Formation requirements
• Consent as the basis for enforcing standardized terms
• Unnecessary legal categories
• Image of buyer and firm
• Existing law
• Content control
• International transactions
• Other tactics
• Conclusion
• Appendix - Standard Form Contracts In Use In Selected Sectors
• Notes

Preface

1. Contract law no longer explains the dynamics of the overwhelming majority of contracts used to complete transactions in the market. Business models have rendered to historical curiosity the principal codifications of contract law and their counterparts in the common law. These works belong in museums, not in civil codes, statutes or cases. The cause of contract law's undoing is the standard form contract. Once considered the exception to the general rule, that contracts require minds to meet on terms, the standard form contract now is the general rule. There is not, never was, and never will be a "meeting of the minds" in the forum of standard form contracts. Consent is irrelevant to make a contract effective. It is time to accept reality and to reinvent the law of contract.

2. Standard form contracts are ubiquitous.[1] They are used in commercial and consumer transactions, spanning the range from the international purchase of multi-million dollar equipment to the domestic purchase at trivial cost of dry cleaning services.[2] Standard form contracts are the document sans pareil for information technology license agreements, particularly end user contracts. Prestigious arbitral institutions that provide services to resolve contract disputes use them in dealings with parties to disclaim liability for damages.[3] Non-profit organizations use them to conduct business worldwide.[4] There is no exit from the domain of standard form contracts.

3. The reason is expediency. Parties, no matter how sophisticated and soundly capitalized, cannot afford to waste time, money and effort negotiating details of ordinary transactions. The speed of transactions is essential to the efficient delivery of products in the market. Custom contracts produced after rounds of negotiations are a minority of today's contracts limited to transactions where the cost of legal advice is justified in terms of the net "price" of the contract.[5] Even when lawyers customize contracts, they start with standard forms; amendments made to these standard forms are likely to reflect standard "rider" clauses. The global market has increased the quantity of standard form contracts in commerce and vindicated their role of providing clarity to cross-border transactions that otherwise would be governed under opaque rules of private international law.[6]

4. The American legal system generally has allowed the use of standard form contracts and enforced their terms. This rule is virtually absolute for contracts between merchants. The assumption is that merchants know what they are doing and should be held accountable for their business judgments. The rule is slightly variable for consumers. Depicted as victims of large enterprise, consumers benefit from judicial devices designed to defeat terms that courts find "unconscionable" or surprising, and hence to circumvent the general rule that persons are bound by contracts they make. Federal and state legislatures have enacted statutes to protect the consumer against aggressive contracting and his own ignorance in certain transactions.

5. The European legal system generally has disapproved - if not disdained - the standard form contract. The European Union Council Directive on Unfair Terms in Consumer Contracts invalidates standardized terms that are unfair and result in a significant imbalance of obligations between the parties to the detriment of the consumer.[7] It also contains a grey list of presumptively invalid terms.[8] The proposed Principles of European Contract Law (PECL), the product of the Commission on European Contract Law, do not distinguish between merchant and consumer transactions.[9] The PECL incorporate the EU Directive to standardized terms and, under independent provisions, permit parties to avoid contracts marked by excessive benefit or unfair advantage.[10] The individual member states of the European Union have national consumer legislation as the EU Directive sets only a minimum baseline. The tenor of individual EU state legislation protects the adherent of standardized terms, mainly consumers but sometimes merchants.[11]

6. The international legal system has reduced the question of standard form contracts to an aberration of contract law. The United Nations Convention on Contracts for the International Sale of Goods treats standard form contracts only in its "battle of the forms" provision.[12] The International Institute for the Unification of Private Law's UNIDROIT Principles, a self-proclaimed lex mercatoria applicable to any international business transaction, invalidate "surprising" standardized terms and permit parties to escape obligations under theories of inequality of bargaining power. [13] In addition, the Principles contain a robust doctrine of good faith jeopardizing the legitimacy of any single term in a contract.[14] For commercial contracts, this approach is an astounding deviation from the baseline that merchants do not need the patronage of government. Applied to standard form contracts, the "Principles" are an attempt to restore an anachronism. The traditional rules of contract law are outmoded and fail to track contemporary commercial realities.

7. The great debate about standard form contracts stems from the fact that they deviate from the elementary principle of contract law, false probably from the time it was first articulated, that contracts are based on freedom to choose terms and represent the bargain of the parties. Standard form contracts do not represent a bargain at all. Nor do they represent a freedom to choose terms. In consumer and some business transactions, one party, generally the seller, writes the majority of, if not all, the contract terms and the other party, generally having no chance to dicker for different terms and without reading the terms, accepts the contract to get the product. In other business transactions, the parties exchange standard forms that often are inconsistent. The elementary principle of contract law - the bargain - is undercut. The parties did not engage in a process of give and take over contract terms. Rather, one party produced terms that if not accepted, foreclose the deal. Or, both parties used inconsistent terms that, at the contract's conclusion, were outside the parties' real agreement.

8. Predictably, actors in the market have drawn the battle lines. Consumers, and businesses incapable of imposing their terms, oppose the validity of standard form contracts.[15] They argue that it is wrong to allow one party to set terms to the transaction without the real consent of the other party. Large and small sellers having the power to impose their terms support the use and enforcement of standard form contracts. These companies want the ability and flexibility to design standardized terms the way they design their products. Standardized terms regularize transactions, logically, if not empirically, reduce costs and facilitate the exchange of products. Each side has deployed experts - legal, economic and political - to support their position in the competition for legislative capital.

9. The scholarship, the case law and the legislation are based on misplaced ideas about standard form contracts. First, standard form contracts are not ordinary contracts fitting within the universally accepted model of contract law based on party autonomy.[16] Second, there is nothing new about standard form contracts even including the business model of "pay now terms later" transactions.[17] Third, no significant difference exists between standard form contracts printed on paper or displayed as graphics on computer screens. Using zeros and ones, instead of ink, is a factor of no significance for the regulation of standard form contracts. Fourth, licenses are species of contracts. The legal rules that apply to standard form contracts should apply equally to software licenses.[18] Fifth, the description of standard form contracts as "contracts of adhesion" is no longer useful, and the different treatment of merchants is no longer justified, since merchants do not meaningfully consent to standardized terms.

10. Producers inevitably will specify conditions to sale of products. Contrary to convention, producer imposed terms are not invariably abuses of economic power. Even if they are, the political economy of standardized terms does not provide a useful construct to determine their validity. Rather, that view results in a mud-slinging match between industry and professional representatives of consumers. Standardized terms regularize business practices, guarantee that producers treat every purchaser identically and derive from the mass marketing of goods and services. Many standardized terms are not predatory, but beneficial, for example those terms that concretize abstract or general default rules. Several beneficial terms are the result of market forces not legal rules. The question is how to legitimate the use of standardized terms while limiting the range of conditions producers may impose on products.

11. The critical insight: standardized contracts are commodities. Where the product is a license, the contract is the commodity. Where the product is a hard good, the contract is part of the commodity. Producers have a general obligation to place non-defective products into the stream of commerce. By analogy, producers have an obligation to place non-defective standardized terms into the stream of commerce. Consequently, a standardized term destroying the economic value of the product would be unenforceable as the product liability equivalent to a defect. However, the analogy to tort law need not result in the death of contract. Allowing producers to specify conditions of products is preferable to other alternatives: (1) enforcement or non-enforcement of all terms, (2) bureaucratic administration of contracts, and (3) the random striking down of terms based on judicial instinct.

12. Consequently, a promising approach to standardized terms is based on identifying their underlying principles, examining problem terms in the market and creating provisions to exercise "direct content control" of select terms. Importantly, with increasing cross-border transactions, "content control" provisions must be the product of comparative law study to enable sellers to predict the validity of terms in foreign jurisdictions.[19] This book lays the groundwork for a solution to the validity of standardized terms without reliance upon existing doctrine.[20] The effectiveness of the approach may be measured against its consequences.[21] Treating standardized terms as commodities sets straight the legal basis of contract and deals head-on with policy issues underlying the replacement of negotiated terms.

    A Note on Methodology

13. 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.

    Chapter One - The Problem

    "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]

14. 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]

15. 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.

16. 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.

17. 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]

18. 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.

19. 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.

    Chapter Two - The Early Origin and Use of Standard Form Contracts

20. 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]

21. 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]

22. 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.

23. 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.

24. 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.

25. 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.

    Early Examples of Standardized Terms

26. 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]

27. 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.

28. 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]

29. 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 mechanics of buying and selling products in the 18th and 19th centuries

30. 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]

31. 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.

32. 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.

33. Even at this early stage, firms treated pre-printed conditions as contracts enforceable between the seller and buyer. This perception persisted even though these terms were unilaterally imposed and non-negotiable, unlike the ordinary contract as a process of bargain. For example, the North American Steamship Company ticket stated in pre-printed language, "For value received, on the conditions herein, hereby mutually agreed to, the North American S.S. Co. contracts to furnish to M (space for person's name) who by accepting this contract agrees to its limitations." The ticket did not contain any line for the signature of the buyer, but only the blank space for the steamship's agent to complete the ticket by writing in the buyer's name. The buyer's act of paying for the ticket and using it, signaled the buyer's acceptance of the "mutually agreed to" terms. Acceptance of terms by payment of the product deviated from the standard paradigm of acceptance - the signature of the party - thereby foreshadowing acceptance signaled by opening a box containing the written term inside.

    The validity of pre-printed terms in the 19th century

34. 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]

35. 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.

36. 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.

37. 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]

38. 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]

39. 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.

40. 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]

41. The 19th century Supreme Court also upheld pre-printed limitation of liability terms on bills of lading used by railroads. For example, in Hart v. Pennsylvania R. Co., Hart shipped five horses and other property on one railroad car. [62] By the negligence of the railroad company, one of the horses was killed, others were injured and additional property was lost. Hart claimed the horse killed was a racehorse worth $15,000. However, the form bill of lading contained several paragraphs of dense text, one of which specified that the value of a horse was $200. The Supreme Court limited Hart to the remedy provided in the bill of lading. According to the Court, Hart had accepted as "just and reasonable" the "valuations" stipulated in the bill of lading by the railroad company because he paid the specified rate of freight. However, the case does not contain any evidence that Hart had another choice, that is, to negotiate a different rate based on his claimed value of the horse, $15,000. The bill of lading was pre-printed Form No. 39 entitled "Limited Liability Live-stock Contract for United Railroads of New Jersey Division." Nevertheless, the Supreme Court stated, "The valuation named was the 'agreed valuation,' the one on which the minds of the parties met."[63] Similar to the logic in Primrose, the Court reasoned, "It is just to hold the shipper to his agreement, fairly made, as to value, even where the loss or injury has occurred through the negligence of the carrier. The effect of the agreement is to cheapen the freight and secure the carriage, if there is no loss; and the effect of disregarding the agreement, after a loss, is to expose the carrier to a greater risk than the parties intended he should assume."[64] Where one of many identical transactions in the ordinary course of business fails and produces a loss disproportionate to the cost of the product, sellers may limit their liability so long as they do not efface their obligation to pay damages.

    The business purpose role of standardized terms

42. 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]

43. 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.

44. 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]

45. 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.

46. 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.

47. 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]

48. 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.

49. 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.

    Chapter Three - Market study: Standard Form Contracts

50. 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.

51. 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.

52. 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).

53. 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]

    Location of contract

54. 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.

55. 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.

    Manner of acceptance

56. 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.

57. 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.

    Limitation of warranty

58. 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.

59. 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.

60. 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.

61. 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.

62. 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."

    Limitations of Damages

63. 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.

64. 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.

65. 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.

66. 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.

    Return and refund

67. 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.

68. 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.

69. 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

70. 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]

71. 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]

    Other terms

72. 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.

73. 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.

    Business to Business Contracts

74. 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.

75. 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.

76. 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.

    Conclusions

77. 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.

78. 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.

79. 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.

80. 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.

81. 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.

82. 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]

83. 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.

84. 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.

    Chapter Four - The Great Schism: Reality and Law

85. 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]

86. 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.

    The Paradigm

87. 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]

88. 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]

89. 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.

90. 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.

91. 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]

92. 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.

93. 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.

    Resort to legal fictions

94. 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.

95. 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.

96. 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]

97. 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.

98. 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.

99. 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.

100. 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.

101. 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]

102. 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.

103. 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.

104. 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 this case, ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure.

105. Further support for the holding was found in UCC §2-606 defining a buyer's acceptance of goods. A buyer accepts goods if after delivery and an opportunity to inspect them, the buyer does not reject the goods. Where terms are placed in the package containing the product, rather than posted on the package itself, the buyer may reject the goods and the terms by returning the product. The buyer may determine that the terms make the software worth less than the price. But nothing in the UCC requires sellers to maximize buyers' gains. Judge Easterbrook found: "Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package's contents, is how consumers are protected in a market economy."[121]

106. The Court cited five well-established examples of "pay now terms later" transactions: (1) insurance policies, (2) tickets, (3) consumer goods, (4) drugs and (5) software, where the overwhelming legal authority enforced the terms though provided after payment. Under Zeidenberg's argument, for example, sellers could not limit any warranty if it were contained in a leaflet inside the box. However, no state has disregarded limitation of warranties furnished with consumer products.

107. Even when the "signer" does not have access to the terms, courts apply a constructive signature approach to hold that the signer has agreed to them. The provisions on the ticket form in Carnival Cruise were not provided to the plaintiff until after the ticket was purchased. In ProCD, the terms were not available until the package was opened. In other instances, standard terms are enforced even when they are not given to the purchaser. The constructive consent approach is absurd. The ProCD term was reasonable but was never consented to. People can differ as to whether the Carnival Cruise provision was reasonable, but that difference of opinion has nothing to do with the futility of looking for, and finding, consent.

108. Stunningly, ProCD has generated the most controversy, though Zeidenberg arguably is the least sympathetic party and the result appears appropriate in the particular case. Because the ProCD database was not copyrightable, the producers had no choice but to regulate the downstream use of their $10 million product through the institution of contract. Since Zeidenberg bought a consumer copy, the restrictions on his use were reasonable as measured by the lower cost of the product. Yet, courts confronted with something marginally new, like a "shrink wrap" license, thought that because Zeidenberg did not have a chance to diagram the terms of the contract while standing in the aisle of the retail store but had to actually open the package to learn them, he did not give his "constructive consent." While the alternative: "take it back" is the sensible answer, sense has not shaped judicial opinion. In contrast, decisions like Klocek v. Gateway and Specht v. Netscape, discussed fully later, have invalidated standardized terms found respectively inside a box and on a computer screen. [122]

     Conclusions

109. Minds cannot meet on terms contained in standardized documents. The enormous set of legal rules governing the enforcement of ordinary terms thus bears no relation to the majority of contracts now made including business-to-business contracts. To make existing law work, courts have engaged in elaborate legal fictions twisting the rules so that they can explain standardized terms, something the rules were never meant to govern. The process resembles the pre-Copernican epicycles to explain the motion of the planets. Just as centering the sun at the center of the planet system simplified explanations of the planets' motions so would centering standardized terms at the center of contract law simplify explanations of why standardized terms should be enforced or not.

     Chapter Five - Contracts of Adhesion

110. Rather than re-centering contract law to deal directly and rationally with standardized terms, the law put a patch on the contractual paradigm to recognize the special nature of standardized terms. The law coined a new term: "contract of adhesion" to categorize most standard form contracts used in consumer transactions. The Supreme Court of New Jersey, using a broadly accepted definition, has stated, "the essential nature of a contract of adhesion is that it is presented on a take-it-or-leave-it basis, commonly in standardized printed form, without opportunity for the "adhering" party to negotiate except for a few particulars."[123] A contract deemed "adhesive" is not per se unenforceable. Rather, courts review the parties' relative bargaining power, the degree of economic compulsion motivating the "adhering party," and the public interest affected by the contract to determine whether to enforce particular terms of the contract. Although not per se unenforceable, the designation "adhesive" gives courts breadth to invalidate standardized terms on vague grounds such as "public policy," often a bare disguise for judicial sentiment.

     Origins

111. The French legal philosopher Raymond Saleilles coined the term "contract of adhesion" in 1901. It appeared in his book, De la Declaration de Volonté, subtitled Contribution à l'Étude de l'Acte Juridique dans le Code Civil Allemand.[124] The Committee of Foreign Legislation of the Ministry of Justice in France had commissioned Professor Saleilles of the University of Paris, and other colleagues of the faculty of law, to translate and comment upon the new German Civil Code. Saleilles' work focused upon the General Part of the Code called the Théorie de la declaration de Volonté, and particularly with the institution of contract by which parties created legal obligations. The legitimacy of the parties' act was based on the exercise of their free will embodied in the contract. Professor Saleilles devoted approximately one paragraph of text to "contracts of adhesion" to differentiate them from the conventional bargained-for contracts. His remarks have had a completely disproportionate effect on subsequent scholarship given his cursory treatment of the subject.

112. Professor Saleilles addressed "contracts of adhesion" in Art. 33 entitled, Pour ce qui est de l'interprétation d'une déclaration de volonté, il y a lieu de rechercher la volonté réele et de ne pas s'en tenir au sens littéral de l'expression, devoted to rules governing the judicial interpretation of contracts, expressed in extremely abstract language.[125] Since a true contact represented a unification of the wills of both parties, the judge had the task of interpreting this "unified will" against the expected economic outcome and the obligations of "good faith" and loyalty the parties owed to each other. But, if only one party dictated the contract terms, the underlying theory of enforcement did not apply, because the contract failed to embody the unification of independent declarations of will. Saleilles addressed this problem in paragraph 39 that deserves full quotation in the original language followed by an English translation:

     Sans doute, il y a contrats et contrats; et nous sommes loin dans la réalité de cette unité de type contractuel que suppose le droit. Il faudra bien, tôt ou tard, que le droit s'incline devant les nuances et les divergences que les rapports sociaux ont fait surgir. Il y a de prétendus contrats qui n'ont du contrat que le nom, et dont la construction juridique reste à faire; pour lesquels, en tous cas, les règles d'interpretation individuelle qui viennent d'être décrites devraient subir, sans doute, d'importantes modifications; ne serait-ce que pour ce que l'on pourrait appeler, faute de mieux, les contrats d'adhésion, dans lesquels il y a la prédominace exclusive d'une seule volonté, agissant comme volonté unilatérale, qui dicte sa loi, non plus a un individu, mais à une collectivité indeterminée, et qui s'engage déjà par avance, unilatéralement, sauf adhésion de ceux qui voudront accepter la loi du contrat, et s'emparer de cet engagement déjà crée sur soi-même. C'est le cas de tous les contrats de travail dans la grande enterprise, des contrats de transport avec les grandes companies de chemin de fer, de tous ces contrats qui revêtent comme un caractère de loi collective et qui, les Romains le disaient déjà, se rapprocheraient beaucoup plus de la lex que de l'accord des volontés.

