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

nate between largeand small-volume buyers in contract terms. Producers generally do not give to small-volume buyers the advantages that the largevolume buyers have obtained by their greater bargaining power.

For example, the large-volume buyers in the automobile market are the national car rental companies—Hertz, Avis, and so on. Each of them buys tens of thousands of new cars each year. The companies’ executives do not ride in the cars, however; only their customers do. Their executives therefore have no concern for their own personal safety. At most, the companies have only a concern that they not be liable for any personal injuries their customers may suffer, and the least expensive way of avoiding this is to include disclaimers in their rental contracts. They can also require the car manufacturers to indemnify them.

Many of the car rental companies’ other interests are also significantly different from the interests of the ordinary car buyer. They either have their own maintenance and repair facilities or contract this work out on a large scale, which makes it relatively inexpensive. The inconvenience and expense that individual car owners incur if they have to take a car in for repairs is not a problem for these companies, because they can avoid it by buying a few more cars than they need to be in operation at any one time. Thus, the national car rental companies are far less interested in getting favorable warranty terms than an individual car buyer would be and more interested in getting their cars at a lower price instead. They also have less interest than does an ordinary buyer in the physical durability of the cars, and no interest at all in the possible early obsolescence of its style. The national car rental companies routinely replace their cars with new ones in one or two years.

The second flaw in the argument is that contrary to what it assumes, sellers can and do discriminate between largeand small-volume buyers in terms of sale. In fact, such discrimination is routine. A large-volume buyer takes for granted that it will get better terms than those given to the ordinary buyer. The only questions are how much and in what respects. Ordinarily, a seller will not even offer a large-volume buyer the standard contract nor deal with it through the same channels as it would use for ordinary buyers. For example, Hertz would not send its purchasing officer to a car dealer. It would send him to the car manufacturer’s national headquarters, or a car manufacturer would send a high-level sales executive to see Hertz. Even if a seller and a large-volume buyer do set the terms of their specially negotiated deal by one of the seller’s standard consumer forms, a simple way of expressing the special terms is to cross out or write over the conflicting terms in the form.21 Thus, no matter how the producers and the large-volume buyers negotiate their contracts, the terms the producers give to the large-volume buyers are not also given to low-volume buyers.

Conclusion

Technology and standard contracts combined with certain aspects of classical contract early in the present century to produce wide, systematic inequalities of bargaining power between producers and consumers. The result was to make contracts generally very unfavorable to consumers and in many instances to lower the quality of the products themselves. Judges and legislatures began to take these facts into account beginning about 1960. The new laws they made are the subject of the following chapters.

3

Reasonable Expectations

ROBERT E. KEETON discovered that courts in insurance cases were using an approach he called reasonable expectations in the 1960s. I derived the same approach on theoretical grounds for all contracts. Keeton and I worked independently but by coincidence published our results within a year of each other in 1970–1971. The highest courts of most jurisdictions have since adopted the approach, although some adopted it only for insurance. This chapter gives a history of “reasonable expectations” and tries to bring together its many manifestations under a common set of principles.

Origins in Insurance

The traditional judicial approach to the insurance contract is a vigorous use of the doctrine of contra proferentem; that is, ambiguities in a legal instrument are construed against the drafter. Contra proferentem has serious drawbacks, however. An insurer can avoid it by using clear language, and the clear language does not warn the purchaser, because people rarely read their policies before purchasing them. The doctrine can work unfairly, because resolving an ambiguity against the insurer can result in the insured’s getting more than he bargained for. Precedents do not settle anything, because insurers can redraft their policies. The doctrine frequently produces unprincipled decisions, because the uncertainties of language allow courts to create ambiguities in order to rationalize conclusions they want to reach for other reasons.

