Учебный год 22-23 / Binding Promises - The Late 20th-Century Reformation of Contract Law

turbing” the allocations of risk resulting from disparities of bargaining power. The court thus used the vagueness that Llewellyn left in the concept of unconscionability in the way that Llewellyn intended a court to use it, to give effect to what the court perceived to be the principles and policies underlying the section. Despite the Official Comment, the court perceived these to include protection against abuses of superior bargaining power.

Unconscionability was Llewellyn’s solution to the problem of the recipient’s lack of consent to a standard form. Although nothing in Section 2- 302, the Official Comments, or Judge Wright’s formulation specifically restricts the doctrine’s application to standard forms, the element of procedural unconscionability is almost sure to be lacking in any other case. In the thousands of decisions concerning unconscionability the courts have handed down since the Code was enacted, there is not one in which the terms held to be unconscionable were not standard. Llewellyn first addressed the problem of the standard form in 1939.30 The Common Law Tradition: Deciding Appeals, published in 1960, expressed his final thoughts. There, after concluding that the problem was that the recipient did not give the form his full assent, Llewellyn said:

The answer, I suggest, is this: Instead of thinking about “assent” to boilerplate 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.31

What Llewellyn here called “a blanket assent (not a specific assent),” courts now call “procedural unconscionability.” Terms Llewellyn here described as “unreasonable or indecent” or as “alter[ing] or eviscerat[ing] the reasonable meaning of the dickered terms,” courts now describe as “substantively unconscionable.”

The substantive changes courts have made in the doctrine since WalkerThomas have only strengthened it. Whereas Walker-Thomas required that a contractual provision be both procedurally and substantively unconscionable in order to be stricken, courts now use a so-called sliding scale. A term is now stricken if the two kinds of unconscionability, considered together, “weigh enough.” In principle, therefore, either procedural or substantive unconscionability is now sufficient, if it alone “weighs” enough.32 Judge Wright may have anticipated even this one change in his formulation. He suggested in a footnote in Walker-Thomas that highly substantive unconscionable terms might be evidence of procedural unconscionability. The consumer presumably would not have agreed to a very unfair term if he had been aware of it, understood it, and had a free choice in accepting

it.33 The logical result of following this suggestion would be to strike terms if they were highly substantively unconscionable without independent proof that they were also procedurally unconscionable, because their procedural unconscionability would be presumed. Judge Wright did not make it, but there is also an argument that a high degree of procedural unconscionability ought to be sufficient reason to strike a term, because a high degree of procedural unconscionability is tantamount to fraud. Fraud is a defense to enforcement of a contract without regard to the seriousness of the harm.

Courts now apply the unconscionability defense to business consumers and individual consumers without distinction. The first step away from the initial assumption that the doctrine protected only individual consumers was to hold that although a business claiming to be a victim of unconscionability confronted a higher burden of persuasion, it could raise the defense. By now, hardly any reported decisions even note the character of the party pleading the defense, and there are no evident differences in the results. At least 40 percent of the parties seeking the protections of unconscionability in the reported cases have been business consumers since 1990.34

Unconscionability has been a valuable defense against egregious unfairness, judging from the frequency with which it has been used, but it has had no discernible effect on business conduct. There is no evidence that producers against whom unconscionability defenses have been successful have removed the offending provisions from their contracts as a result. The reason, presumably, is that including possibly unconscionable provisions in a contract is a no-lose gamble. The producer gains the advantages the provisions provide if the consumer does not contest them or if the consumer does contest them but the court disagrees, and the producer is no worse off than it would have been if it had not included the provisions if the consumer contests them and the court agrees. The burden is on the consumer to recognize the unconscionability and to convince the court that it is the case, and the producer loses nothing for having tried to enforce the provisions in the first place.