     Without doubt, there are contracts and contracts. We are far in the reality of this unity of contractual type supposed by the law. It is necessary, however, for the law to address nuances and divergences from this contract ideal that have arisen in the market. There are contracts that are contracts in name only. The legal construction to be given these types of contracts is undeveloped. The normal rules of interpretation must be modified to deal with these deviations from the conventional contract that contains a unity of wills between parties. For lack of a better term, we may call these contracts, contracts of adhesion, denoted by the exclusive dominance of the will of one party to the contract. It is a unilateral act of one party that dictates the law of the contract not just to an individual contracting party but to any potential contracting party. In addition, the contract is set prior to making an offer to accept it. All labor contracts in large industry and transport contracts in large rail road enterprises are contracts of adhesion, as are all, mass market contracts presented in fixed form. The Romans stated that these types of contracts resemble law more than they resemble the voluntary agreement of the parties. [Translation by author].

113. Because the contract of adhesion differed from the bargained-for contract based on the voluntary agreement of two parties, the principles of interpretation applicable to the latter did not apply to the former. Rather, judges ought to interpret contracts of adhesion as they would interpret a law enacted by a sovereign. Without specifying a specific test, Saleilles identified the following criteria to guide the judicial interpretation of contracts of adhesion: (1) good faith, (2) the economic relations at stake, (3) natural rights and (4) the economic and social consequences of enforcement upon the individual, broadly conceived as social policy. Saleilles never insinuated that adhesive conditions were per se unenforceable. The analogy between the contract of adhesion and legislation leads to the contrary conclusion - they are valid as interpreted.

114. In 1910, René Demogue, a French legal philosopher, described contracts of adhesion in language devoid of negative connotation and equated them with standard form contracts. Contracts of adhesion made it easier for individuals to arrange their private affairs in the market place and to create wealth. They removed impediments to the transfer of assets, thus allowing for rapid and cheaper transactions. He stated, "The legal systems of the western world, inspired largely by the wish to encourage business and the active life, have sought so to arrange the performance of juridical acts, and legal life in general, as to economize time to the utmost, thus making it easier for individuals to act and thereby to create wealth."[126] The principles of least effort and economy of time led Demogue to suggest the unification of commercial law of all countries. A common body of law would reduce, if not eliminate, uncertainties in transactions and conflicts between diverse legal systems. Specifically, with respect to contracts of adhesion, Demogue remarked:

     This neo-formalism may also show itself in special forms: notably in the contract of adhesion, where the agreement is found to be settled once for all, and is formed frequently by a mere acceptance, without a special offer. The contract may make its appearance not only where the terms used are almost ritual in character, but also in the case of particular documents which are greatly simplified, and often not signed, such as railway or lottery tickets, money certificates, and the like.[127]

115. While contracts of adhesion played a useful role in economic development and evolving business practices, they placed the individual in a whirlwind of transactions undercutting what Demogue called the "psychological" security and autonomy of the individual. "Rapidity of operations is little favorable to security, in the sense that it is easy to be in error as to certain consequences of the act performed."[128] Hence, at this early point, Demogue recognized that, in ordinary commercial transactions, neither the business person nor the consumer read the terms of contracts, and even if they did, probably did not understand their significance. A legal conflict arose between the social utility of adhesion contracts and the consequences, sometimes adverse, that these contracts had upon the adhering party. For example, the use of short periods of limitations for the enforcement of claims might deprive persons of legal rights they would have had under background law.[129]

116. Shortly, the term "contract of adhesion" crossed the ocean and wove its way into the vocabulary of American jurisprudence. In 1927, Patterson, in his article on the delivery of life insurance contracts, declared that freedom of contract rarely existed in these cases. Citing Demogue, Patterson declared, "Life insurance contracts are contracts of "adhesion'."[130] In 1931, Llewellyn, in What Price Contract, briefly mentioned them, again citing Demogue, but did not subject adhesion contracts to analysis. Llewellyn also reviewed The Standardization of Commercial Contracts in English and Continental Law in 1939 and stated, "Prausnitz is concerned with a problem which has for some time now been live in our own law, and which is on the increase, but which has not yet made its way into full familiarity."[131] While the review recognized that "the careful and skillful gathering of English cases which [Prausnitz] presents, and the comparative study of Continental material which accompanies them, will both buttress the foregoing position and gain some additional clarity if read against its statement," Llewellyn treated the emergence of standardized terms as something limited to transactions on the other side of the Atlantic ocean. He ended the review with the statement, "Prausnitz half promises a sequel to this useful study."[132] Consequently, although the term was introduced into American legal vocabulary as early as 1920, no court or scholar had produced a full analysis of its implications for contract law at that time.

117. However, a full analysis arrived in 1943 when Friedrich Kessler published his article Contracts of Adhesion - Some Thoughts about Freedom of Contract.[133] The article has profoundly influenced subsequent scholarship and has framed the parameters of the debate, parameters that still dominate the discussion of adhesion/standard form contracts. Kessler's article mainly is an attack upon the insurance industry and its attempt to avoid covering risks suffered by an insurance applicant prior to the time the insurance company has agreed to insure the applicant and has issued a policy. If courts were to strictly interpret the contract, courts would be required to deny recovery to an injured applicant not yet covered by any insurance policy. Kessler finds this result morally repugnant because of the special nature of the insurance business and because the bargaining power of the insurance company exceeds the bargaining power of the applicant. The abuse of contract law by insurance companies is the wedge Kessler used to indict the entire institution of contract based upon what he calls the "dogma of freedom of contract." Exposing this point of weakness in contract law, Kessler launched into a jeremiad against the enforcement of contracts of adhesion under general contract principles.

118. Kessler constructed his argument as follows. A capitalist system derives wealth by parties making exchanges in the market. The law protects this method of wealth production by delegating to individual citizens a piece of sovereignty enabling them to participate in the law making process. Parties define their rights and obligations by contract. Courts interpret contracts but do not write them for the parties. This model of contract depends for its moral justification upon three predicates: (1) the parties are free to bargain, (2) the natural forces of the market bring together the parties, and (3) the parties have approximate social and economic equality. The development of large scale enterprise and mass production has led inexorably to the "standardized mass contract." In a standardized mass contract, the enterprise dictates terms to the "weaker party" because the enterprise either has a monopoly or because competitors use the same terms. Freedom of contract enables enterprisers to legislate in an authoritarian manner contrary to the predicates underlying the moral justification of the institution of contract. Kessler hence urged courts to "listen to their sense of justice" to defeat terms in a contract of adhesion that offend public policy. In haunting language, matched only by Marx and Engels, Kessler concluded: "Standard contracts in particular could thus become effective instruments in the hands of powerful industrial and commercial overlords enabling them to impose a new feudal order of their own making upon a vast host of vassals."[134]

119. In 1971, W. David Slawson in Standard Form Contracts and Democratic Control of Lawmaking Power dealt peripherally with contracts of adhesion. In his view, a contract of adhesion was a contract literally imposed upon a person who had no choice but to accept it.[135] His example was that of a person forced to hand over twenty dollars to the party holding a gun to his head. "A contract which one party makes because he is coerced in this "total" sense is what we shall mean by a "contract of adhesion."[136] Remarkably, given his extreme and unorthodox definition of the term, Slawson did not conclude that contracts of adhesion were per se unenforceable. He recognized the benefits of standardization, "Standardization of legal obligation may be necessary for the proper functioning of a corporation which issues large numbers of contracts in the course of its business." [137] He also recognized the reality of modern contract making that precluded "dickering" for terms. He stated, "Where do the authors suppose that "dickering" occurs? Have they ever heard customers in a department store "dicker" terms of sale with the clerks?"[138] He added, "Surely by now even the most commercially naïve among us knows that most sales persons have no authority to "dicker" terms at all."[139] Most importantly, he stated, "Nor in the past has the validity of contracts ever been thought to depend upon their having been "dickered."[140] The process of give and take is inessential for an enforceable contract. For example, Slawson noted that price and other terms of sale were enforceable under contract law despite the fact they were adhesive, that is, the buyer had no choice but to accept them if he wanted to buy the product.

120. In 1983, Todd D. Rakoff, in an ambitious and dense essay entitled Contracts of Adhesion: An Essay in Reconstruction rejected the theory of contracts of adhesion proposed by Llewellyn, Kessler, Slawson and Leff.[141] In his view, contracts of adhesion "are best seen neither as results of the exercise of monopoly power nor merely as concomitants of mass production and mass distribution, but rather as circumstances intimately linked to specific organizational form in which mass production and distribution most typically occur in our society."[142] He went on to explain that firms created standard form contracts to stabilize external market relationships and to serve the needs of their hierarchical and segmented structure. The internal organization of the firm required the use of fixed terms; the hierarchical structure of the firm prevented virtually any person from having the power to change any term in the contract. The fixed nature of the contract did not surprise the firm's customers who knew they could not alter any firm's standard contract and who were not interested in most standardized terms anyway. In language similar to Kessler's, Rakoff concluded: "It is no longer sufficient to view the contract of adhesion as a mere legal form operating as a transmission belt of monopoly power. The use of form documents, if legally enforceable, imparts to firms - even to those otherwise harnessed by the pressures of competition - a freedom from legal restraint and an ability to control relationships across the market."[143]

121. The novelty of the theory is modest and highly nuanced. Preceding scholars from Prausnitz to Leff recognized that standardized terms were functions of the institution of contract used to displace or give specificity to common law rules. They also perceived that firms used this power to regulate their relationships with customers in the market. Why else would firms have standardized terms? Slawson argued that contracts of adhesion were an impermissible delegation of lawmaking power to firms because the contracts were not made in a democratic manner. Similarly, Kessler believed that they were instruments of oppression in the hands of the new ruling class. In Rakoff's words, they were "deals crammed down the throats of helpless consumers by self-serving wielders of vast economic power." Like Slawson, Rakoff also concluded that standardized terms were presumptively invalid. The theory's novelty is the recognition that ordinary contract law is not built to solve the question of whether any particular "invisible" as opposed to "visible" term is enforceable.

122. In 1990, Michael I. Meyerson wrote a compelling analysis of standard form contracts based on the economic model.[144] Starting from fundamental economic assumptions of contract law and a paradigm efficient contract, Meyerson identified the essential properties of standard form contracts and explained their inefficient effects. The economic analysis of standard form contracts is based on disclosed assumptions and standards that even if not scientifically valid nevertheless are measurable and fairly precise. Although Meyerson restricted his analysis to consumer form contracts, his analysis applies to standard form contracts generally where one party has fixed the form and that form is non-negotiable. Hence his observations apply to consumer and business standard form contracts.

123. The paradigm efficient contract follows from four axiomatic principles. First, "[i]ndividuals are presumed to act to maximize their total benefits minus costs."[145] Second, the voluntary exchange of resources leads toward their most valuable use. For example, if a seller values product X at $100, but a buyer is willing to pay $150, then the transfer of product X to the buyer would result in the highest and best use of that product. Third, government intervention in the market place is a second best solution when the ideal conditions - perfect information - of voluntary exchange are present. Fourth, "the law should supply generalized contract terms so that contracting parties need not specify them."[146] These "default rules must approximate what the parties would have agreed to had they negotiated the issues."[147] In effect, the supplied terms save the parties the expense of negotiating them.

124. The paradigm efficient contract consists of two kinds of terms: (1) terms that are the product of voluntary bargain and (2) terms created by government to reflect a hypothesized negotiated bargaining process.[148] Enforcement of contracts therefore has several benefits. First, it vindicates individual judgment about the use of particular resources. Second, it maximizes social wealth by facilitating the transfer of resources to persons making the highest and best use of those resources. Fourth, all things being equal, the transfer has a Pareto superior effect: one person is better off and no one is worse off.

125. More important, the economic model treats contract terms as product properties and assigns a "price" to them. Parties decide the value of individual contract terms just as they decide the value of other product properties.[149] Meyerson uses the following add-on clause to illustrate this point: the failure to make one payment entitles the seller to repossess all products previously purchased by the buyer.[150] Assuming perfect knowledge, the buyer can ascertain the present value of the add-on clause. Consequently, "the higher the cost of the provision to the buyer, the lower the price the buyer will be willing to pay for the purchase."[151] The cost of contract terms is equal to the probability of the loss occurring multiplied by the magnitude of the loss suffered if the risk materializes.[152] Therefore, Meyerson concludes, in an efficient market with perfectly informed parties, "an add-on clause may well be good for the purchaser; it decreases the seller's cost and may result in lower prices. In this perfect world, prohibiting the add-on clause would harm consumers by raising prices and by depriving consumers of the right to elect to pay a lower price for a less favorable contract."[153]

126. However, consumer form contracts deviate from the efficient contract model for two reasons. First, "consumers do not read form contracts, or do not understand the terms, and are thus unaware of their contents."[154] Second, "the businesses that draft these contracts do so knowing that they will not be read by the typical consumer."[155] Hence, most subordinate terms shift risks away from the seller and onto the consumer. The consumer will not know the subordinate terms because the cost of acquiring the necessary information exceeds the expected gain to the consumer for that information.[156] The cost to the consumer is made more excessive by the high cost of understanding a terms legal significance. "Consumers signing standard form contracts will generally not know the value of most of the contract terms either before or after purchase."[157] Consequently, Meyerson concludes, the consumer's substantial lack of information alters the assumption that free choice will inevitably lead to an efficient result.[158]

127. The results are disturbing. "For standard form contracts, the quantity effect occurs when uniformed consumers buy too much of a product or service because they have not accurately evaluated the costs of the risks involved."[159] In addition, because "consumers are "price conscious" but not "term conscious," a lower price will increase demand, but better contract terms, which are not understood, will not."[160] The consumers' failure to understand the cost of the risk induces rational sellers to shift risks to consumers.[161] "The lack of consumer knowledge, therefore, will cause consumers to purchase too many products and services with inefficient contracts and encourage sellers to create form contracts that are inefficient."[162] The contracts are inefficient because, without perfect knowledge, the consumer cannot maximize his total benefits through transactions in the market. Consumer form contracts thus do not even remotely resemble the efficient contract based on perfect knowledge and utility maximization.

128. The literature generally disapproves of "contracts of adhesion" as abusive to consumers and as calling for restrictions on enforcement. While there are dissenting voices in the literature, they generally are limited to standardized terms used in intellectual property licensing.[163]

     Case law

129. Introduced into the case law, the contract of adhesion attained its fullest expression in Henningsen v. Bloomfield Motors, Inc. where the New Jersey Supreme Court declined to enforce a disclaimer of an implied warranty of merchantability because the term was contained in a contract of adhesion and that term violated public policy.[164] In Henningsen, Clause Henningsen had bought a Plymouth, manufactured by the Chrysler Corporation and sold by its dealer, Bloomfield Motors, Inc. The purchase order contained a disclaimer of the implied warranty of merchantability in virtually illegible fine print. Shortly after the car was purchased, Mrs. Henningsen suffered a personal injury in a single car accident when the car's steering mechanism failed and the car crashed into a wall off the highway. The Court stated, "We hold that under modern marketing conditions, when a manufacturer puts a new automobile in the stream of trade and promotes its purchase by the public, an implied warranty that it is reasonably suitable for use as such accompanies it into the hands of the purchaser."[165]

130. While parties ordinarily were free to displace the common law by entering into contracts, that option was available only if the contract was "the result of the free bargaining of the parties who are brought together by the play of the market, and who meet each other on a footing of approximate economic equality."[166] Because the Henningsen contract was a contract of adhesion, not the result of free bargaining, the manufacturer could not disclaim the implied warranty of merchantability by a standardized term contained in its form contract. The Court found:

131. But in present-day commercial life the standardized contract has appeared. It is used primarily by enterprises with strong bargaining power and position. 'The weaker party, in need of the goods or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses. His contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood in a vague way." (citations omitted).[167]

132. In an astonishing understatement, the Henningsen court in 1960, after a belabored analysis of cases, recognized the imperfection of the contractual paradigm. "The history of the law shows that legal doctrines [the contractual paradigm], as first expounded, often prove to be inadequate under the impact of later experience."[168] Yet, as Chapter One has demonstrated, the contractual paradigm was dead by the end of the 19th century.

133. While courts classify certain contracts as "adhesion contracts," the designation itself has not resulted in the large scale setting aside of standardized terms. Rather, an adhesion contract triggers a set of criteria by which courts determine whether to enforce the contract or any particular term. For example, 32 years after the landmark Henningsen decision, the New Jersey Supreme Court in Rudbart v. Water Supply Com'n rejected the claim that because investment securities were contracts of adhesion, the standardized terms they contained were unenforceable.[169] At issue was the standardized term explaining how bond holders were to be informed of an early redemption. The Court acknowledged that the bonds possessed the properties of contracts of adhesion but stated that the question of enforcement does not end with that conclusion. Rather, "in determining whether to enforce the terms of a contract of adhesion, courts have looked not only to the take-it-or-leave-it nature or the standardized form of the document but also to the subject matter of the contract, the parties' relative bargaining positions, the degree of economic compulsion motivating the "adhering" party, and the public interest affected by the contract."[170] Applying the criteria to the bonds, the Court found that "the principal justifications for invalidating terms of a contract of adhesion are simply not present in a fully open and competitive securities market" despite the fact that the terms of purchase and sale are pre-set by parties with superior economic clout.[171] However, "fully open or not," the average bondholder has no greater knowledge of the product than Meyerson's improvident consumer. What the Court really did was make a policy decision not to de-stabilize the capital markets by authorizing judicial interference with standardized terms attached to investment products.