Many people were aware of these drawbacks, but no one came forward with a better solution until some courts began using one in the 1960s. Keeton, then a professor at Harvard Law School, discovered these decisions and reported them in a two-part article titled “Insurance Law Rights at Variance with Policy Provisions,”1 which he published in 1970. In the decisions he discovered, the court did not stop at construing the policy against the insurer, but declared rights that might be at variance with or in addition to those the insurer provided in the policy. Keeton’s analysis of the cases led him to conclude that he had discovered a new principle, which he formulated as follows:

The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations.2

For example, in one of the cases Keeton reported, Gerhardt v. Continental Insurance Co.,3 the court gave the insured coverage under her comprehensive homeowner’s policy for her liability to a domestic employee who was injured while working at the insured’s home, despite an exclusion in the policy for domestic employees who were covered by workers’ compensation law. The face sheet of the policy contained language stating there was coverage for liability because of bodily injury and a declaration by the insured that she employed not more than two full-time residence employees. The policy did not mention the exclusion except in its back pages. Quoting itself in an earlier case, the court said:

[I]nsureds are entitled to the measure of protection necessary to fulfill their “reasonable expectations” and . . . they should not be subject to “technical encumbrances or to hidden pitfalls.”4

Justifications in Insurance

Principles and policies are more fundamental than rules and doctrines. We justify rules and doctrines by reference to principles or policies. Although Keeton initially characterized the decisions he discovered as embodying a new principle, he must have changed his mind later, because he eventually began suggesting principles and policies to justify it. Other commentators always regarded it as a rule or doctrine. Kenneth S. Abraham suggested three justifications in 1981: efficiency, equity, and risk distribution. By “efficiency,” he meant allocative efficiency, which is an economist’s term for a particular kind of beneficial distribution of wealth, or “utility.” Put simply, Abraham’s “efficiency” justification was that the doctrine of reasonable expectations gives people the insurance they expected, by requiring insurers to give it to them regardless of the contents of the policies. By “equity,” Abraham meant such equitable doctrines as estoppel, reliance, and fairness. He defined risk distribution as the courts’ holding that the insurance covered the risks they thought it should cover regardless of whether the insurers had written the policies to cover those risks.5

Keeton offered some slightly different justifications in the treatise he coauthored with Alan I. Widiss in 1988.6 First, insurance contracts are typically long and complicated, and few insureds read them with care, if they read them at all. Second, people who buy insurance typically could not read the policy before agreeing to it even if they wanted to, because insurers

typically do not deliver the policy until weeks or months after they have sold the insurance. Third, the provisions in insurance policies are sometimes unconscionable or unfair. Fourth, it is appropriate to protect an insured’s expectations that derive from the marketing practices of the insurer or from the conduct of the industry as a whole. Fifth, sometimes the insurer’s conduct in the particular instance leads the insured to expect something the policy does not provide.7

Acceptance in Insurance

Despite the justifications that Abraham and Keeton had offered for it, Mark C. Rahdert found reasonable expectations to be in trouble in 1986. Rahdert reported a number of jurisdictions announcing limits to it or “retreating” from “advances” made previously.8 In 1990, however, Roger C. Henderson concluded that the doctrine was solidly established and predicted that additional jurisdictions would continue to adopt it until it was the law everywhere.9 Henderson identified two versions of the doctrine. The stronger is the one Keeton stated in 1970: the reasonable expectations of the insured prevail even if they are at variance with the policy. The weaker version allows clear policy language to override the reasonable expectations, at least if the language is conspicuous. Henderson describes the weaker version as not really an advance beyond contra proferentem. The observation is not quite correct. Contra proferentem resolves ambiguous language against the insurer, but it does nothing for inconspicuous language. Therefore, requiring that policy language be conspicuous in order not to be ignored in favor of the insured goes some distance in the direction of reasonable expectations, although it still falls short of it. Conspicuous language still cannot affect the insureds’ expectations about what they are getting if they do not have an opportunity to read the policy before purchasing it.

Henderson found ten jurisdictions in which the highest court has clearly stated the stronger version and six more in which he concluded that the stronger version is probably in force, although the highest courts’ decisions do not clearly say so. He found one jurisdiction (Idaho) in which the highest court had rejected the stronger form of the doctrine and eight in which a court at a lower level had declared that its highest court had not yet adopted the doctrine. Of the remaining twenty-five jurisdictions, he found twelve with decisions that use the language of reasonable expectations but do not use it clearly enough to allow one to know whether they are applying the stronger or the weaker version and thirteen with decisions that either say nothing about the doctrine or say something that leaves their position on it unclear.