Unconscionability resembles reasonable expectations. The first two elements of procedural unconscionability—that the consumer not have had a reasonable opportunity to read the terms or could not reasonably have been expected to understand them—are essentially the same as a finding that the terms do not conform to the consumer’s reasonable expectations. However, unconscionability differs from reasonable expectations in three respects. First, reasonable expectations does not include any parallel to the third element of procedural unconscionability, which is that the consumer had no reasonable alternative to accepting the terms. Second, reasonable expectations overrides standard terms that conflict with it even if they are not substantively unconscionable. Third, whereas reasonable expectations re-

places any terms it overrides with the parties’ reasonable expectations, it has never been clear how a court should determine what should replace the terms if unconscionability renders them unenforceable. Most courts have allowed the reasonable expectations to replace them, however, presumably because this is the rule for filling any “gaps” in an express contract, even under classical contract law.

The condition that the first difference addresses is rare, and the third difference will presumably disappear as courts realize that the parties’ reasonable expectations should “fill in” any “gaps” that an application of unconscionability creates. Therefore, the only important difference is the second one noted, that the parties’ reasonable expectations override conflicting standard terms even if the terms are not substantively unconscionable. One might conclude from this that unconscionability will eventually disappear, because reasonable expectations will render it unnecessary. Any time that unconscionability would override the terms, reasonable expectations also would do so, and reasonable expectations would override terms in some cases in which unconscionability would not.

The differences between the two laws’ conceptual schemes point to the same conclusion. The theoretical underpinnings of reasonable expectations are simple and straightforward. They ground the law in the most basic principle of contract. The theoretical underpinnings of unconscionability, on the other hand, are not simple, and to some extent they are self-contradic- tory. They require one to accept the legitimacy of contracts to which one party did not give meaningful consent but to deny their legitimacy to the extent they operate unfairly. Consequently, one would expect that although judges might have more difficulty in accepting reasonable expectations, because it constitutes a greater change from prior law, once they became familiar with it, they would use it in preference to unconscionability if a case permitted them to do so. The reported decisions support this prediction. Whereas the first or first few decisions in a jurisdiction resting on reasonable expectations may also rest on unconscionability, the subsequent decisions resting on reasonable expectations are likely to rest on reasonable expectations alone.35

Nevertheless, I doubt that unconscionability will disappear. We are more likely to see it change so as to do just those things that reasonable expectations cannot. Decisions on unconscionability will increasingly emphasize substantive unconscionability, so that the doctrine will eventually be concerned with this element alone. Contracts will always consist of the parties’ reasonable expectations, but unconscionability will authorize a court to invalidate any aspects of the reasonable expectations that unexpectedly operate unfairly. Appellate courts will continue to make most of the law of reasonable expectations, whereas trial courts will make most of the unconscionability decisions on the basis of the particular facts of the case.

Contract Formation in a “Battle of the Forms”

Section 2-207 governs contract formation in a “battle of the forms.” One could describe Sections 2-207 and 2-302, on unconscionability, as the two extremes of Article 2. Whereas Section 2-302 is probably the article’s best and most successful section, Section 2-207 is certainly the worst.

What contracts teachers have dubbed a “battle of the forms” can occur if both parties use standard forms. Some businesses regularly buy enough to make it worth their while to compose their own standard buying forms. Buying forms are not product specific; rather, the businesses that use them draft them as best they can to cover the whole range of things they buy. The “battle” consists of the buying and selling businesses sending each other their standard forms, each trying to make its forms compose any contract they eventually make. The winner of the “battle” is the one that succeeds in this attempt.

Classical contract law decided the winner by the “last-shot rule,” which in turn derived from the “mirror image rule.” By the logic of classical contract, a purported acceptance that is not the “mirror image” of the offer does not make a contract, because the parties have evidently not agreed on the different terms.36 Consequently, a purported acceptance that is not the mirror image of the offer is a counteroffer, which terminates the earlier offer and becomes a contract only if the other party accepts it by a mirror image acceptance before it expires.37 Therefore, when two businesses engage in a battle of the forms, their exchanges of forms only create more offers. Each form either one sends operates to reject the offer consisting of the previous form the other sent and becomes itself the only offer outstanding. The “battle” ends when one of two things happens. Either the buyer accepts the goods while the seller’s form is the offer outstanding, or the seller delivers the goods while the buyer’s form is the offer outstanding. The law deems the acceptance or delivery of the goods to be an acceptance of the offer that was then outstanding. So the terms of the last offer made become the terms of the contract; the “last shot” wins. The result is arbitrary, because the parties’ contractual intentions bear no necessary connection with who fired the “last shot.”