134. The doctrine has not fared better outside the securities markets. The New Jersey Appellate Division in Gras v. Associates First Capital Corp., enforced an arbitration clause contained in a loan agreement not subject to negotiation and presented as "part of a stack" of closing papers.[172] Applying the criteria of Rudbart, the Appellate Division found that the loan documents were contracts of adhesion, but stated that, on balance, public policy favored arbitration as a means of dispute resolution. "The arbitration agreements signed by plaintiffs here are specific enough to inform plaintiffs that they are waiving their statutory rights to litigation in a court."[173] The Supreme Court of Texas enforced an arbitration provision signed at a closing for the purchase of a manufactured home.[174]

135. Even where courts have reached different results, the classification of the contract as one of adhesion was not the basis for the decision. For example, the Supreme Court of California in Armendariz v. Foundation Health Psychare Services, Inc. denied enforcement of an arbitration agreement in a standard employment contract because the term was unconscionable.[175] Although the court found that the employment contract was a "contract of adhesion," that characterization only performed a minor role in satisfying the procedural aspect of the two-prong unconscionability test. Had the Supreme Court not characterized the employment contract as one of adhesion, the result would have been the same. The employee's need for the job effectively demonstrated a defect in the process of forming the terms of the contract. Likewise was the result in Szetela v. Discover Bank where the court held that an arbitration clause in a credit card agreement was unenforceable as unconscionable because it prohibited class action claims and limited the recovery of damages.[176] While finding that the Discover Card agreement was a contract of adhesion, the court stated, "even if the clause at issue is not an adhesion contract, it can still be found unconscionable."[177] The court in Pardee Construction Co. v. The Superior Court followed a similar logic when refusing to enforce an arbitration clause in a home construction contract.[178] The court stated, "Finally, in any event, even if the parties' agreement were deemed not to be adhesive, plaintiffs have established the judicial reference provisions of those agreements were unconscionable."[179]

136. The Gras opinion reveals the rogue nature of the "adhesion contract." In the absence of waiver, persons have a constitutional right to jury trial. A person may waive that right by making a knowing and voluntary decision. It is difficult to fathom a less suitable environment for waiving a constitutional right than closing a loan agreement. First, the debtor generally does not see the papers prior to appearing at the closing. Second, the papers are presented simply for signature with a simple explanation of the nature of the document and not a "blow by blow" description of specific terms. Third, there is no opportunity to read the papers or to challenge any specific term if the debtor wants to close the deal. Even if the arbitration agreements in Gras were "specific enough" on paper, it does not follow that they were genuine waivers of constitutional rights. The Appellate Division simply had a preference for arbitration as provided by federal and state law and was unwilling to disturb standard banking practices.

137. The distinction between standard form contracts and "adhesion contracts" is not useful. With the exception of merchants battling over their forms, all standard form contracts are "contracts of adhesion." The "adhesion contract," as a device for policing standardized terms, is ineffective as demonstrated by Rudbart and Gras, and irrelevant as demonstrated by Armendariz and Szetela. While the adhesion contract might have been an exception to the general contract rule at the time Professor Salleiles coined the term, the adhesion contract now is the rule. Classifying a contract as adhesive does not produce rules having the capacity to predict a particular result in any case.

     Chapter Six - Covert Tools of the Judiciary

138. Courts employ other tests to invalidate standardized contract terms. Three widely recognized tests are: unconscionability, unfair surprise and defeat of reasonable expectations.[180] Yet, the different names of these tests do not imply fundamental differences in definition. The implied rule underlying these devices for managing terms is: what shocks the judicial conscience. Systematic rules thus are replaced with heartwarming intentions. As applied, courts mix the tests to establish a bouillabaisse of rules governing particular terms. The tests also leech from one compartment of law to another by analogical reasoning. The result: they behave with the uncertainty characteristic of measuring sub-atomic particles at high velocity. Courts hide the basis of their decisions, making it impossible for parties to plan for the future.[181] In a remarkable statement, since he introduced unconscionability in the Uniform Commercial Code, Llewellyn has remarked, "covert tools are never reliable tools." [182]

     Unconscionability

139. Unconscionability is an integral part of equity, and has been enacted in statutory form by Uniform Commercial Code Article 2 (Sales). Section 2-302, which applies to the sale of goods, provides:

     "(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result."

     (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination."

140. The provision bestows authority upon a court to invalidate unconscionable terms but does not require that result. The Official Comment states, "The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract." The parties are allowed to introduce evidence, but the question of whether a contract or term is unconscionable is considered a question of law. The Official Comment continues, "The principle is one of the prevention of oppression and unfair surprise." Uniform Commercial Code Article 2A (leases) contains a mirror provision.[183]

141. In 1967, Arthur Allen Leff in Unconscionability and the Code - The Emperor's New Clause exposed the "statutory pathology" of Section 2-302. Discussing the ten cases cited in the Code to illustrate the operation of Section 2-302, Leff observed:

     Assuming, therefore, that the ten cases are to illustrate what judges do when faced with appealing fact situations and unhelpful legal doctrines, how do they do that job? First, they illustrate only "adverse construction of language," which is only one of the four evasive techniques named in the comment. They do not exemplify "manipulation of the rules of offer and acceptance," or any findings that a clause is contrary to public policy." Thus, the cases are apparently not designed to be exhaustive on the subject of manipulative techniques. What they do illustrate, however, and quite well, is the skewing of legal doctrine that may be caused by an emotional pressure to get a more heartwarming result. It cannot be denied that uncertainty of a particularly virulent kind enters the picture when the basis of a decision and its stated basis part company.[184]

142. Since Leff published his article in 1967, courts have applied Section 2-302 without adopting a uniform definition. The West Group 2002 pocket part to the Uniform Laws Annotated cites 20 law review articles on unconscionability and contains 15 fine print pages of case summaries. Despite this intellectual output, courts cannot even agree on whether both "procedural" and "substantive" unconscionability are required to invalidate a contract or term.

143. The failure of "unconscionability" to control terms derives principally from the inability to define it. The Code does not define the term and the common law definition is slippery: a term that is oppressive or that gives the stronger party an unfair advantage over the weaker party.[185] One court has stated, it is "an amorphous concept obviously designed to establish a broad business ethic."[186] One commentator has put it better, and bluntly, "The word "unconscionable," as finally used in the Code, describes neither the dramatic situation of two persons bargaining nor the "imbalance" or "lopsidedness" or other quality of the resulting contract, but rather describes the emotional state of the trier which will justify his use of the section."[187] The courts have gone no farther in explaining unconscionability than Lord Hardwicke in 1867 who stated it is a bargain "such as no man in his senses and not under delusion would make on the one hand, and as no honest man would accept on the other."[188] Unconscionability cannot be reduced to a precise formula.[189] No generally accepted tests have emerged. "The cases are too fact specific to lead to a useful body of precedent."[190] "The courts thus continue to manipulate the unconscionability principle in order to reach the equitable results they desire."[191]

     The reasonable expectations test: unfair surprise

144. State courts often use the "reasonable expectations" test to determine whether a non-negotiated term in a standard form contract should be enforced against the buyer. A typical statement of the test is, "In dealing with standardized contracts, courts have to determine what the weaker contracting party could legitimately expect by way of services according to the enterpriser's 'calling' and to what extent the stronger party disappointed reasonable expectations based on the typical life situation."[192] The "reasonable expectations" test consists of two parts. First, the parties do not have equal bargaining power. Second, the term in dispute must frustrate the reasonable expectations of the weaker party. "As this provision is applied, courts have focused on the expectations of the party manifesting assent rather than the drafter of the term, notwithstanding the language suggesting a contrary focus."[193]

145. In order to determine what is the "reasonable expectation" of the weaker party, courts examine the written contract, the prominence of the term in dispute, the circumstances under which the contract was made, and the purpose of the term. The courts use these factors to determine whether the weaker party actually had knowledge of the term. If the weaker party had actual knowledge of the term, then the term could not have frustrated the party's expectations since a party cannot be surprised by what he knows. The signature of the weaker party, the clarity and conspicuousness of the term, as well as actual notice of the term are the key considerations in determining what the weaker party actually knew about the standardized term. If the weaker party knows about the term, it is enforceable unless it contravenes public policy.

146. However, if the court determines that the weaker party had no knowledge of the term, then it must decide whether the term is beyond the reasonable expectations of an ordinary person. This determination of "reasonable expectation" is left to the discretion of each individual court. Because the "reasonable expectations" test lacks hard standards, courts using this test reach conclusions based on nothing more than the predilections of individual judges without supporting evidence.

147. Take the 1976 case of Wheeler v. St Joseph Hospital.[194] Prior to his admission to St. Joseph Hospital for an angiogram and catheterization test, David Wheeler signed an admission form containing an agreement to arbitrate claims with the hospital. The Wheelers sued the hospital for damages arising from his injuries sustained during his medical treatment. The hospital sought to enforce the arbitration agreement in the admission form. The Appellate Court produced a majority opinion and a dissenting opinion. In the majority opinion, the Court noted, "a party cannot be compelled to arbitrate a dispute he has not agreed to submit" and held that Mr. Wheeler's signature did not constitute his consent to be bound by the written and clear terms of the contract.[195] The Court stated, "Absent notification and at least some explanation, the patient cannot be said to have exercised a "real choice" in selecting arbitration over litigation," despite that fact that Mr. Wheeler had the option to refuse arbitration.[196]

148. The Court found that the admission document was a contract of adhesion. Stating, "Enforceability depends upon whether the terms of which the adherent was unaware are beyond the reasonable expectations of an ordinary person or are oppressive or unconscionable."[197] This characterization allowed to the Court to conclude that something as vague as the parties' reasonable expectations, really constituted the contract instead of the words contained in the contract itself. Without substantiation, the Court concluded that a patient, "[w]ould hardly expect his signature to an admission form to be taken as an agreement to give the hospital as well as any doctor the option to compel arbitration of a malpractice claim."[198] Taken to its logical conclusion, the rule in Wheeler would require face-to-face encounters between sellers and buyers where the seller's representative would have to explain the contents and legal effects of standard terms to the buyer.

149. However, the dissent in Wheeler reached the opposite conclusion based on the identical set of legal rules. The dissent found that, "Almost every written commercial transaction, except one hammered out by two lawyers representing two individuals of equal bargaining power, is in a broad sense, a contract of adhesion."[199] Merging the reasonable expectations test with the unconscionability test, the dissent stated that the rules governing adhesion contracts come into play only when the contract contains terms giving the party with the superior bargaining power an unconscionable advantage. Contrary to the majority view, the dissent found that the hospital did not take any unconscionable advantage of Mr. Wheeler. The arbitration clause was spelled out in plain English, in normal size type, and appeared right above the signature line.

150. Comparing the majority and minority opinions demonstrates the arbitrary nature of the reasonable expectations test. In juxtaposition, the majority and minority opinions represent the honest but personal preferences of the judges. Neither opinion constitutes a logical chain of legal reasoning but a broad-based policy analysis unsupported by evidence required to fortify the decision. Without taking a public opinion poll, the majority found that no reasonable person would expect to find an arbitration clause in a hospital agreement. Based upon an equal lack of evidence, the dissent found that no reasonable person would prefer litigation to arbitration. The reasonable expectations test posits the source of contract terms outside the written contract. The test permits courts to substitute their judgments for that of the authoring party. While some may argue it is better to have courts write contracts than firms, the practical consequences of judicial opinions often have unintended consequences. Courts also are unable to assemble the data needed to resolve public policy issues that transcend the limits of particular cases.

     Restatement (Second) of Contract

151. The Restatement (Second) of Contracts is a restatement of common law in the form of a Code. It carries weight by virtue of the authority of the American Law Institute that publishes the Restatement. Although the Restatement is not enacted by any legislature, courts often cite it in support of their decisions. With respect to standard form contracts, the Restatement (Second) of Contracts, Section 211 provides: "Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement." This standard focuses on the state of mind of the party preparing the standard form contract. This party usually is a professional: merchant, seller, manufacturer or attorney. The author of the contract is put in the position of asking itself what the other party to the contract would think of a particular term included in the contract. In effect, the author of the contract must ask and answer a counterfactual question: If the other party to the contract knew about the term before making the contract, would the other party reject the contract?

152. To vacate a term under this standard, a court must find that: (1) the author of the contract had reason to believe, (2) that if the other party knew of the term, (3) the term would cause the other party to reject the term. The drafters of the Restatement explain: "For that to occur... the terms must not only be surprising, but also highly adverse to the deal."[200] Only a few states have adopted the Restatement (Second) of Contracts test.[201] In contrast to the "reasonable expectations" test, which focuses on the knowledge and expectations of the buyer, the Restatement test focuses on the knowledge and expectations of the seller. However, as implemented, there is no meaningful distinction between the straight "reasonable expectations" test and Section 211 of the Restatement (Second) of contracts. The latter, like the former, invites courts to re-write explicitly clear contracts based on the judicial view of doing justice, a method usually leading to arbitrary and debatable results.

153. Take Lauvetz v. National Car Rental for example. The Alaska Supreme Court held that the average person renting a car would not know that the collision damage waiver would not apply to damage caused by driving the car while intoxicated.[202] Two vacationers in Alaska arranged to rent a van from National Car Rental. Osborne actually signed the rental agreement but listed Lauvetz as an authorized driver. In addition, Osborne purchased the collision damage waiver option. The terms and conditions of the rental agreement, including an explanation of the collision damage waiver, were printed on the inside of the travel folder containing the rental agreement. One term stated that the vehicle shall not be used "by any driver under the influence of intoxicants, drugs, or any other substance to impair driving ability." The rental agreement further provided:

     I understand that if the vehicle is obtained or used for any prohibited use or in violation of this agreement, then the CDW option shall be void and, where permitted by the law, the liability and comprehensive protection, PAI, PEC, and SLI insurance shall be void."[203]

     Neither Osborne nor Lauvetz read the terms and conditions. Three days later, Lauvetz, driving while he was intoxicated, got into a single car accident and wrecked the van. Lauvetz pleaded no contest to charges of reckless driving.

154. National Car Rental sued Lauvetz and Osborne to recover compensatory and punitive damages for the wreck of the van. The complaint alleged that Lauvetz was intoxicated at the time of the accident, that the intoxication caused the accident and that the CDW did not apply because Osborne and Lauvetz were liable for damage resulting from a prohibited use of the van. The trial court ruled that the "terms and provisions of the collision damage waiver in the car rental agreement governing drunk and reckless driving are valid, binding, and enforceable, and the Court rejects defendants' position that the CDW is insurance."[204]

155. The Alaska Supreme Court, relying upon Section 211 of the Restatement (Second) of Contracts, reversed, citing the following:

     (1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing....

     (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement."

     This section establishes the general enforceability of the terms of standardized forms, whether the customer reads or understands them. However, customers "are not bound to unknown terms which are beyond the range of reasonable expectation."[205] Parsing the Restatement (Second) test from the common law "reasonable expectations" test, the Alaska Supreme Court noted that the latter reflects those "reasonable expectations" a customer would have after reading the standardized form, while the former actually presumes that the customer does not read the form.[206] Given the clarity of the terms in the National Car Rental Agreement, Osborne and Lauvetz could not plausibly have argued that the exclusions were beyond their reasonable expectations.

156. Contrary to that view, however, the Alaska Supreme Court stated "Section [211] on the other hand, emphasizes the reasonableness of the term or condition, no matter how clear its meaning might be to the layman if he happened to read it."[207] The Court then dismissed National's arguments that "no person who drives a car that does not belong to him can have any reasonable expectation that he can drive that car recklessly or while intoxicated" and that "Lauvetz's position that a prohibition against drunk and reckless driving is an unconscionable or unreasonable limit on the CDW is absurd."[208] Rather, for the Court, the relevant question was "whether the purchaser of the damage waiver reasonably expected the waiver to be subject to any exclusions."[209] Without any empirical support, such as a study of customer habits and perceptions, the Court concluded "a consumer would not reasonably expect the damage waiver to be less than complete."[210] In the Court's view, the term "complete" meant that the driver would not be accountable for any loss, even that caused by his fault.

157. The Court's holding is nothing more than judicial law making in the insurance field. If the Alaska legislature wanted to hold insured's completely blameless for their actions in rented automobiles, the legislature could have enacted a law producing that result. The Court's holding also vindicates a dubious, even outrageous, claim made by a supposedly "ignorant" consumer. The one-thing consumers know about insurance policies, maybe the only sure thing they know about them, is that they contain exclusions. Where did the Court come up with the remarkable conclusion that a person who rents a car, drives it while intoxicated and wrecks the vehicle, then can walk away from the destruction without further cost because the person bought the CDW option? In the name of ignorance, the Court exonerates the consumer from the consequences of his fault. There is nothing in the Restatement (Second) to support this holding. First, the Restatement does not constitute an invitation to re-write insurance contracts. Second, the restatement does not suggest that a person who damages property because of a voluntary act of intoxication should be surprised to find out his contract makes him responsible for the consequences of his behavior. While the policy virtues of spreading risk across the customer base has its proponents, the Restatement (Second) has taken no position in this political debate.

158. More important, the Restatement (Second) contains two flaws. First, if the language of "surprise" is taken literally, then the test does not hold consistently over time. When a standardized term in a contract is revealed to be a surprise, then it ceases to be a surprise if it is contained in subsequent contracts. Second, Comment f of the Restatement appears to efface the distinction between "surprise" terms and manifestly unreasonable terms. Comment f provides: customers "are not bound to unknown terms which are beyond the range of reasonable expectation." If that interpretation is correct, the Restatement (Second) test is indistinguishable from other doctrines used to police contracts and invalidate terms such as public policy and unconscionability.

     Infirmities of private litigation

159. Even with substantial regulation of standard form contracts, the use of covert tools does not prevent a firm's use of sharp practices in the market. The decision in Gonzales v. A-1 Self Storage, Inc. illustrates the limits of term invalidation where the judgment is effective only against parties to the litigation, resulting in continued use of the same term by other firms, and demonstrates the tendency of "unconscionability" contained in sales law to be imported into other departments of law.211 In May 1999, Ms. Gonzales rented storage space from defendant to hold her personal property worth approximately $5000. The rent was $126 per month. She signed defendant's rental contract, paid the first month's rent, an additional pro-rated amount and bought a lock. The rented area consisted of an eight foot by ten foot space. The ceiling consisted of "a fence like grate." In July 1999, about two months later, Ms. Gonzales returned to the storage facility to retrieve some items and discovered that her property had been either entirely or partially destroyed by the entry of water from the top of the storage space. She sued based on negligence. A-I Storage stipulated to the water damage, denied negligence and relied upon the contract limiting its liability to $50.

160. The contract consisted of more than 30 paragraphs. The defendant relied principally on paragraphs 10 and 11 that provided:

     10. Non-Liability of the Owner and Insurance Obligations of Occupant.
     Occupant, at occupant's expense, shall maintain a policy of fire and extended coverage insurance with burglary, vandalism and malicious mischief endorsement for at least 100% of actual cash value of such stored property.
     Occupant expressly agrees that the carrier of such insurance shall not be subrogated to any claim of occupant against owner, owner's agents or employees.
     The Owner shall not be liable for personal injury or property damage ....
     The Occupant hereby agrees to indemnify and hold the owner harmless from and against any and all claims for damages to property or personal injury, including attorney's fees or costs ....

     11. Release of Owner's Liability.
     Any and all personal property stored within or on the leased premises by Occupant shall be at Occupant's sole risk and no bailment is created hereunder. Owner shall have no liability for loss or damage to any property of Occupant stored in the space, or otherwise, arising from any cause whatsoever .... Owner shall not be liable to Occupant for any loss or damage that may be occasioned by or through Owner's acts, omissions to act, or negligence, or by acts of negligence of Owner's or other Occupants on the premises ....
     The Occupant does hereby waive and release any rights of recovery against owner that it may have hereunder.
     Owner's liability shall not exceed the sum of $50 and Occupant's sole remedy at law or in equity shall be the right to recover a sum within such limit."[212]

     However, to clarify the defendant's virtual lack of any responsibility, paragraph 30 provided, "The implied warranties of merchantability and fitness for a particular purpose and all other warranties expressed or implied are excluded from this transaction and shall not apply to the space and facilities. In addition, paragraph 30 stated that Ms. Gonzales agreed to indemnify the defendant against all claims, including attorney's fees and costs of litigation.

161. The court did not consider whether the contract formed a barrier insulating defendant from liability. Rather, "the issue before the court is whether these paragraphs, together with the rest of then contract, so pervert the ideals of good faith and fair dealing that the contract as a whole is rendered unconscionable."[213] Based on the remarkable language of the contract and defendant's failure to propose any plausible explanation of how the property was water damaged, the court found the defendant was negligent, the contract did not operate to mitigate defendant's liability and that the contract was unconscionable as a matter of law. Parsing the decision reveals the background law that would have applied in the absence of contract, how the contract displaced that law and why the court reached its conclusion that the contract was unenforceable.

162. The parties entered into a bailment for hire. Ms. Gonzales was the bailor and defendant the bailee. Black's Law Dictionary defines bailment for hire as:

     A contract in which the bailor agrees to pay an adequate recompense for the safekeeping of the thing intrusted to the custody of the bailee, and the bailee agrees to keep it and restore it on the request of the bailor, in the same condition substantially as he received it, excepting injury or loss from causes for which he is not responsible. [214]

163. The Uniform Commercial Code defines a bailee to mean "the person who by a warehouse receipt, bill of lading or other document of title acknowledges possession of goods and contracts to deliver them."[215] The UCC has codified the duty of care imposed upon the bailee:

     (1) A warehouseman is liable for damages for loss of or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful man would exercise under like circumstances but unless otherwise agreed he is not liable for damages which could not have been avoided by the exercise of such care.

     (2) Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage, and setting forth a specific liability per article or item, or value per unit of weight, beyond which the warehouseman shall not be liable; .... No such limitation is effective with respect to the warehouseman's liability for conversion to his own use.[216]

     The bailee bears the burden of producing evidence of the fate of the goods.

164. The contract displaced the background law entirely. Contrary to the nature of the transaction, paragraph 11 declared that no "bailment was created hereunder." Paragraph 10 required Ms. Gonzalez to obtain insurance, without specifically requiring insurance to cover water damage, and deprived any insurance company from its right to sue the defendant even when damage was caused by defendant's negligence. Paragraph 11 also protected defendant from any liability for loss of property, except noting that the maximum amount of liability was $50. Moreover, that paragraph required Ms. Gonzalez to indemnify defendant. The contract completely effaced the common law and contravened the Code by failing to limit liability per item or value per unit of weight.

165. Reasoning by analogy, since the transaction involved a service not a good, the court stated, "The Uniform Commercial Code provides that [it] is up to the court to find as a matter of law that the contract or any clause of the contract was unconscionable at the time it was made."[217] The statute allows courts to police contracts or clauses that they find are unconscionable. "The basic tenet of unconscionability is whether, "in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable at the time of the making of the contract."[218] The principle prevents oppression and unfair surprise.

166. Viewed in its entirety, the court found that the contract was outrageous, singling out the following standardized terms: (1) the attempt to avoid all liability for defendant's actions including its negligence, (2) requiring Ms. Gonzalez to obtain insurance while simultaneously depriving any insurer from suing defendant, (3) requiring Ms. Gonzalez to indemnify the defendant, (4) limiting liability to $50, (5) denying the creation of a bailment for hire, (6) requiring Ms. Gonzalez to waive and release any rights of recovery, and to pay defendant's attorney's fees and costs and (7) excluding all warranties of quality and performance.

167. Unlike the plaintiff in the oft-cited cross-collateral case of Wheeler Furniture, the A-1 Self Storage, Inc. decision involved a completely innocent customer. Ms. Gonzalez paid all fees and did nothing to cause damage to her property. While she did not obtain the "required" insurance, the facts do not show whether insurance was available for storage space and the contract did not specify that the insurance cover water damage. Consequently, had Ms. Gonzalez obtained the "required' insurance, defendant would not have changed its position of no liability. A-1 Storage, Inc. used a contract to sell a product unsuitable for its intended use without incurring any legal responsibility.

     Conclusion

168. Covert tools fail to provide guidelines to firms and contract drafters in the development of standard form contracts. Enforcing standardized terms unless they defeat "reasonable expectations," are unconscionable or contain "surprising terms" does not limit the creativity of drafters in writing standard form contracts or the practices of firms in using them. Rather, the vague limits upon the freedom of contract principle encourage lawyers and firms to test the limits of these doctrines. The result is a "free for all" with random victims, since, unless the contract is challenged in litigation or the parties resolve disputes without reference to the contract, the contract governs the transaction and remains a private affair.

     Chapter Seven - Proposed Solutions

169. There is no dearth of proposals to solve the problems posed by standardized terms for the law of contract. Authorities on the subject are many and their proposals are varied. However, except for the general propositions of Demogue, Prausnitz and Llewellyn, no specific proposal set forth by the "academic authorities" has woven its way into American law. This chapter provides a selection of proposals from several leading authorities and identifies the virtues and defects of each plan. The selection is not exhaustive, but focuses on works that have influenced the development of thought in this area.

     Demogue (1911)

170. Demogue recommended the establishment of a flexible body of rules to assure the rapidity of transactions and to encourage innovation in the market place.[219] The institution to establish these rules was not the government, ill adapted to adjust to market place changes in Demogue's view, but was self-governing business organizations. In addition, he proposed that firms explain standardized terms to customers prior to closing the deal, and that these explanations bind the firm, even representations made by the firm's agents and sales clerks.[220] He also proposed the operation of rules based on the status of the parties. Hence, terms valid between merchants would not necessarily be valid between merchants and consumers. Moreover, he envisioned collective bargaining agreements between organized groups such as workers and employers but also manufacturers and customers.[221] Finally, he recognized a limited role for courts and legislatures: they could limit the shift or risks to customers or forbid certain terms entirely.

171. Demogue was extremely prescient. Since 1911, the United States and Europe have adopted law containing substantial disclosure requirements for standardized terms. The law often requires prominent placement of terms designed to bring them to the attention of the customer. Non-disclosed terms are unenforceable under many laws. Law in the United States and Europe also distinguishes between contract terms enforceable between merchants and those enforceable between merchants and consumers. For example, the Convention on the International Sale of Goods does not apply to consumers; the Uniform Commercial Code often distinguishes between the obligations of merchants and consumers. Consumer protection legislation also is based on this distinction of status. Self-governing organizations set rules for certain sectors of the economy such as the securities markets. Finally, the law has restricted the use of certain standardized terms and, in other cases, barred them altogether.

172. Yet, as Demogue recognized, his expedients were imperfect, but not for the reason he specified: a "drag" on the market. Rather, the view persists that firms are engaged in a conspiracy to deprive customers of rights and to maximize profits at their expense. The patches the law has placed on terms contained in standard form contracts have failed to solve the global problem presented by contracts drawn by one side without the knowledge or genuine consent of the other party: why, in the first place, should government countenance a private ordering of obligations based on this model?

     Prausnitz (1937)

173. Prausnitz supported the social decision to allow firms to use standardized terms in their business, since they benefited both parties to the transactions. "[T]he science of law as a whole owes a debt to this form of agreement. No code, however well drafted, will be able to provide for all contingencies."[222] He gave three examples of statutes successfully and apparently fairly, codifying business practices: the 1927 Standard Terms and Conditions of the Railways Act, the 1893 Sale of Goods Act, and insurance legislation in European countries. Law thus benefits from the experience of "commercial draftsmen." Prausnitz based this view on the sensible principle, regrettably lost in the later thought of Slawson and Rakoff, that contractual terms are not equivalent to statutes enacted by legislatures. They are conditionally valid rules for individual contracts dependent upon the blessing of courts for enforcement. Without court sanction, the terms are not worth the paper they are written on. Hence, the first backstop against misfiring standardized terms is the judicial system and its power to review contracts to determine which terms are enforceable.[223]

174. Nevertheless, Prausnitz recognized the potential for abuse within a legal system delegating authority to firms to set contract terms. He stated, if left unrestrained, the authority of firms to set rules would completely displace the common law designed to balance the interest of citizen and state.[224] The result would be legal uncertainty, firms having the power to change publicly made legal rules at will. Prausnitz observed, "For it cannot be allowed to pass unnoticed, unremedied or at least uncontrolled, that a vast number of citizens are forced to satisfy their needs under terms of which they have no knowledge in detail and which are not prescribed by a public authority."[225] Because the law must guard against this danger, the drafter of standardized terms drafts at his peril if he ignores the public welfare. The degree of regulation depends upon whether a "State is more "capitalist" or more "socialist," whether it is democratic or dictatorial, whether its administration of justice is efficient or inefficient, cheap or dear."[226]

175. Governments have three options: courts, legislatures and administrative agencies. Courts are effective at providing relief to aggrieved parties in individual cases. However, they are ineffective to deal with wholesale grievances. Legislatures are the right authority to remedy wholesale grievances. However, legislation is inflexible and may impose awkward risks on firms. "The change of traffic routes through political developments, the starting of new industries, bad crops, new inventions, migration, settlement, and a host of other factors cannot be divined by the legislature."[227] Consequently, the only logical alternative was administrative regulation. Authorities would assert themselves and interfere with the development of standardized terms in the market. The method of administration might be license, regulation or police action. While Prausnitz concluded that administrative regulation was the only logical alternative, he expressed reservations about its use. With implicit reference to Germany, Prausnitz admonished, "It is in constant use only in dictatorial states with consequences which cannot be discussed here." Although the United States and Europe are not 1930's Germany, reliance upon administrative agencies presents risks associated with incompetent officials, aggressive use of state authority and inconsistent, if not incoherent, enforcement of regulations. Prausnitz identified the institutions of government that could regulate the use of standardized terms and identified the general limitations of each institution.

     Llewellyn (1960)

176. Llewellyn developed both legislative and judicial rules to correct standard form contracts containing oppressive outrageous terms. His legislative approach is incorporated in the Restatement (Second) of Contracts. The Restatement (Second) provides that a person assenting to standardized terms is bound by them unless the party who authored the contract knew or should have known that the adhering party would be surprised by the term. Llewellyn's formula contains two steps. First, a person who assents to a standard form contract specifically assents to the "dickered terms" and generally consents to all other reasonable terms contained in boilerplate clauses, but he does not consent to oppressive or outrageous terms. In the Common Law Tradition, Llewellyn pronounced:

     "Instead of thinking about "assent" to boiler-plate clauses, we can recognize that so far as concerns the specific, there is no assent at all. What has in fact been assented to, specifically are the few dickered terms, and the broad type of the transaction, and but one thing more. That one thing more is a blanket assent (not a specific assent) to any not unreasonable or indecent terms the seller may have on his form, which do not alter or eviscerate the reasonable meaning of the dickered terms. The fine print which has not been read has no business to cut under the reasonable meaning of those dickered terms which constitute the dominant and only real expression of agreement, but much of it commonly belongs in."[228]

     The blanket assent, given under ignorance, is limited to "reasonable terms" because the adhering party has trusted the firm's judgment and expertise in commercial matters not to use terms negating the "dickered" terms.

177. Like Prausnitz, Llewellyn reposed a certain degree of faith in trade usage and custom. "[A]mong those terms which plainly are in fact assented to only one time in a thousand[,] there are still many which are sound particularizations of the deal to the business, very useful and wholly within reason; and those ought to be sustained and applied."[229] Hence, in evaluating the validity of any particular term, courts should consider evidence of trade usage and custom to establish a standard of review, since established trade usage embodied presumptively sound business practices.

178. Llewellyn wielded tremendous influence in his day. His ideas contributed to rules contained in the Uniform Commercial Code Article 2 and the Restatement (Second) of Contracts. The Principles of International Commercial Contracts also contains the "surprise" test for standardized terms identical to the rule of the Restatement (Second) of Contracts. However, given the fact that Llewellyn wrote on the subject of form terms over a period of thirty years and had knowledge of Prausnitz's seminal work, his "answer" to the problems posed by the use of standardized terms in the market is quite modest, though eminently practical.

179. First, Llewellyn clings to the idea that standard form contracts are ordinary contracts, even though of a special nature. Although he differentiates between the nucleus of terms the parties actually agree to, and the peripheral terms they do not agree to, his "blanket assent" approach to peripheral terms is a notorious fiction. His answer: a combination of legislative and judicial tinkering to curb abuse, extend the original ideas of Prausnitz by giving them detail but do not represent a revolutionary insight into the nature of the legal problem or its solution. Llewellyn's views stand in the shadow of Demogue who, approximately 50 years earlier, accurately predicted the lines along which the law actually progressed.

180. Rakoff criticizes two aspects of Llewellyn's answer. First, the fiction that adherents agree in advance to most terms under a veil of ignorance is a rationalization to reach a result that standardized terms are voluntarily assumed obligations. Rakoff argues Llewellyn did not go far enough and throw off the mantle of contract law from standard terms. Second, Llewellyn's trust in the business community was misplaced: "Llewellyn has thus missed the significance of the institutional context in which standard form contracts are produced; he has failed to understand that it is very often the lawyer's expertise, not the businessman's, that is revealed."[230] Hence, the form does not incorporate any relevant social wisdom. The empirical evidence supports Rakoff's observations. While standardized terms in 19th century forms generally reflected business rules based on the firm's experience, practice and knowledge of its industry, contemporary forms demonstrate that lawyers have taken over the process of drafting standardized terms. Lawyers act solely in the interest of their client and draft against every possible contingency to reach an outcome favorable to the firm. With limited exceptions, lawyers do not have first hand knowledge of the firm's business. Therefore, the rules they write do not incorporate the wisdom of the trade. They are designed to pass the maximum degree of economic and juridical risk to the other party.

     Slawson (1971)

181. Either ignoring or oblivious to Prausnitz's admonition, Slawson proposed an administrative law of contracts. His approach developed from the claim that standardized contracts were politically incorrect documents. Firms produced standardized terms without the prior consultation of the customer. The dictatorship of the firm conflicted with the democratic political model. Since the production of terms did not resemble the production of statutes enacted by legislatures, the standardized terms were illegitimate private law making. The "combined effect of economics and present law is to make all standard forms unfair."[231] What is needed, Slawson stated, was a field of administrative law reconciling the interests of firms and the reasonable expectation of the consumer.[232]

182. Legislatures enact statutes containing broad principles, leaving the detail of enforcement and specification to administrative agencies. Slawson believed that contract law had reached an analogous point where the general principles of contract were well settled. The task was to develop secondary rules to deal with standard form contracts and contracts of adhesion. The paradigm was the democratic process of law making in the Athenian sense where every person had an opportunity to speak his mind. Ordinary contract law handled the few terms the parties actually agreed to under the contract. Slawson's administrative system would conform the remaining terms of the contract imposed by the firm to public interest standards.

183. Slawson did not propose the creation of a new bureaucracy to implement his program. Rather, courts would act as administrative agencies. The centerpiece of his model was judicial review based upon "non-authoritative" standards - "reasons, principles, or considerations possessing no legal authority within the jurisdiction but of greater generality than the law being reviewed and serving to demonstrate that it is in the public interest."[233] Conformity to standards would validate the private law making of the parties because it subjects the "private law making" to democratic control.[234] By analogy, courts also could rely on other sources of law such as sales law and mandatory statutory law. His conclusion was that all standard form contracts were an abuse of power that judicial review had to put right.

184. The problem of Slawson's program is its lack of specificity. Inviting courts to render judgment based on non-authoritative standards is an invitation to lawlessness. Under Slawson's view, no subject of term making would be beyond the court's competence, though he does concede difficulties in the day-to-day administration of prices. Slawson attacked existing law for the unprincipled way in which it dealt with standard form terms, mainly by defeating them under the doctrine of unconscionability. However, compared to his administrative system of contracts, the law of unconscionability has the precision of mathematics. Slawson's proposed solution of an administrative system of contracts is an ill-conceived amorphous program that fails to provide explicit solutions to specific problems raised by standard form terms. It is a cure worse than the disease.

     Rakoff (1983)

185. After an exhausting examination of his intellectual predecessors, and after determining that standardized terms are a function of a firm's organization, not of monopoly power, Rakoff concludes that all "invisible" standardized terms are presumptively unenforceable. Visible terms are those terms customers actually agree to. The remaining terms of the contract are the "invisible" terms. By presuming that invisible terms are presumptively unenforceable, Rakoff shifts to the firm the burden of justifying enforcement of terms. Under his practical program, the firm must prove that the term not only reduces costs or relates critically to its practices but also achieves "particular social purposes." Courts are the "Delta Force" of his program.