Section 2-207 displaced the “last-shot rule” for contracts covered by Article 2.38 The reader who is not familiar with the section should read it just enough to appreciate the difficulty of understanding what it requires. Experience has demonstrated not only that the section is difficult to understand but that even understanding it does not solve its problems, because it provides for only some of the alternatives it leaves open.39 For example, although Subsection (2) says what should happen if the parties are both merchants and the acceptance or confirmation includes terms additional to

those in the offer, it says nothing about what should happen if one of the parties is not a merchant or if the acceptance or confirmation includes terms different from those in the offer. Worst of all is that the section is no improvement over the common law even if one could overcome all its difficulties of interpretation. The results to which it leads are no less arbitrary than the results of the “last-shot rule,” because they bear no more connection to the parties’ contractual intentions than it does.

The section’s existence is a mystery, because its complications violate the precepts Llewellyn set for himself for encouraging grand-style judging, but there is a line of decisions on the section that managed to engage in grand-style judging anyway. The leading case is Daitom, Inc. v. Pennwalt Corp., which the U.S. Court of Appeals for the Tenth Circuit handed down in 1984.40 Judge William E. Doyle wrote the opinion. Pennwalt, the seller, sent a form containing terms limiting the warranties to one year. Daitom accepted Pennwalt’s offer with a form containing terms creating a warranty by description, not subject to a one-year limitation. Daitom did not make its claim of breach of warranty until more than one year after purchase. The court held for Daitom on the ground that terms that are in one party’s forms but not the other’s are “knocked out,” thereby creating a “gap,” which the court is to “fill in” as provided by the last sentence in Subsection

(3). With few exceptions, the “supplementary terms incorporated under . . .

other provision[s] of . . .” the Code to which this sentence refers simply direct the court to fill the “gaps” with the parties’ reasonable expectations, so the end result of Daitom is to replace the section with the law of reasonable expectations. The court acknowledged its indebtedness to James J. White for its solution. White had proposed it in the treatise he coauthored with Robert S. Summers.

Both parties in Daitom were “merchants” as the Code defines this term, and the court considered the terms at issue to be “additional” rather than “different” terms, but the decision logically applies to any case in which the parties make a contract by exchanging dissimilar forms. If either party is not a “merchant,” the dissimilar terms in the acceptance presumably do not become part of the contract unless the other party accepts them, so they are “knocked out” and leave “gaps,” just as Daitom held. Likewise, if the dissimilar terms are “different” rather than “additional,” the logic of Daitom would say that the “different” terms in both forms were “knocked out,” again leaving gaps to be “filled in,” as Daitom prescribed.

However, Daitom falls short of reasonable expectations in one particular. Sometimes people agree to negotiate with each other toward a final agreement before they agree on all the terms of the final agreement itself. They can also agree further on what shall happen if their negotiations toward a final agreement should fail. They can agree either that there will be

no deal or that some third party (ordinarily an arbitrator or a court) shall be authorized to complete the contract for them. Daitom fails to allow for the first alternative. It provides no way of enforcing the parties’ agreement to negotiate toward a final agreement while at the same time honoring their agreement that the deal is off if the negotiations fail. Charles L. Knapp published an article in 1969, “Enforcing the Contract to Bargain,”41 in which he concluded that the law should recognize this kind of an agreement as a contract to “bargain . . . in good faith.”42 Not all courts have followed Knapp’s suggestion, but most have, and its sensibleness should ensure that all will eventually accept it.43 The courts could also follow Knapp’s suggestion under the Code, under the authority of Section 1-103, which provides that the common law shall apply any time it is not “displaced by the particular provisions” of the Code.