186. Invisible terms are judged as follows. Courts must first determine the default law that would apply in the absence of the standardized term. If the term and the default law do not differ, the court throws out the contract term and uses the default law to settle the dispute. In Rakoff's words, "If the applicable background law, once it has been determined, yields the same result as the form term, the court ought to render judgment on the basis of the legally implied rule alone and treat the form term as an irrelevancy."[235] If the term and the background law are incongruent, the firm must prove that the term is integral to its business as a social institution and that an increase in the product's price would not accomplish the same result. In Rakoff's words, "If the point is merely that such terms help drafting parties make money, it is clearly inadequate, because that purpose can be served by raising the visible price."[236] This conclusion applies even in the face of evidence that consumers prefer lower prices more than they care about onerous invisible terms.[237]

187. The work of the court under the Rakoff program is substantial. "[J]udges would have to make a more precise determination of the background rule at issue and of its application to the facts than is often required under present practice."[238] The process would require courts to undertake wide-ranging investigations of the firm's organizational structure, its methods of price setting and of controlling business risks. In addition, the process would require courts to identify and explain relevant customs and trade usage to determine whether the standardized term is consistent with trade practice or deviates from it. Not that inconsistency would end the matter. Based on this immense data put forward by the firm, the court then would have to determine whether the firm proved that the standardized term was an essential business practice whose effect could not be achieved by any means other than by the institution of contract. Rakoff dismisses the impact of his program on litigation: "The suggestion that the existing system is to be praised for efficiently discouraging litigation in effect assumes that the selfsame system's promise to alleviate the worst aspects of contracts of adhesion is not seriously meant."[239]

188. Rakoff's proposal may be kindly referred to as impractical. Given the choice between his system and using a standardized term, no firm, except those who prefer litigation to business, would use any term unless the background law did not contain one. Even then, the risk of adopting a unilaterally imposed term would be substantial. Consumers are organized into effective litigation groups such as Consumers Union. They are protected by Attorneys General and by private law firms seeking class action lawsuits against firms with deep pockets. Second, courts are ill-equipped to compile the economic and business data to implement his standard of review. Judges also are unqualified to make judgments in areas outside their domain of expertise, generally the law. Judges are not trained economists or business administrators, and courts are not institutions geared to investigating the economic effects of terms on price, firm organization and the like. Third, because of its lack of concrete standards, the Rakoff program would yield disparate decisions based upon the education, skill and political leanings of individual judges. Just challenging a term would likely lead to settlement because the firm would avoid the prospect of litigation under this standard. Fourth, the entire program does not apply to small firms that lack complex internal organization and the resources to satisfy the burden of justification. Roberto Unger, in his philosophical work entitled "X", called for a department of destabilization to build instability into social and government institutions. Rakoff's proposal is Unger's department of destabilization for contracts.

     Meyerson (1990)

189. The Meyerson proposal, derived from the economic model, divides consumer form contracts into three types of terms, each having its own rule of application: (1) explicit terms, (2) seller representations and (3) undisclosed terms. Explicit terms are terms the consumer has consented to, such as price quantity and description. However, explicit terms also include subsidiary terms that the seller explains and brings to the attention of the consumer such as an acceleration or arbitration clause. Provided the circumstances demonstrate actual consent, explicit terms are enforced against the consumer. Seller representations are promises that the seller or its representative makes through advertisement or oral statements. These promises are enforced and override any conflicting subsidiary term in the contract. Undisclosed terms are all remaining terms contained in the consumer form contract. Meyerson maintains the economic analysis of consumer form contracts demonstrates that the "framework for enforcing consumer form contracts can be termed the "doctrine of reasonable expectations," with the focus on the reasonable expectations of the consumer."[240]

190. "Sellers can discover the reasonable expectations of the consumer at far less cost than the reverse."[241] This statement follows from the fact that sellers engage in multiple similar transactions with consumers and are thus in the best position to know what consumers are likely to expect in their contracts. "Once both parties are operating under the same accurate assumptions as to the meaning and value of their contract, their consent can be presumed to indicate a value maximizing transaction."[242] Meyerson concludes, the "doctrine of reasonable expectations would enforce those form contracts that are entered into knowingly and voluntarily by consumers with adequate information."[243]

191. However, sellers cannot obtain the consumer's consent to every subsidiary term prior to closing the transaction because there is a limit to how many terms can be meaningfully explained to the consumer to support the claim of consent. Meyerson therefore proposes that the risk of undisclosed terms be placed upon the person in the best position to insure against them. Not surprisingly, "the business seller ... is the superior insurer for most goods and services."[244] To insure against risks that ordinarily sellers would pass to consumers through subsidiary contract terms, the seller charges "all customers a higher price."[245] Meyerson claims, "The doctrine of reasonable expectations also is more economically efficient than an alternate regime relying on ambiguous or covert standards, such as unconscionability or the principle of interpreting contracts against drafters."[246]

192. Meyerson's proposal neither is logically derived from the economic model nor does it contain more precision than the "alternate regimes" he criticizes. First, his plan of educating consumers is limited by the number of items that can reasonably be explained prior to closing a transaction, the varying degrees of intelligence among consumers and the varying skills of sellers' clerks. Second, oral promises or statements made by sellers' clerks are too easy to allege and too difficult to prove. In the litigation context, his program would lead to costly fact-finding contests and foreclose the option of summary disposition of cases. In addition, sellers' clerks generally do not understand the products they sell, never mind the effects of legal terms contained in pre-printed contracts. Consumers also generally know that they cannot rely upon the representations of clerks. Finally, the argument that sellers are superior risk bearers is a tired cliché. It is an excuse for making one consumer an insurer of other consumers, a highly debatable policy choice that does not follow ineluctably from economics, and an excuse for raising prices including additional profits for sellers. The doctrine of reasonable expectations is no more concrete than the doctrine of unconscionability or any other test courts presently use to evaluate the validity of standardized terms. In an effort to please his socialist audience, Meyerson takes "law and economics" to a dead end.

     Chapter Eight - The European Union Position

193. The European Union Commission opposes the use of most producer-developed standardized terms in consumer contracts: they are patently unfair. The starting premise precludes any inquiry into whether there is an appropriate role in the market for the development of standardized terms by firms. The Commission has stated, "General contractual terms and conditions aim to replace the legal solutions drawn up by the legislator and at the same time to replace the legal rules in force in the Community by unilaterally designed solutions with a view to maximizing the particular interests of one of the parties."[247] Market studies "have not only demonstrated the ubiquity of unfair terms in standard-form contracts but also the enormous difficulty of getting hold of the contractual terms before concluding a contract or independently of such a contract."[248] Based on economic reasoning, the Commission has declared that sellers should not externalize the cost of risks, but raise the prices of products since sellers, as opposed to consumers, are in the best position to obtain insurance.[249] The only question is the method by which to eradicate producer developed standardized terms from the internal market.

194. Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts is the principal directive governing standard form contracts in consumer transactions.[250] It is considered the milestone in consumer policy at the Community level. The EU Directive requires replacement of case law with legislation addressing specific problems posed by standardized terms.[251] The EU Directive, and most member state legislation, is a mix of litigation-based remedies and regulatory controls on standardized terms.[252] The European Union and member states often authorize public officials to police the use of standardized terms. More important, the EU Directive contains an Annex of illustrative terms that presumptively are unfair contract terms. The list deals directly with recurring and troublesome terms and guides the implementation of the general rule in specific cases by telling decision-makers which type of terms to watch out for. In addition, the EU Directive and its national counterparts generally contain restrictions on choice of law, penalties, unilateral change of contract terms and compulsory arbitration.

195. In his compelling article, "Standard-terms Contracting in the Global Electronic Age: European Alternatives", James R. Maxeiner analyzes the Unfair Terms Directive, its historical precedents and its method of controlling the content terms of standard form contracts. His article also undertakes a comparative study of German law and its particular implementation of the EU Directive. Mr. Maxeiner, who received his Ph.D. from Munich and is fluent in German, has based his description of German law on original sources. Without reproducing the depth of his work, the Unfair Terms Directive and its implementation in Germany and France are examined as are the relevant provisions of the Principles of European Contract Law.

196. The EU Directive provides a general rule to govern the enforcement of terms found in "pre-formulated standard contracts" involving the sale of goods and services.[253] It also contains a mandate for member states to prevent the use of unlawful consumer contracts. Thus, the directive is preemptive, intended to prevent injury resulting from unfair contracts, and intended to give sellers the certainty of knowing beforehand that their contracts satisfy the law. However, the EU Directive and many national implementations still maintain the artificial distinction between commercial and consumer transactions when the empirical evidence indicates that contracts between businesses often are based on non-negotiable standardized terms shifting risk to the buyer just as they would do in transactions between businesses and consumers.

197. Article 1 defines unenforceable terms: "A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer." To determine whether any term in a contract is unfair, courts are directed to examine the nature of the good, the circumstances under which the contract was made and the other terms of the contract.[254] Significantly, Article 4(2) excludes the contract's main subject matter and adequacy of price. The Directive hence does not apply to negotiated terms and to the exchange of product against payment of price.[255] Equally significant is the presumption that terms drafted in advance and over which the consumer could have had no influence are non-negotiated terms and enforceable only if they are deemed not unfair under the Directive.[256] Merchants seeking to enforce pre-formulated standard terms bear the burden of proof to show that the term was the product of negotiation and enforceable under ordinary contract law.

198. Article 6 explicitly limits the ability of merchants to circumvent the application of the Directive by choice of law. That Article provides:

     Member States shall take the necessary measures to ensure that the consumer does not lose the protection granted by this Directive by virtue of the choice of the law of a non-Member country as the law applicable to the contract if the latter has a close connection with the territory of the Member States.

     Since consumer contracts have ipso facto close connections to the territory of member states, Article 6 effectively prohibits the use of the law of non-Member states to govern consumer transactions. Combined with the consumer protections built into Treaty of Rome (1980) and Council Regulation (EC) No. 44/2001 of 22 December 2000, incorporating the jurisdictional rules of the Brussels Convention, merchants are likely to be bound by the contract law of the consumer's jurisdiction and the consumer has the right to sue the merchant in the place of the consumer's domicile. As Maxeiner notes, with particular reference to license agreements used by American firms, standard terms deviating from European private international law are unenforceable against European consumers.

199. Importantly, and a departure from American practice, Article 7 requires member states to establish a preventive program for standard form contracts used in consumer transactions. Article 7(2) requires member states to delegate authority to consumer groups to bring enforcement actions. These actions may be brought against sellers collectively, and not just against a single seller.[257] Administrative agencies charged with consumer protection also have the authority to challenge the legality of widely used pre-formulated standard contracts. This mechanism may act as a prior restraint on terms, preventing them from inflicting damage on consumers. It also gives vendors assurance that their contracts are valid.

200. A term found to contradict the Directive is invalid but the remaining terms survive if valid. Article 6 (1) provides, "Member States shall lay down that unfair terms used in a contract concluded with a consumer by a seller or supplier shall, as provided for under their national law, not be binding on the consumer and that the contract shall continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair terms."

201. The general rule of the EU Directive is vague. The Directive fails to clarify whether both procedural and substantive unfairness is required to trigger its application. The terms "unfair," "good faith" and "significant imbalance," the key terms used in the Directive, are not defined leading to uncertainty in the rule's application. The direction to evaluate the circumstances surrounding the contract to determine whether to apply the Directive invites protracted and expensive litigation. Arguably, for comparative purposes, the most substantial benefit of the Directive is the list of presumptively invalid terms contained in the Directive. However, with few exceptions, the list does not contain terms frequently found in standard form contracts used in the United States. Nevertheless, while the list has limited incorporation value, the approach of identifying specific terms is useful as a model for American law.[258]

202. The Annex contains a list of 17 terms that may be considered unfair. The list is indicative only and serves as a reference point in determining whether a disputed term is unfair. Many terms contained in the Annex deal with penalties imposed upon consumers, the leverage of merchants to change terms unilaterally or to extend contract terms automatically. Legislation in the United States prohibits the use of some terms in the list. However, four terms deserve mention since the EU Directive indicates they are unfair and their use in standard form contracts in the U.S. is widespread. Item (a) of the Annex permits finding a term unfair if it has the effect of "excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier." Item (b), the most frequently litigated class of term, permits finding a term unfair if it has the effect of "inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier if any of the contractual obligations, including the option of off-setting a debt owed to the seller or supplier against any claim which the consumer may have against him." Item (i) permits finding a term unfair if it has the effect of "irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract." Item (q) permits finding a term unfair if it excludes or hinders "the consumer's right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions." If these presumptions were incorporated into American law, they would likely invalidate the following terms in consumer contracts: (1) arbitration clauses, (2) most waivers of tort liability, (3) any term found in a "pay now terms later" transaction and (4) exclusions of all warranties, if item (b) is applied to "guarantees."[259]

203. Notwithstanding the landmark status of the Directive, the Commission has deemed it a failure. The Report from the Commission has stated that the traditional approach embodied in the Directive -obtaining an injunction against the use of unfair terms-- is a "negative" system. Once a term is deemed unfair, the professional normally will replace it with a new one. "As a result the new term may also be unfair and the only way to remove it is to start all over again. Unfair terms are like the Hydra: cut off one head and others grow in its place."[260] Although the Commission set a deadline for implementation of 31 December 1994, it was not until 1998 that all member states had transposed the Directive into national law. Even then, several transpositions contained errors leading the Commission to institute infringement actions against certain member states such as Denmark and the United Kingdom to name only two. The list also has triggered problems. States refusing to transpose the list have argued that it militates against consumer protection because domestic law already prohibits certain listed terms. Case law has shown that ambiguous terms in the list have weakened its practical impact. Many terms are vaguely worded producing problems of interpretation.

204. The Report from the Commission sets forth several suggestions for eradicating unfair terms from standardized contracts under what it calls a "positive system for eliminating unfair terms."[261] The Commission has proposed expanding a pilot program instituted in Portugal whereby representatives from professional bodies and consumer associations negotiate terms through collective bargaining agreements. In conjunction with the European Parliament, the Commission also has proposed the creation of a Community mediator to establish a community level system to improve the practical enforcement of the Directive. In this regard, the Commission has proposed harmonizing the supplementary national legislation often relied upon to give content to the general terms of the Directive. Differences of national law have produced disparate results on identical terms as is predictable in any multi-jurisdictional legal system. Hence, given the increase of cross-border transactions in the internal market, often involving consumers entering into contracts with foreign or internal firms where the contracts are printed in a foreign language, the Commission is particularly concerned about uniformity of legislation. The Directive itself is open for reform including expanding its scope to cover professional transactions.

205. While the European Union is not monolithic, individual state law disfavors the general use of standardized terms. The German Civil Code, enacted in 2002 and repealing "The Standard Contract Terms Act (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen, AGB-Gesetz)," illustrates this trend.[262] Section 305 defines standard business terms: "Standard business terms are all contractual terms pre-established for a multitude of contracts which one party to the contract (the user) presents to the other party upon the conclusion of the contract." Standardized terms do not become part of the contract unless two conditions are met as specified by sections 305(2) and (3): the user must expressly draw the other party's attention to the terms, and give the other party a meaningful opportunity to ascertain their content. However, deferring to freedom of contract and commercial practice, the general rule applies only to consumers. The criteria of sections 305(2) and (3) "do not apply to standard business terms which are proffered to a business person, a legal person governed by public law or a special fund governed by public law." When the general rule applies and the criteria of incorporation are not met, the remainder of the standard form contract is valid and interpreted against statutory rules, provided no party would suffer unreasonable hardship by being bound to the contract.

206. Section 307, which implements the Directive, applies to all standardized contracts including commercial contracts. This section invalidates any term that, contrary to good faith, places the contractual partner at an unreasonable disadvantage. Significantly, an unreasonable advantage is presumed if it "cannot be reconciled with essential basic principles of the statutory rule from which it deviates." Sections 308 and 309 then specify terms invalid subject to appraisal in standard form contracts and terms invalid without appraisal. Terms invalid per se include price increases within the first four months of the contract's term, terms excluding liability for damage caused by the user's grossly negligent breach of the contract, liquidated damages and penalty clauses.[263] Presumptively invalid terms include a provision giving the user of the contract an "unreasonably long or inadequately specified period for acceptance or rejection of an offer or for performance," and a right of termination "without an objectively justified reason specified in the contract." Standardized terms are subject to further review. Surprising terms, that is, terms the contractual partner would not have expected, do not become part of the contract. Ambiguous terms are interpreted against the user of the contract.

207. According to Maxeiner, the German approach, which he calls the "contract model," controls standard terms without throwing freedom of contract overboard. He states: "In German theory, the contract model does not limit freedom of contract. The parties may agree to the term they like. What the contract model does is to prevent one party from using the drafting device of standard terms to introduce terms that unreasonably disadvantage the other party. The contract model does not ask whether the deal or a particular term between the parties is fair; it asks whether the standard terms provided by the user are a good faith basis for the parties' contractual relationship."[264]

208. France recently has transposed the Directive into its national law.[265] Article L 132-1 of the consumer code contains a variation of the general rule of the Directive. French law prohibits "abusive clauses" used in consumer contracts that cause a significant imbalance between the rights and obligations of the contract parties. The French implementation does not explicitly refer to good faith. The balance of the contract remains valid if it survives the excise of the abusive terms. Article L 132-1 also codifies the Annex of the Directive including the presumptive invalidity of any standardized term that limits the consumer's access to the legal system to pursue a remedy against the seller. Complying with the mandate to enforce the Directive, Article L 132-2 creates the Commission of Unfair Terms within the Ministry of Consumer Protection. That public institution is responsible for the review of standard form contracts used in consumer transactions and the identification of potentially abusive clauses. Article R 132-3 identifies the composition of the Commission and identifies the public authorities having the power to enforce the Commission's recommendations.

209. The Principles of European Contract Law, published in 1999, are the product of the self-appointed Commission on European Contract Law.[266] The ultimate ambition of the PECL is incorporation into a future European Civil Code that would contain the law of contract, tort and other obligations. The PECL is drafted in broad principles that do not go into details. Rather, like the CISG, the Principles "should be interpreted and developed in accordance with their purposes," and that "issues within the scope of the Principles but not expressly settled by them are as far as possible to be settled in accordance with the ideas underlying the Principles."[267] Consequently, the salient features of the PECL are critical to their interpretation and development.