The Permanent Editorial Board for the Code published a proposed amendment of Section 2-207 in 1990.44 The proposal would be an improvement, but it would be better still simply to repeal the section in order to allow courts openly to apply reasonable expectations under the Code, just as they can under the common law. Although Daitom already does this, with the exception noted, it does so in the teeth of the section’s provisions, and of course, some jurisdictions may not follow Daitom.

Warranties and Remedies

There is no contract in a “pure” sale. The seller gives the buyer ownership in the goods, and the buyer pays for them. Neither makes any promises. Since there is no contract, there are no remedies for breach of contract. Once the parties have made the sale, they owe no duties to each other. When a seller does say something to a buyer about the goods, he often states it as a fact—“This horse is three years old,” for example. A statement of fact under such circumstances can carry at least three meanings. It can be a condition, which if it is not satisfied entitles the buyer to return the goods and get his money back. It can be a promise, which if it is broken entitles the buyer to damages. Or it can be both. The practice arose centuries ago of calling such statements warranties, probably in order to capture all three meanings they can have without specifying which. For example, if a seller says, “I warrant this horse to be no more than three years old,” the seller commits himself to the horse’s being no more than three years old whether or not he believes it to be the fact. If there are warranties, there are also remedies for their breach.

The law distinguishes between implied and express warranties. Implied warranties exist unless the seller disclaims them. Express warranties are

those the seller expresses. Implied warranties cover aspects of a sale that are generally understood. For example, the implied warranty of title is that the seller owns the goods he is selling. The Code carried forward these traditional concepts by stating a variety of implied warranties, but only two of them are pertinent here. Section 2-314 sets out the so-called warranties of merchantability that are implied in every sale; they concern the quality of the goods. Section 2-315 sets out the so-called warranties of fitness for particular purpose. These apply only if the seller has advised the buyer of the fitness of the goods for a particular purpose, for example, that the seller’s computer will be able to do the work the buyer needs.

Section 2-316 authorizes sellers to disclaim any or all of the implied warranties, and Section 2-719 authorizes sellers to limit the buyer’s remedies if any of the undisclaimed warranties are breached, although in neither case is the authority absolute. A warranty disclaimer must be clear and conspicuous to be effective,45 and a remedies limitation is ineffective if, under the circumstances, it would operate unconscionably or defeat the remedies’ essential purpose.46 The conditions on the effectiveness of warranty disclaimers are similar to procedural unconscionability and reasonable expectations in being aimed at providing some assurance that the buyer is warned and understands. On the other hand, the conditions on the effectiveness of remedies limitations are similar to substantive unconscionability and relational torts in providing some protection against unfairness and requiring that a remedy not be so limited that it ceases to provide the protection it should. However, the similarities are only that. With few exceptions, the decisions on Section 2-316 have not interpreted it to require anything like the understanding consent that the law of reasonable expectations requires,47 and the decisions on Section 2-719 have not interpreted it to require anything as specific and definite as some of the relational torts require.48

The greatest weakness of the two sections, however, is the widespread assumption that warranty disclaimers and remedies limitations are mutually exclusive things; a contractual provision supposedly either disclaims warranties or limits remedies but never does both. As a result, a seller can choose which condition to meet; he is not required to meet both. If a seller chooses to draft a provision as a warranty disclaimer, although the provision must be clear and conspicuous to be effective, it can be as unfair and as destructive of the buyer’s rights as the seller likes. On the other hand, if a seller chooses to draft a provision as a remedies limitation, although the provision must be reasonably fair and leave the buyer with enough remedial rights to provide some meaningful protection, the seller is under no obligation to warn the buyer or enable the buyer to understand.49