210. In his article, "The Structure and Salient Features of the Principles of European Contract Law", Professor Lando, the principal architect of the PECL, sets forth eight salient features. Three are germane: (1) pacta sunt servanda, (2) good faith and fair dealing, and (3) unfair contract terms. The foundation of the PECL is the mandate: "you shall keep your bargain." Consistent with that moral imperative, the preferred remedy for breach is specific performance, though the PECL recognizes exceptions for changed circumstances and waste. The first salient feature hence sets the PECL firmly on the foundation of freedom of contract and mutual exchange of promise. To dispel any doubt that contract is a matter of morality, Professor Lando stresses that good faith and fair dealing derive from Kant's categorical imperative: "Your behavior shall be governed by such principles as if you were a legislator in a society of reasonable beings obeying common laws." Therefore, good faith is the king of the PECL. "It supplements the provisions of the Principles and it may take precedence over other Principles when strict adherence to them would lead to a manifestly unjust result."[268] The unfair contract term provision closely follows the EU Directive, but the PECL also contains provisions on "procedural unfairness" to help "a disadvantaged party." Because the PECL apply to consumers and businesses alike, the unfair contract term provision applies to any non-negotiated term. "Even the big and powerful enterprise is protected. Experience shows that such a party may also inadvertently subject itself to unfair terms."[269] With respect to standardized terms, the PECL is not innovative. However, the strong infusion of morality would give courts expansive powers to strike standardized terms not only that run afoul of specific Principles but also that produce a manifestly unjust result, no matter what the Principles say.

211. Larry Bates, in the Administrative Regulation of Terms in Form Contracts: A Comparative Analysis of Consumer Protection, provides an overview of the European model and argues for the adoption of a regulatory approach in the United States to be implemented by the Federal Trade Commission.[270] His argument follows from his criticism of litigation-based techniques used in the United States. He notes accurately, "Because the protection realized by a consumer in litigation-based programs works to the benefit of the individual consumer only, litigation is an inefficient means by which to make protection generally available." The previously discussed case of Gonzales v. A-1 Storage bears out his argument. A-1 Storage likely had used the standard form contract challenged by Ms. Gonzales in the usual course of its business prior to the time it was deemed unconscionable as a matter of law. Hence, customers who sustained damage to their property, but did not litigate the contract terms, probably abided by the contract and swallowed their losses. In addition, A-1 Storage may continue to use the standardized form in future dealings. Other firms in the same industry may use contracts containing the term removed in the private litigation. The net effect is random protection against unfair terms based on a party's decision to go to court.

212. The "after the fact" application of litigation-based techniques provides additional support for his argument. Limitations on the "freedom of contract" principle, being vague and unsusceptible to definition, invite lawyers to write, and businesses to use, standardized terms that test the limits of the free ordering of private affairs, because, as Meyerson has shown, there are no market incentives to restrain firms from shifting all risk to customers. The market hence may be flooded with standardized terms running afoul of the law and controlling the outcome of any particular dispute, unless the customer files a lawsuit and obtains a judgment against the firm. The EU Directive, in theory though not in practice, rejects this approach appointing an ombudsman authorized to review widely used standard forms and to file suit based on their violation of statutory regulation without waiting for any particular person to suffer an injury. In Bates' words, "the most important protection provided for consumers is the collective action procedure through which consumer organizations can act to compel the users of form contracts which contain terms illegal under the Act, to stop using the offensive terms."

213. However, the European model raises the question of whether the cure is worse than the disease. In the form of the PECL, the European approach is objectionable. The moral tone and conviction are inappropriate to a scientific solution to contract problems. The PECL is two steps backward, relying on metaphysics to regulate commercial affairs. In the form of the EU Directive, the European approach is an acknowledged failure, leading to the obvious question: why import a broken system. Nevertheless, the European experience has value for American jurisprudence as to its list of suspect terms. The specific identification of terms attempts to define indirectly vague expressions like "unfair." But it does not go far enough. Second, the European approach of authorizing public authorities to bring actions against sellers collectively could be instituted within the Federal Trade Commission or organized consumer groups.[271] However, wide scale monitoring of this sort would entail a change of American legal culture. That approach also assumes that officials bringing the actions and courts deciding cases are qualified to assess the economic effects of their actions on markets. That assumption is highly debatable. In addition, the European solution: raise prices, is an oversimplified solution to the problem of standardized terms. It fails to distinguish between legitimate terms benefiting the market and allowing for developing business models from abusive terms tantamount to fraud or deceit.

     Chapter Nine - Back to the Future

214. The law of contract treats the standard form contract mainly as an aberration to be handled by judicial doctrines on a "case by case" basis. Although this assumption is contrary to fact, the judicial doctrines have prevented the enforcement of egregious standardized terms. In spite of incessant scholarly attacks on the citadel of contract, the law of contract has survived the problems posed by standardized terms for more than 100 years, and that law has remarkably withstood challenges to its legitimacy. However, the foundations of contract law now stand on shakier ground. Why after a century of repeated but failed attacks does the law of contract taught in school, codified in the law and reported in decisions appear to be falling apart? The destabilization of contract law appears to be the confluence of: the end user license agreement, the Internet, and the recent failure of Uniform Commercial Code revision.[272]

215. The business model of structuring transactions based on payment first and terms later, when applied to software licensing, has generated substantial debate in the scholarly literature and in the courts about its legality. The term "mass market contract" has replaced the term "standard form contract" and its pejorative counterpart "contract of adhesion." Even though Prausnitz used the term "mass market contract" in 1937, it was not until the Uniform Computer Information Transactions Act (UCITA) promulgated in 1999, and the sole survivor of the UCC revision process related to licenses, that the term became common in legal vocabulary.[273] The term now has captured the attention of legal scholars and jurists and is used to imply something innovative in the practice of selling products to multiple buyers on fixed conditions in large markets. Internet commerce and software licensing has led to amnesia about well-established legal authority.[274]

216. With few exceptions, U.S. courts and scholars have gone back to the future. For example, a renowned scholar states, "UCITA for the first time validates post-payment disclosure of terms - "pay now, terms later" - under what is know (sic) as the "rolling contract" theory of contract formation."[275] Another scholar states, "A particular issue involving standard form contracts has recently presented itself. In the computer sales industry, where most transactions occur through telephone orders between the consumer and a sales representative, a standard form agreement is made available by the seller only after the consumer has paid for the purchase and the seller has shipped the goods."[276] Both observations ignore legal history, earlier case law and scholarly literature, [277] not to mention the 1991 United States Supreme Court decision in Carnival Cruise Lines v. Shute, a "positive" legal principle whether you like it or not.[278]

217. An analysis of four cases demonstrates the controversy: Step-Saver Data Sys., Inc. v. Wyse Techn.; Klocek v. Gateway, Inc.; Specht v. Netscape, and I.Lan Systems Inc. v. Netscout Service Level Corp. The decision in ProCD represents the "business as usual approach" to end user license agreements anchored within the institution of contract. The analysis of the case is not repeated here. By contrast, Step-Saver, Klocek and Specht take the opposite view, treating the EULA as a sinister and predatory novelty in the law of contract. The cases demonstrate the policy conflict surrounding the validity of standardized terms. Recent developments in case law indicate that ProCD is gaining momentum but the ultimately outcome is anyone's guess.

     Four Case Examples

     1. Step-Saver Data Systems, Inc. v. Wyse Techn. and The Software Link, Inc.[279]

218. In 1984, Step-Saver obtained a free copy of a program called "Multilink" from The Software Link (TSL) company. "Multilink" was an operating system for multi-user systems. Step-Saver was building a system composed of a single server and dumb terminals to sell to clients mainly lawyers and doctors. Step-Saver's multi-user system consisted of an IBM server, Wyse terminals and the TSL operating system software. In 1986, Step-Saver obtained copies of an upgraded TSL operating system called "Multilink Advanced" and tested that software. Based on these tests, Step-Saver decided to build its multi-user system based on the TSL operating system. From 1986 to 1987, Step-Saver purchased and resold 142 copies of "Multilink."

219. Purchases took place as follows. Step-Saver telephoned TSL and placed its order. Step-Saver then sent a purchase order containing the price, quantity, item description, shipping and payment terms to TSL. TSL shipped the order and sent an invoice containing the same terms. Step-Saver made several purchases from TSL. Step-Saver claimed that TSL's sales representatives stated on the telephone that "Multilink" was compatible with most DOS applications. Neither the purchase order nor the invoice contained other contractual terms.

220. The TSL operating system software, as had the earlier trial software, came in a box with a license agreement. The license agreement contained terms: (1) disclaiming all express and implied warranties, (2) providing for an integration clause that the license expressed the final agreement of the parties, and (3) stating that opening the box, using the software and failing to return it within 15 days, constituted acceptance of the license agreement. The license agreement also prohibited reselling the software.

221. Step-Saver sold 142 multi-user systems to its customers. The systems did not work and customers began to complain. Step-Saver tried to figure out the problem, but also asked TSL and Wyse for technical help. The three companies failed to solve the problems with Step-Saver's system and each blamed the other for the problem. Twelve Step-Saver customers sued Step-Saver.

222. Step-Saver sued Wyse and TSL in federal district court for the Eastern District of Pennsylvania seeking a declaratory judgment for indemnification of costs incurred in defending law suits against its customers. The district court dismissed that action. Subsequently, Step-Saver filed a second complaint against TSL and Wyse alleging breach of warranties and intentional misrepresentations by TSL. The district court directed a verdict in favor of TSL on the warranty and intentional misrepresentation claims and dismissed TSL from the suit. The jury returned a verdict for Wyse on the warranty claims. Step-Saver appealed.

223. The Third Circuit treated the box top licenses of the TSL software package under Uniform Commercial Code §2-207 governing the battle of the forms.[280] Here, the form "battled over" was the box top license agreement, the third form in the sequence of writings between the parties. UCC §2-207 provides in relevant part:

     (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

     (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
     (a) the offer expressly limits acceptance to the terms of the offer;
     (b) they materially alter it; or
     (c) notification of objection to them has already been given or is ... given within a reasonable time after notice of them is received.

224. The Third Circuit found that the additional terms contained in the license agreement materially altered the contract and therefore did not become part of the contract between TSL and Step-Saver. Rather, the contract consisted of the purchase order and invoice and express oral statements made by TSL representatives on the telephone. The Third Circuit stated, "In the absence of a party's express assent to the additional or different terms of the writing, section 2-207 provides a default rule that the parties intended, as the terms of their agreement, those terms to which both parties have agreed along with any terms implied by the provision of the UCC." Since the box top license agreement was not part of the contract, TSL never disclaimed express or implied warranties.

225. The conduct of the parties supported the court's §2-207 analysis. Step-Saver's president repeatedly objected to the terms of the box top license agreement. Step-Saver twice refused to sign agreements that would have formalized the license agreement terms. TSL, however, continued to do business with Step-Saver knowing that the latter had rejected the box top license terms. TSL, in the court's view, was unwilling to forego the transaction if the additional language was not included in the contract. TSL also admitted that one of the terms in the license agreement - the sale prohibition - was not enforceable because the parties agreed otherwise, thereby lending support to the claim that the license agreement did not apply to Step-Saver. The court did not attribute significant weight to the act of opening the boxes and failing to return the product under the circumstances. Consequently, Step-Saver does not stand for the proposition that a party cannot be bound by "box-top" terms through the act of using the product or opening the box.

     2. Klocek v. Gateway, Inc.[281]

226. Nine years later, and subsequent to ProCD, the federal district court of Kansas reached a result identical to that of Step-Saver in a case predicted on entirely different facts, thereby restating and extending the Step-Saver rule. Klocek, a Missouri resident, bought a Gateway computer. Inside the computer box, Gateway included a copy of its Standard Terms and Conditions Agreement (STCA). At the top of the first page, the STCA stated, "NOTE TO CONSUMERS." The first page also contained the following language. "This document contains Gateway 2000's Standard Terms and Conditions. By keeping your Gateway 2000 computer system beyond five (5) days after the date of delivery, you accept these terms and conditions."

227. The STCA contained an arbitration clause in paragraph 10 providing that any dispute or controversy arising out of or related to the agreement or its interpretation would be settled exclusively and finally by arbitration. Klocek ignored this arbitration clause and filed a complaint, individually, and on behalf of a similarly situated class of consumers, against Gateway and Hewlett Packard in the U.S. District Court for the District of Kansas. The complaint contained claims of fraud, breach of contract and breach of warranty. Klocek, a lawyer, maintained that Gateway failed to provide promised technical support and that his Gateway machine was incompatible with his Hewlett Packard printer and his Internet access. Gateway filed a denial and a motion to dismiss, claiming that Klocek was required to arbitrate his complaint under Gateway's Standard Terms and Conditions Agreement.[282] The district court denied Gateway's motion to dismiss finding that the arbitration clause was unenforceable because not part of the contract of sale.[283]

228. The District Court compared the decisions in Step-Saver Data Sys., Inc. v. Wyse Techn., [284] Arizona Retail Sys., Inc. v. Software Link, Inc.,[285] and U.S. Surgical Corp. v. Orris, Inc.,[286] where the courts refused to enforce the "shrink wrap" terms in license agreements with the decisions in Hill v. Gateway 2000, Inc.,[287] ProCD, Inc. v. Zeidenberg,[288] and Mortenson Co., Inc. v. Timberline Software Corp.,[289] where the courts enforced the terms.

229. The court found that the contract of sale was formed when Klocek placed his order for the computer and Gateway agreed to send it prior to the delivery of the license terms.[290] Because Gateway did not inform Klocek of the license agreement when he ordered the computer system, the license agreement a fortiori was not part of the parties' agreement, but constituted unenforceable, additional terms under UCC §2-207. Klocek's failure to return the Gateway computer system did not amount to his express consent to terms, since Gateway could not unilaterally set this condition after the fact of sale. The court rejected the rationale of ProCD, stating Judge Easterbrook wrongly assumed that ProCD was the offeror in the sales transaction. Rather, the court found that Klocek was the offeror and Gateway the offeree. Consequently, ProCD could not specify the method of accepting its sales terms since it was not the master of any offer; it was the recipient of an offer.[291] However, unlike Step-Saver, Klocek did not repeatedly object to the standardized term, as did Step-Saver. Hence, Step-Saver fails to provide direct support for Klocek, a distinction the district court ignored.

230. Since Gateway provided "no evidence that at the time of the sales transaction, it informed plaintiff that the transaction was conditioned on plaintiff's acceptance of the Standard Terms," and since "the act of keeping the computer past five days was not sufficient to demonstrate that plaintiff expressly agreed to the Standard terms," Klocek did not surrender his right of jury trial.

     3. Specht v. Netscape Communications Corp.[292]

231. In Specht, several Internet users, excepting Specht, had downloaded "SmartDownload" from Netscape's Web site. SmartDownload was freeware that improved the process of downloading software from the Internet. The plaintiffs obtained copies of "SmartDownload" by visiting a page on Netscape's Web site pertaining to the downloading of software. That page contained a tinted box labeled "download" and a reference to the fact that downloading and use of the software constituted acceptance of Netscape's software license agreement. The user did not have to read the license agreement before downloading the software, but had notice of the license's existence and an opportunity to review the license by visiting a linked Web page. The license agreement contained a mandatory arbitration clause governing disputes between the parties.

232. The plaintiffs filed suit against Netscape in the New York District Court alleging violation of the federal Electronic Communications Privacy Act and the federal computer Fraud and Abuse Act, claiming that the software enabled Netscape to track their Internet surfing activities. Netscape, relying upon the license agreement, moved to force arbitration of the dispute and stay the court proceedings. The place of arbitration was California and the clause made the loser pay the costs of arbitration.

233. Judge Hellerstein framed the issue as: (1) did the parties enter into a binding contract, and (2) if so, did the arbitration clause apply to the dispute? To determine the first question the court resorted to ancient history using the following standard, "Promises become binding when there is a meeting of the minds and consideration is exchanged. So it was at the King's Bench in common law England; so it was through more than two centuries of jurisprudence in this country; and so it is today."[293] Judge Hellerstein found that the parties did not enter into a binding contract because the plaintiffs were not forced to assent to the license agreement, such as by clicking the mouse over an icon, prior to downloading and using the software. He also found that the reference to the license agreement was too obscure, the electronic equivalent of buried fine print. He therefore concluded that the parties were not bound by the terms of the license agreement because there was no meeting of the minds. The court stated, "Netscape's failure to require users of SmartDownload to indicate assent to its license as a precondition to downloading and using its software is fatal to its argument that a contract has been formed."[294] Consequently, Netscape was ordered to appear in New York to defend the lawsuit against it. Plaintiffs were spared the requirement of submitting to arbitration in California and risking paying Netscape's legal fees.

234. The United States Court of Appeals for the Second Circuit affirmed the district court judgment in Specht v. Netscape Communications Corp. [295] However, the Second Circuit's reasoning as to whether the Internet users were bound by the license terms was decided within the artificial framework of consent. The major difference between downloading Netscape Communicator versus SmartDownload was posited on the fact that Communicator forced users to consent to terms whereas SmartDownload referred users to documents published on separate Web pages, similar to airline tickets that refer purchasers to documents retained at airline offices. This is a remarkable exercise in nonsense. Had Netscape coerced users into clicking "I agree" to the terms of SmartDownload, users neither would have read the terms, nor would they have refused the license had they read them. Users wanted the product. The Second Circuit distinguished ProCD and Mortensen.

     4. I.Lan Systems Inc. v. Netscout Service Level Corp.[296]

235. The decision in I.Lan is important because it was decided subsequent to Klocek and Specht, rejected those views and adopted the ProCD rationale. I.LAN helped companies monitor their networks. Netscout (hereafter, and formerly known as, Nextpoint) sold software that monitored networks. In 1998, the parties entered into a Value Added Reseller (VAR) agreement under which i.Lan agreed to resell Nextpoint's software to customers. Each software package also contained a click wrap license requiring the user to click "I agree" to its terms before the software could be installed on the computer. The 1998 agreement contained warranty disclaimers and limitations of liability, virtually identical to those contained in the click wrap agreements, and incorporated the click wrap licenses by reference.