In most situations, a producer can achieve the same results by either route. For example, suppose a producer wants no liability for product defects that manifest themselves more than one year after the consumer purchases the product. One way of achieving this would be to require all claims for breach of warranty to be made within one year of purchase. A court would regard this contractual language as a remedies limitation and therefore treat it under Section 2-719. Another way of achieving the same result would be to disclaim all implied warranties and replace them with an express warranty that lasts only one year. A court would regard this language as a warranties disclaimer and therefore treat it under Section 2-316. In the first case, the producer would have breached its warranties even if the defect surfaced after a year, but the consumer would have no remedy for the breach. In the second case, the producer would not have breached its warranties if the defect surfaced after a year, so of course, the consumer would also have no remedy in this case. If a producer can achieve the same results by either route, of course, it will choose the route it thinks it can travel more easily. Ordinarily this will be a warranty disclaimer, because Section 2-316 requires only that the disclaimer be clear and conspicuous, and consumers rarely pay attention to the contents of forms anyway. The producer thus avoids all the substantive protections that Section 2-719 would give the consumer if the producer had chosen the route of a remedies limitation.

Not only do the Code’s sections on warranties, warranty disclaimers and remedies limitations fail to provide sufficient protection, they do additional harm by preventing courts from applying the common law reforms. The clear-and-conspicuous requirement for warranty disclaimers protects the consumer less than does the law of reasonable expectations for many reasons, the most important of which is that the former does not require a producer to make the disclaimer’s significance clear. Therefore, if a court gives effect to a warranty disclaimer because it meets the clear-and- conspicuous requirement, without examining whether the resulting contract conforms to the consumer’s reasonable expectations, the Code is blocking the application of reasonable expectations. Numerous courts have done this.50

Likewise, if a court refuses to create a relational tort because it would impose a duty on a producer that the Code would allow the producer to disclaim, or because it would give a consumer a remedial right that the Code would allow a producer to limit, the Code is blocking the creation of relational torts. The Texas Supreme Court created an undisclaimable warranty of good and workmanlike quality for services in 198751 but refused to extend it to contracts for the sale of goods in 1990 because the Code allows sellers to disclaim warranties.52 The cases holding sellers

of expert advice liable for professional malpractice or its equivalent are legion,53 but if the sellers also sell the goods to which their advice relates, the Code allows them to disclaim their liability. The cases holding this are also legion.54 It is as though we allowed physicians to disclaim their professional responsibilities if they sold their own medicines. I will deal further with these and other conflicts between the reforms and the Code in the final chapter.

7

Choices and Prohibitions

PREVIOUS CHAPTERS have treated the reforms individually. This chapter treats them as they relate to one another, to Article 2 of the Code, to contract law as a whole, and to the Constitution. These relationships give rise to certain choices and prohibitions. A court could sometimes use more than one of the reforms to reach the same result, and sometimes Article 2 prohibits, or might prohibit, reaching the result one of the reforms would reach. A second set of choices consists of the means by which we might heal the rift that Article 2 created in contract law; I described this rift in the Introduction. Two lines of decisions by the U.S. Supreme Court impose certain constitutional prohibitions on contract law and on the remedies the law provides in private actions of any kind. One line, I will argue, invalidates the American Rule in certain situations. The other requires sensible standards for punitive damages. Finally, I will describe certain abuses of the reforms and suggest how we might prevent them.

The Choice between Reasonable Expectations and Relational Torts

No court has yet addressed the question of which of these approaches it should use in a situation where it could use either to reach the same result, presumably because no court has yet been aware that it had the choice.

C & J Fertilizer, Inc. v. Allied Mutual Insurance Co.1 is an example. This is the 1975 decision in which the Iowa Supreme Court refused to enforce a definition of burglary in an insurance policy that limited the term to burglaries leaving visible marks of illegal entry. The Iowa court used reasonable expectations, but a court in a jurisdiction that was pursuing the relational tort development presumably would have applied the covenant of good faith and fair dealing. It presumably would have held that the covenant required an insurer who had sold “burglary insurance” to pay compensation for a burglary in the common meaning of the term. An insurer would not be acting in good faith or dealing fairly if it were to deny coverage on the basis of a hidden and unexpected policy definition.

Comunale v. Traders and General Insurance Co.,2 the 1958 decision that began the development of relational torts in California, is an example