236. In 1999, i.Lan purchased Nextpoint software for $85,231.42 evidenced by a purchase order. I.Lan claimed that it purchased the unlimited right to Nextpoint's software including perpetual upgrades and support whereby it could rent rather than sell Nextpoint's software to its customers. Nextpoint disagreed with i.Lan's interpretation of the 1999 transaction. In addition, Nextpoint noted that the 1998 VAR agreement and its license agreements limited its liability to the license fee paid for the licensed product.

237. I.Lan filed a complaint in the federal district court based mainly on breach of contract and violations of Massachusetts General Laws Chapter 93A. The District Court denied i.Lan's motion for summary judgment seeking specific performance of the 1999 transaction, specifically perpetual upgrades and unlimited support. The District Court granted Nextpoint's motion for summary judgment limiting its liability to $85,231.42, were i.Lan to prevail on claims other than its action for specific performance.

238. There were three agreements in this case: (1) the 1998 VAR, the 1999 purchase order, and the click wrap license agreements. The click wrap license agreement stated that it did not affect existing or subsequent written agreements or purchase orders. Rather than finding that the click wrap license agreements did not legally exist if other written contracts already existed, the Court found that the terms of the click wrap license agreements were meant to fill the gaps of the purchase order and VAR agreement.

239. According to the Court, Article 2 of the Uniform Commercial Code was the best law to govern click wrap licenses, even though technically Article 2 does not govern software licenses. The Court observed that the latter exist in a legislative void. However, because software licenses are entered into every day, and business persons reasonably expect that some law will govern them, for the time being, Article 2's familiar provisions better fulfill the expectations of the parties than the common law.

240. The Court rejected i.Lan's argument for specific performance because under 2- 217 the goods must be unique to justify that remedy. The software in this case was not unique. Nextpoint's software was one of several competing software packages in the market. Hence, the court found i.Lan could purchase another product in the market and re-configure its systems to use it. The Court found that the click wrap license agreements did not foreclose an equitable remedy.

241. To determine whether the click wrap license agreement was enforceable under Article 2, the Court looked to two provisions: 2-204 (contract formation) and 2-217 (additional terms/battle of the forms). The license was enforceable under either provision. I.Lan explicitly agreed to the terms of the license agreement when it clicked on the box stating, "I agree." The court embraced the theory of ProCD holding that terms inside a box of software bind a consumer who uses the software after having had an opportunity to thread the terms and reject them.[297] "If ProCD was correct to enforce a shrink wrap license agreement, where any assent is implicit, it must also be correct to enforce a click wrap license agreement, where the assent is explicit." "Money now, terms later" is a practical way to form contracts and Article 1 of the UCC provides that its provisions shall be interpreted to reflect custom, usage and agreement of the parties.

242. The Court further found that the license agreement would be enforceable under 2- 207 because it did not materially alter the terms of the 1998 VAR agreement. That agreement, like the click wrap agreements, limited liability to the price paid for the licensed product. "It would be absurd to allow the silence of the [1999 purchase order] to destroy the detailed private ordering created by the 1998 VAR and click wrap license agreements." The Court found that the "only sensible interpretation of the 1999 purchase order is that it did not affect the limitations of liability found in the parties' prior or subsequent agreements."

     Conclusion

243. The Klocek decision rests heavily upon the decision and reasoning of Step-Saver.[298] However, the facts of Step-Saver are materially different from the facts of Klocek. Gateway and Klocek did not have an ongoing business relationship. Gateway offered its products to any buyer having the money to purchase them. Gateway and Klocek did not know each other and transfer contracts back and forth, thus creating a question of which document contained the full agreement of the parties. Klocek did not tell Gateway that he objected to the terms of the STCA. In fact, by his silence and failure to return the product, he accepted the terms of the STCA according to Gateway's "clear as day" written contract terms. The Klocek transaction was a faceless, one-time retail transaction that lacks any similarity to the commercial relationship between the Step-Saver parties where Step- Saver said "no" to the "box top" license directly to TSL.

244. Since the facts of Step-Saver and the facts of Klocek are sufficiently different to make the holding and reasoning of Step-Saver inapposite to the problem in Klocek, the Klocek opinion stands on shaky ground. Pulling the rule of law out of Step-Saver and applying it to Klocek is an unjustified extension of the Step-Saver holding. Likewise faulty is the District Court's reliance on Arizona Retail Systems, Inc. v. Software Link, Inc.[299] The only other case, the Klocek court cited in support of its position, U.S. Surgical Corp. v. Orris, Inc., a trademark/patent infringement case involving an antitrust counterclaim, consists of a one-page memorandum stating, without any explanation, "the labels included on plaintiff's instruments did not create a valid restriction on the implied license to use the instruments."[300] Orris cannot be cited for the proposition that shrink wrap licenses, not specifically consented to, are unenforceable contracts.

245. The practical consequences of Klocek also are troubling. Taken to its logical conclusion, Klocek would invalidate practically every standard form contract used in commerce today. In most transactions - the scholars tell us more than 90% of all transactions - the buyer is not alerted to the terms of the standard form contract and does not give his explicit consent to them prior to buying the product. For example, are insurance contracts to be unenforceable under contract law because the sales person did not comb through every single provision of the policy with the insured? Are terms set on airline tickets unenforceable because the airline sales representative did not go through a litany of disclosure prior to taking payment from the customer?

246. These rhetorical questions emphasize a major point: contemporary commerce does not and cannot operate under the contract model of bargaining embodied in the common law and the Uniform Commercial Code. Judge Easterbrook got it right when he said "On Zeidenberg's arguments ... if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age."[301] In addition, the downside of enforcing the STCA is insignificant. Klocek, a lawyer, had the right to return the computer system for a full refund had he exercised that right within five days of delivery. That was not an undue burden placed on him. By failing to enforce the STCA, the District Court has effectively rewarded his deliberate ignorance or his sly cunning. Finally, determining the legal effect of license agreements under UCC §2-207 is tautological. Since the original contract usually consists of a purchase order and invoice that do not speak to the legal rules governing the parties' relationship, the license agreement -- the subsequent embattled form -- materially alters the terms of the original contract and is unenforceable. The legal methodology pre-determines the outcome of the dispute.

247. Similarly, in Specht, Judge Hellerstein's notion of assent embodies an ideal, without any real historical counterpart, where equal parties through a give-and-take process reach agreement on each and every term of their contract. The contract principles of the King's bench have no place in twenty-first century mass market transactions. Judge Hellerstein's starting point of analysis is regressive and disregards commercial realities that the law of contract is intended to reflect. The Appellate decision in Specht likewise fails to break through the walls of contract law and turned on distinctions between the placement of text on separate Web pages and the technology of coercing users to agree to terms prior to installation of the product.

248. I.Lan is an important step in the process of looking to custom in the trade to determine the enforceability of click wrap license agreements. The court rejected the Step-Saver and Klocek decisions that run contrary to the way everyone does business and buys products. Rather, the i.Lan Court accepted the practical theory of ProCD and made the important distinction between the validity of a contract based on how it is formed and the enforceability of any of its terms, a distinction overlooked by courts that persist in using outmoded contract law to analyze standard form contracts.

     Chapter Ten - Reinventing Contract

249. A standardized contract is nothing more than a commodity. A commodity is a product commonly available, easily produced and substituted, with little and declining pricing power. Some standardized contracts are products as such. For example, end user license agreements and insurance contracts lack physical attributes; they are the product. Credit agreements closely approximate the contract as pure commodity. Where hard goods or services are exchanged in the market, the standard contract accompanying them constitutes part of the product. Since standardized terms directly influence the price of products, they are indistinguishable from hard components of the product, though intangible. In the ordinary market, the commodity of contract is bought and sold like any product. The reinvented law of contract must stand on this premise.

250. The consequences that follow are: (1) the deletion of formation requirements based on offer, acceptance and consideration, (2) the elimination of consent as the basis for making contracts effective, (3) the collapse of unnecessary legal categories, (4) using an image of a buyer lying somewhere between the polarities of risk aversion and risk taking, (5) saving useful remnants of existing law, and (6) the creation of content control provisions for select terms deemed necessary for specific regulation. These are normative premises insusceptible of truth verification. But, they do not float in thin air. They rest upon inferences drawn from the history, empirical data, and legal development related to standardized transactions. The criticism that law, reinvented or otherwise, will not stop the production of "unfair" standardized terms does not constitute a fault in the theory. Law can never prevent misconduct, but merely impose sanctions for breaking it.

     Formation requirements

251. The entire formation model of contract law must be thrown out for standardized transactions. Formal requirements of offer and acceptance do not correspond to the reality of how the commodity of contract is transferred in the market. These formalities, often rigid and elaborate constructs, are irrelevant to the existence of standardized contracts. The law no more gives contract, as properly understood, its existence any more than its gives a container of automobiles its existence. If there is an exchange of product against payment, the buyer gets the contract, whether the commodity is the contract or whether the commodity contains the contract as a component part. The buyer's understanding of the "terms" of the contract also is irrelevant to the existence of the contract. Buyers do not understand the "inner workings" or "chemical composition" of most commodities they buy. Yet, the legal question of whether or not a sale of a computer or bottle of wine has taken place, and is enforceable, does not turn on whether the buyer understood the role of circuits in the personal computer or the process of fermentation in the production of wine. It follows therefore that standard form contracts come into existence and are effective upon the exchange of money (cash or credit) for products.

252. In place of formal requirements, one simple rule stands: a standard form contract becomes effective when the sale occurs and the seller either transfers the contract to the buyer or makes the contract accessible to the buyer. The definition is not narrow because it refers to "sale." Following the premise of collapsing categories, sale covers any disposition of a product, as explained later. Irrelevant is the timing of the delivery of the contract and its content, whether that content is a limitation of warranty or license terms. Commodities are shipped in parts, and the institution of contract historically has covered different species of contracts. If buyers do not read standardized terms, and if they did, nevertheless would not understand them, then it makes no sense to predicate the effectiveness of contracts on the ground that the terms were available to the consumer prior to purchase.[302] Making contracts effective upon the transfer of the product thus fits market behavior and creates symmetry between that market and the law. If the seller does not include contract terms with the product, then the background law supplies them. If the seller integrates contract terms into the product, the contract is effective. Whether the contract is enforceable raises a separate question, governed by content control provisions.

     Consent as the basis for enforcing standardized terms

253. No idea is more insipid than the one of consent in the context of standardized terms. From the 1902 decision in Fivey to the 2002 decision in I.lan, there is not one iota of consent on the buyer's part to the terms in the contract. Mr. Fivey signed the document, and the company -- I.lan -- clicked the mouse pointer over the "I agree" button. But the bottom line is that they did not consent to any terms. Absent in each case was thoughtful and deliberate decision after weighing costs and benefits. In other words, the very core of consent was missing. The parties' consent to and knowledge of standardized terms is irrelevant to the existence and effectiveness of standard form contracts. No further comment is needed.

     Unnecessary legal categories

254. The law of contract resembles "Art Nouveau." However, while ornate design is appropriate to architecture, it is inappropriate to a field that loosely may be called a social science. Reinventing contract for standardized terms requires a departure from unnecessary complexity. If Newton explained the law of motion governing large bodies in three laws, and Einstein equated matter with energy in a single formula, it is not beyond the reach of legal caretakers to develop law for standardized contracts based upon minimum necessary principles. The law has created so many classifications that it would be impossible to address each one. A few examples suffice.

255. Contract law now distinguishes between consumers and professionals with respect to standardized terms. The distinction is unjustified and unnecessary. The law should treat consumer and commercial standardized agreements under the same set of rules when the underlying dynamic of the transaction is identical: the contract is the function of exchange and not the product of bargain. The empirical data and the case law have shown that the firm behaves like the consumer when it engages in standardized transactions with other firms. A commercial party or legal entity buying products on the open market does not exercise any more bargaining power with respect to secondary contract terms than does a consumer. In other words, the consumer and commercial transactions are functionally equivalent for determining effective contract terms. So long as parties do business with sellers in open markets based on standardized terms, then logic requires their identical treatment.

256. The variety of legal terms to denote nuances, arguably important in other legal departments, have no place in standardized transactions as to the effectiveness of contracts. A logical starting point is defining terms used in the market that describe the dynamics of the exchange: "buyer," "seller," "product," "open market" and "standard form contract." Let us start with the term "product," used widely in the market but not found in the dogmatic legal texts. For example, Article 2 of the UCC applies to goods, but not to services, information, or extensions of credit. The CISG is equally myopic applying only to goods, with the exception of assembly provided the service component is not the preponderate part of the exchange. In standardized transactions, these distinctions are inapposite. The object of exchange is not germane to the question of the validity of any standardized term.[303] The term "product" covering goods, services, licenses and credit is the solution. The rationale for replacing the myriad terms for identifying the object of exchange with the single term "product" recognizes that the issue of a contract's enforceability transcends differences in what is exchanged on the market and justifies the treatment of an exchange based on standardized terms.

257. Equally central to simplification is defining broadly the terms "buyer," "open market" and "sale." For reasons already noted, the term "buyer" should apply to consumers, merchants and legal entities. Likewise, the term "seller" covers any person, regularly engaged in the business of selling products that sets or adopts the record of uniform legal terms governing the relationship between itself and the buyer, that is, the standard form contract. Normally, the manufacturer is the party that makes the uniform record of legal terms and that enters into the contract relationship with the buyer, but the definition includes other parties in the chain of distribution if these parties adopt the standardized terms.[304]

258. Equally unnecessary are distinctions now made mainly for tax, priority and copyright reasons among the terms sale, lease, security interest and license. To reduce divisions further, the term "sale" should cover sale, lease, license or other dispositions of a product in an open market, since the inventiveness of the firm and its counsel cannot be underestimated. The broad definition of "sale" establishes that the underlying dynamic of the exchange, not the "form" of the transaction, triggers application of the rules governing standardized terms.[305] Lastly, a new term must be introduced to the vocabulary of the dogma: open market. The term "open market" means the public sale of a product to a large population of persons having the money to buy it. An open market may consist of a "class of persons" because some sellers do not offer their products to every potential buyer. For example, car lease companies cannot enter into contracts with anyone; by law, the buyer must have a license and have attained a certain age. Similarly, wholesalers offer to sell only to business entities. Limitations of this sort do not change the open market nature of the sale. Additionally, the market itself need not be a physical place like a retail store. It can be a mail order system, an Internet market or the like.

259. This foray into the "Art Nouveau" of contract law is merely a beginning. The analysis is not intended to be comprehensive but illustrative of the problem of multiplying categories in response to special interests, demanding an exception to a general rule, or to the work of legal scriveners, solving problems discrete to their field by the invention or refinement of legal classification. The edifice of nuance is not needed to identify a standardized term and to determine its effectiveness.

     Image of buyer and firm

260. Implied in every law are policy assumptions. The reinvented law of standardized contracts is no exception. The implied assumptions are largely dependent upon the image of the buyer and that of the firm since those assumptions determine the level of protection the law ought to afford to the buyer and the degree of autonomy the law ought to provide the firm. At the outset, the image of the firm underlying standard form contract law is at odds with economics. In monopolistic competition, neither seller's nor buyer's conduct affects price. The demand curve is horizontal.[306] In pure monopoly, the dominant firm, at least in some industries, may be unable to fix the price because the incumbent must guard against new entrants. The price therefore is indirectly determined by competition. In addition, firms' ability to maximize returns is limited by marginal revenue, marginal cost and the law of diminishing returns. The combined effect of these factors, coupled with the financial risks involved in establishing a firm and the high failure rate, produces an image of microeconomics that distinctly differs from the underlying assumption of standard form contract law: universal firm predatory behavior.[307] Moreover, any firm that wants to conduct more than one-off sales must develop the trust of customers by building a good reputation. The firm's behavior is shaped partially by the fact that customers who are ripped off will not make repeat purchases. By contrast, buyers generally are depicted as witless victims.

261. The level of legal protection for buyers fluctuates between two extremes: the insured transaction and "caveat emptor." The insurance proposal has two defects. First, it presumes a debatable image of buyers as persons with "eyes wide shut." Under this view, the buyer is ignorant of the cost of contract terms by virtue of disinterest, limited knowledge or poverty. The insurance proposal would require sellers to charge higher prices and eliminate risk/price terms from their contracts or to absorb the cost of the risk and reduce their profits. The question never asked is what about exclusions? May firms use standardized terms in sales contracts to set the equivalent of exclusions in insurance policy agreements? This alternative ought to have, but has not, provoked study due to its effects upon behavior and the market. The exact effect of mandating insurance is unknown on the market at large. The effect depends, to an extent, on the elasticity of demand for the product. Therefore, it is likely to have an uneven economic impact upon firms and buyers.

262. The insurance proposal also fails to distinguish among the range of terms on the standardized contract spectrum. Some terms clearly are in the visible range such as price, quantity and identity of the product. Although buyers neither negotiate nor bargain for these terms, buyers know about them. Indeed, choices of this sort constitute the principal activity of purchasers in the market place. There is no reason to disturb voluntary choice by subjecting it to judicial or administrative oversight.

263. In addition, from the perspective of setting legal incentives to reduce cost, the insurance scheme is counter-productive. It eliminates the moral hazard. The classic example is that of the person dining in a fine restaurant who suddenly remembers that his luxury automobile is unlocked on the street. Should the diner disturb his fine meal to get up from the table to lock his automobile? If fully insured against theft, the probable answer is, even taking the deductible into consideration: the dinner is uninterrupted. The consequences of certain decisions should visit the decision-maker alone and not the customer base. Prices for products already reflect the insurance costs of theft, fraud and returns.[308] To add additional insurance costs against price/risk terms deprives the risk-taking buyer the option to buy a product at a lower price and assume the risk that an unlikely event leading to a substantial loss will occur. In addition, buyers often create losses by conduct or bad choice, for example, failure to pay or misuse of the product, or entering into a contract exceeding ability to pay. Passing the cost of these losses to the customer base is questionable normatively and economically.

264. However, the most objectionable aspect of the insurance proposal is its portrait of the buyer: incompetent and dependent upon institutional authority. Evidence shows buyers are not as incompetent as legislation and case law often assume.[309] Buyers' tastes change and wipe out firms. This power should not be underestimated. The insurance proposal reduces incentives for buyers to exercise their decision-making powers to drive bad products, and hence terms, from the market, since products consist of terms as well as functions. The image of buyers underlying this view is descriptively inaccurate. To insulate buyers from all risk is to create a somnambulant population. There are equally valid policy reasons - the moral hazard-- for making buyers in the market alert, careful and inquisitive. Customer choice remains a powerful force in the market as demonstrated by bargaining power exercised by customers in re-negotiating purchase price options at the end of automobile leases and the demise of new products failing to stimulate demand.[310]

265. Importantly, firms have legitimate business reasons for holding down costs through allocating certain risks to buyers.[311] General economic developments demonstrate the trend of producing better products at cheaper prices. The information economy is illustrative. Electronic commerce has achieved dramatic cost reductions in distributing business products. Examples include music, films, magazines, news, books and sport.[312] Information is expensive to assemble but cheap to distribute. "The fixed cost of creating a useable product is large, the marginal cost of distributing it is tiny. This cost structure implies vast economies of scale in production."[313] Similar cost reductions for better products in other economic sectors are the result of competition and technological development. Proposals for regulating or prohibiting standardized terms acknowledge that, if adopted, sellers would increase the prices of products to spread the risk across the customer base.[314]

266. Equally objectionable, in the form of a blanket policy, is the "buyer beware" approach. It is inconsistent with the premise that standardized terms are purchased as commodities. With few exceptions, such as high price items, buyers do not examine the contract component of the product. Even if terms are examined, most buyers cannot understand all terms, as the BMW early termination clause has demonstrated. The approach also is unworkable due to the number of commodities buyers consume and the mass marketing and distribution of products. Because buyers are "price conscious," legal professionals drafting standardized contracts for firms shift risk to buyers. The result is objectionable: the practice violates the minimum baseline of fair exchange. Hence, the goal is to find an image of the buyer lying somewhere between Nietzsche's mythical risk taker and Marx's proletariat victim, or in drier terms, between risk aversion and risk taking.

     Existing law

267. The theoretical basis for controlling standardized terms follows from treating them mainly as commodities. The distinction may be drawn between primary and secondary terms. Primary terms are agreed-to terms such as the price, description, quantity and method of shipment.[315] These terms are governed under traditional contract law. Secondary terms are not agreed-to terms such as disclaimers of warranty, limitations of liability and arbitration clauses governed by special rules. Options, such as those found in insurance contracts, are primary terms even though not negotiated provided they affect the price of the product. In addition, the reinvented law of contract must co-exist and not conflict with other existing law, mainly legislation, for example, the securities market laws.

268. It logically follows that there must be a duty to inspect the product, including the contract terms, after its transfer to the buyer. The duty to inspect would be limited to apparent defects. Since the market study has demonstrated that most standardized terms are transparent, this obligation would not impose onerous conditions upon buyers. Following general practices, the discovery of a defect would entitle the buyer to rescind the transaction without penalty. Who would bear the cost of transporting the product in a distance sale is a technicality that can be dealt with in "content control" provisions. Even if the buyer did not exercise the right of return, any particular term might be invalid under a content control provision.

     Content control

269. The first step toward breaking through conventional thought about contracts is to conduct an inter-disciplinary and empirical study of standard form contracts. The empirical study would ground the debate about standardized terms squarely on firm data and identify their social and economic consequences. No one knows, or appears to care about, the cost of "unfair" terms in proportion to GDP. Similarly, no one knows, or appears to care about, the cost of prohibiting firms from using any term deviating from background law. You would think this would be the first mystery to unravel. Yet, it is not even discussed in the literature.

270. The sample of contracts and the case law show a pattern of recurring standardized terms posing "perceived" problems in the market. These recurring standardized terms are best governed by discrete "content controlling" rules specific to the problems they pose. In addition, a default rule is required for those cases falling outside the specific rules. That default principle may be centered on the concept that any secondary standardized term destroying the economic value of the transaction is invalid. This approach avoids micro-management of terms but sets limits to the producer's "freedom of contract." Hence, the second step is to examine the attributes of each problematic term to determine which contractual property of the commodity should be enforced within the overall goal of what combination of economic, political and welfare goals the "content control" provisions is intended to achieve. There is no reason to keep the standard repertoire of tools for determining the validity of standardized terms. Rather, the opportunity exists to break through the existing words: "unfair," "unconscionable," "reasonable expectations," and state what they mean, even if that requires going outside legal doctrine to get meaningful definitions.

271. Direct content control provisions are not equivalent to the list of terms found in the EU Directive on Unfair Terms in Consumer Contracts. Some terms may be prohibited simply on public policy grounds, such as terms disclaiming that a new product is fit for its ordinary use. However, other terms raise complicated issues of appropriate allocation of risks. These terms require narrow but comprehensive sets of rules to govern their use. Terms raising complex legal and economic questions deserve the depth of draftsmanship afforded contract issues dealt with in codes such as the Uniform Commercial Code. The EU method of regulation depends generally on crude one-line descriptions of suspect terms. It is oversimplified and static.

272. In the context of standard form contracts, the problems generally involve questions of insurance. The mass production of products and terms inevitably result in defects. The question for lawmakers is how to allocate the risk of loss among innocent parties to the transactions. The EU facile response is to place the cost of insurance on the producer. However, as economics tells us, whenever the producer can pass the cost of insurance onto the customer base, it will do so. Hence, each buyer in one market is the other's insurer, at a higher price per unit. Insurance generally has two major components: premiums and exclusions. The premium is the higher price; the exclusions are the limitations placed on the extent of liability. But theoretically, what is now called an "externality," is a clause of exclusion under the insurance model. There is no meaningful difference between a risk clause in a standard form contract and a clause of exclusion under the insurance model. So what is the problem with standard form contracts containing limitations of liability, or the functional equivalent of exclusions, that are contained in every insurance policy?

273. Limitations of warranty serve as an example. Based on the sample, most sellers do not disclaim all warranties. Rather, they warrant that the product is free from defects in material and workmanship for a limited period of time, generally one year or longer for hard goods and 90 days for software. Sellers also set remedies for breaches of the warranty, such as repair, replacement or refund, often at the discretion of the seller. The question is not whether the warranty is unfair, unconscionable or defeats the reasonable expectation of the buyer, but whether the warranty follows pragmatically from the nature of the business, the cost of the product, and its expected life. It also depends on allocation of risk as under an insurance contract. Specifying the limits of warranties is not objectively abusive, preserves the "moral hazard" and resembles terms in insurance policy agreements.

274. For example, assume that there is a 10% chance of product failure and that the product costs $1000. Buyers have on average an asset worth $900, that is, the value minus the risk of failure. Assume further that for an additional 5% of the purchase price, the firm agrees to insure the product against all failure, regardless of cause, and to replace the product. Buyers on average now have an asset worth $850. But, since there is only a 10% chance of failure, the question presented is why impose an additional cost of 5% across the customer base when some customers would prefer to pay less and take the chance that nothing will go wrong. These customers will be right 90% of the time. Under this scenario, risk-averse buyers feel safe; buyers on average are poorer.

275. A related question goes to the length of the warranty. The useful life of many products -- given buyer taste, distribution of products in versions and technological change -- is short. The useful life may span a few years and then plummet to zero. Who wants a 20-year-old refrigerator or Xerox copy machine? The question is presented: how is the state going to determine which warranty period falls short of what is enforceable. By analogy to insurance, are firms to offer periodic renewal notices in exchange for additional payments of premiums? These types of questions must be explored and answered to set any content control provision governing limitation of warranties.

276. Certainly firms that sell new products should not be allowed to disclaim all warranties, express or implied. Yet, that is precisely what American law, subject to modifications such as the Magnason-Moss Act, permits firms to do. This rule allows sellers to induce sales by claiming they have something of value and then to deny that claim. Consistent with the theory of contract as commodity, sellers would be prohibited from disclaiming all warranties on new products, and from disclaiming tort obligations for personal injury and death. If the United States had that rule, the judge in the Gonzalez case could have dealt with the claim in one sentence, as opposed to a belabored explanation of unconscionability spread over 10 pages. However, difficult questions arise with respect to sellers of used products termed "as is" and sellers referring purchasers to upstream warranties. For example, based on the nature of the business, the product and its cost, it may be consistent with those factors to permit disclaimers of warranties on used umbrellas but not on used commercial jets.

277. Limitation of damages is another example. The majority of contracts contained in the sample, and that addressed the issue, excluded consequential damages but did not exclude damages entirely. If, for example, film development companies were liable for the cost of exotic vacations due to errors in film development, the price of film development would increase, probably substantially. Likewise, for reasons of cost and nature of process, dry cleaners are justified in limiting their liability. Dry cleaners cannot possibly "spot test" every garment for its suitability in the dry cleaning process without increasing cost and causing delay in delivery of laundered products. The norm of 10 times the cost of the service is consistent with the business, the cost of the service and the inability to avoid damage. Consequently, the question of damages is inextricably tied to insurance and who pays for it.[316]

278. While buyers generally quietly accept the loss of uninsured negatives and clean clothes, buyers generally are noisier when it comes to who is going to pay for the loss of higher priced items. Take cars parked and stolen from commercial parking lots. The law of bailment generally applies to these cases. The owner of the car is the bailor, and the owner of the parking lot is the bailee. The parking lot has a duty to exercise care during its custody of the car. If the parking lot does not exercise care and is negligent, the parking lot is liable to the car owner for any damage due to the failure to redeliver the car. The parking lot must prove it exercised care in its custody of the car. This is the background law that would apply in the absence of contract when a person parks his car in a parking lot and the car is stolen or damaged. Because the parties may alter the "background" law through contract, standardized terms altering the background law have posed complicated questions for courts.

279. Assume a Mercedes Benz worth $75,000 is stolen when garaged in a secure and properly managed parking lot because armed men held the attendant hostage during the theft. Under the background law, the owner of the Mercedes Benz does not have a claim against the parking lot company because the latter was not negligent.[317] If he has comprehensive insurance, he will get the proceeds of the insurance policy in the amount of $75,000. But his payment comes at a price: higher premiums, and probably not only for him but others similarly situated, though completely uninvolved in the event. In other words, all insured drivers pay for the cost of the thief. If the owner is uninsured, he sustains a loss. No one else is damaged.

280. Now assume the parking lot was negligent because the attendant fell asleep during his watch. The result is the same between the insured owner of the car and the parking lot. The insurance company pays the insured in full. But the former is subrogated to the rights of the latter against the parking lot. If the parking lot is negligent, the firm or its insurer reimburses the car owner's insurance company. In addition, the uninsured owner collects as holder of a claim for loss. When the parking lot is negligent, two costs go up: private automobile insurance and the cost of parking. In a major city the demand for parking space is inelastic. When the parking lot is prudent, one cost goes up: private automobile insurance.

281. Is there any justification for permitting a firm to alter these results by standardized terms? Assume the parking lot company attempts to limit its damages for negligence by this language: the "firms' liability for loss or damage of vehicle by fire, theft or explosion is limited to $25,000 unless an additional fee is paid when the vehicle is first parked and a receipt for that higher liability is issued." The limitation is irrelevant for the comprehensively insured owner. It also is irrelevant for any uninsured or underinsured car owner when the value of the car is less than $25,000, which will cover most cars in the market. However, the uninsured or underinsured luxury car owner will feel the pain of the limitation. The question is: should the law enforce or invalidate limitations of liability of this sort for purely economic losses? [318] The limitation may be the function of the market for insurance available to the firm, or not. Should legislators or judges shift risks taken by car owners not having insurance or having inadequate insurance to the market of policyholders and customers of parking lots in the context only of property losses? The underpinnings of the background rule-origin in an era prior to the manufacture of automobiles and the development of diverse insurance products-might justify its abolition. The answer to these questions cannot be derived from study of the law alone. But these are the types of questions drafters of content control provisions must answer before putting pen to paper.

282. Assume a further variation of the hypothetical where the Mercedes Benz owner has 25 mink coats worth $75,000 in the trunk of his $75,000 car when it is stolen. Who should bear this loss? Hadley v. Baxendale instructs that the parking lot firm should not be liable unless put on notice of the special circumstances. But is this rule viable? What if the Mercedes Benz owner says to the parking lot attendant, "By the way, I have $75,000 of mink fur in the trunk." What is the attendant supposed to do in this situation? We know he cannot mark up the fee since he lacks authority. Certainly, there is no special way to handle this car as opposed to others, such as putting it in a vault. The idea of notice is fanciful. Rather, the question of who should bear the loss must turn on an analysis of allocating the cost to the usual suspects: the firm, customers of parking lots, policy holders or the person who created the condition of increased risk. Adhering to the assumption of an "eyes wide open" buyer, the right place to put this loss is on the buyer and no one else. The result would discourage enhanced risk behavior and prevent collateral damage to innocent bystanders: the firm and the respective customer bases.

283. Current law on the subject is absurd.[319] In Barrett Garages, three automobiles were stolen from an airport parking lot. The insurance company made payments to owners of the automobiles stolen from the parking lot and then sued the owner of the parking lot to recover its payments. The claim check given to each driver contained a limitation of liability clause in the amount of $250. The court of appeals held that the delivery of a claim check to the car owners did not create a contract as a matter of law. Rather, a question of fact was presented in each case as to whether the car owner gave his consent to the terms contained in the claim check. The crucial question was "whether the particular circumstances are such that a prudent man, acting reasonably, would or would not have read the exculpatory provisions in question." This result followed from the court's starting principles that, "It is essential to the existence of a contract that there be mutual consent," and that "a person is bound by the printed contractual provisions of an instrument which he accepts delivery of if, as an ordinarily prudent man, he could and should have read such provisions."

284. However, under current law, different circumstances produce different results. For example, in Allbright Phoenix Parking, Inc. v. Shabala, the driver parked his car, locked it and paid the attendant the fee.[320] The parking ticket, which the driver did not read, stated that the lot closed at 9:30 p.m. and limited the parking lot company's liability to $100 for loss by fire, burglary, or theft provided the company was negligent. It also stated "articles left in car at owner's risk." At approximately 11:15 p.m., the driver returned to the lot after it was closed. He discovered that someone had broken into the car and had stolen his valuables in the back seat. In denying relief to the driver, the court of appeals found that, because the driver took his car keys, there was "no bailment relationship" between the driver and the parking lot. Hence, the parking lot was not responsible for the loss of items in the driver's car. The court qualified its decision by stating, "We do not decide in this opinion whether a change of one or more factual circumstances would have altered our conclusions."[321] However one views the results in these cases, the method ignores the stakes and evades the roots of disorder.[322]

     International transactions

285. International transactions raise complicated issues in shaping of "content control" rules. The first issue for decision is whether to include international transactions in legislation based on content control provisions. If they are included for consumer transactions, then as Maxeiner has pointed out, comparative studies are required to identify whether terms are valid in foreign jurisdictions. International transactions involving commercial parties are more complicated. For example, the duty to inspect and right to return for defects may be inappropriate if a U.S. seller has shipped 1900 tons of polypropylene to a purchaser in Kenya and the goods are sitting in a warehouse in the port of Mombasa. In this example, a standardized term may incorporate a risk allocation rule of the International Chamber of Commerce. International carriage contracts may place maximum limits on liability, and the goods may have been transferred by combined or successive transport. Any "direct control" rule must be designed to interface with law that controls international transactions such as the CISG, the various conventions on carriage and commercial trade terms. In many instances, the standardized term should be enforced per se; or left to other law.

     Other tactics

286. Other tactics may supplement the reinvention of contract law.[323] Following the European approach, domestic officials may be given authority to police standardized terms and bring declaratory actions against them seeking their invalidity provided the standards used to determine the validity of the term are based on a "direct control" statute. A possible benefit would be the production of precedent to guide the behavior of law-abiding firms. In addition, groups like Consumers Union in the United States and their European counterparts could extend their product evaluations to cover all properties of the commodity including its contractual terms. Buyers often rely on Consumers Union reports to make purchasing decisions. Unlike individual purchasers lacking the time, money or interest in evaluating risk/price terms, Consumers Union has the resources to make these evaluations. Bad publicity alone has the power to force change in company terms. Just imagine a Web site containing a list of firms using what professional consumer groups deemed were abusive terms. In addition, the preference to solve problems outside the framework of law is well established. Recourse to legal solutions is infrequently used given the number of potential disputes and is not always necessary. Many merchants do not stand on standardized terms because they have a financial incentive to keep the customer. Rather, they resolve problems outside the legal system by acting toward their customer not on the basis of contract but on the basis of business practice.

     Conclusion

287. The scholarly literature tends to project an image of a world filled with cutthroat standardized terms. The market study set forth in Chapter Three contradicts that assumption, though a horror story inevitably arises, and if widely published, creates a misperception of the market based on the fallacy of composition. If the image of standardized contract in the literature is correct, the question is why not forbid sellers from using any standardized terms? However, the consensus of the experts, even the European Union Commission, is standardized terms play an essential function in the market in terms of innovation that cannot be better carried out by government. The argument is not new, goes back to Prausnitz, and now is a platitude. The task therefore is to allow standardized terms to develop in the market under conditions where they reduce product cost, while simultaneously using public authority to set limits to standardized terms when they produce inefficient results.

288. Empirical studies are needed to show the incidence of types of loss in the market, identify the availability and the social cost of insuring against them. A joint effort between lawyers and economists is required to produce this study. Based on that study's results, the caretakers of contract law - legislature, parliament or self-appointed institutions - then would have the chance to develop rules based on non-legal information, commercial reality and soft public policy. Legal doctrine masks the causes of contract problems by resorting to rules about consent and ignores the broader implications of the legal decisions for the market. The proposition that firms are always in the best position to insure and spread risk is facile without further empirical support. Allocating risk to firms may be appropriate under one set of circumstances, but not under a different set of circumstances. Making those distinctions is the major challenge in the creation of comprehensive "content control" rules taking into account nuances of the dynamics of exchange.

289. The time is ripe for reinventing contract. Instead of hermetically sealing standardized terms within contract law, or dealing with them under consumer legislation, it is preferable to treat them independently and globally. Questions of law arising under the use of standardized terms then would be referred to special law. That approach would avoid recourse to vague judicial doctrine or rigid consumer rules. There is no reason why a code governing standardized terms could not be the product of an international organization to strive for uniformity across borders. Model laws promulgated by the International Organization for the Unification of Private law and the United Nations serve as exemplars. The major barrier to reform is inertia and conservatism. The legal community has adapted to standardized terms within their preconceived notions of contract law as a person with a broken leg adapts to a crutch. But why limp when you can sprint?

Appendix - Standard Form Contracts In Use In Selected Sectors