The scholarly reaction to Keeton’s articles and to the development of reasonable expectations itself has been enormous. There have been criticisms, but the favorable opinions are much more numerous. Henderson’s article is a good source of references to the scholarly literature.

Estoppel in Insurance

If an insurer leads a potential insured to expect something that the policy does not provide, and the potential insured relies on the expectation to his substantial detriment, the law almost everywhere is that the insurer is estopped from denying that the policy fulfills the insured’s expectations. As Robert H. Jerry II points out in his treatise, this estoppel is the same as the law of reasonable expectations (or nearly so) except for the requirement of detrimental reliance. In most cases the insureds satisfy this requirement by showing that they could, and presumably would, have obtained other insurance that would have provided what they expected, if they had not expected that the insurance they purchased would provide it.10 I estimate on the basis of my familiarity with the reasonable expectations decisions that the insured could have satisfied this requirement in nearly all of the cases in which he won on the ground of reasonable expectations. Thus, the two doctrines overlap.

However, the overlap is not quite as great as this indicates. The estoppel decisions rest on the insurer’s having created actual expectations in the potential insured, whereas the reasonable expectations decisions rest only on there having been circumstances under which a hypothetical “reasonable person” would have had the expectations. The estoppel doctrine is also more limited in being subject to what is now commonly called the Hunter limitation, that an estoppel “not be used to create coverage that does not exist according to the terms of the policy.” The idea is that an estoppel can only waive a condition or exclusion; it cannot create coverage greater than that which the policy would provide without the condition or exclusion. Although the limitation now takes its name from the 1955 decision of the North Carolina Supreme Court in Hunter v. Jefferson Standard Insurance Co.,11 it was already well established in 1955.

The Hunter court cited the leading legal digests and numerous cases as authority for the limitation. The basis of the limitation is evidently an attempt to conform the estoppel to the principles of classical contract. Classical contract regarded the policy as the contract no matter how unrealistic it was to think that the insured actually contracted on the basis of its content. Therefore, the policy overrode anything to the contrary that the insurer may have had led the insured to expect. Moreover, the parol evidence rule for-

bade the insured to even introduce evidence of any oral or written statements the insurer may have made prior to the sale of the insurance.

As Jerry points out, however, the limitation is illogical. It would eliminate the estoppel entirely if it were taken literally; any estoppel creates coverage where otherwise there was none in the sense that it allows the insured to recover on the insurance where otherwise he would not have been able to do so. Moreover, short of taking the limitation literally, there is no principled stopping point, so the result has been a steady erosion of the limitation. Jerry concludes that although the Hunter limitation is still the majority rule, the broad allowance of estoppel seems destined to displace it in the near future.12 It was the unrealistic assumptions underlying classical contract that must have driven judges to create this limitation. Presumably they did not want to prohibit all estoppels, as classical contract logically would require, so they went as far as they felt they could by allowing estoppels subject to the limitation.

Moreover, even the requirement that the insured show some detrimental reliance is illogical. A promisee’s detrimental reliance on a promisor’s promise constitutes a substitute for consideration when consideration is lacking and thus makes the promise enforceable despite the absence of consideration. However, in the situations in which this estoppel operates, consideration is not lacking. The insured has paid the premiums, or at least promised to pay them. Thus, the estoppel doctrine in insurance logically reduces to the doctrine of reasonable expectations.

The doctrine serves to prevent injustice despite its illogical foundations. Many judges seem more comfortable with it than with the newer doctrine of reasonable expectations. It does not so directly challenge their received notions, and it possesses the evident fairness of protecting the insured’s justified reliance. The older treatises on insurance law that are still in print give it a lengthier treatment than they give reasonable expectations,13 while the newer treatises emphasize reasonable expectations.14 However, the estoppel doctrine is surely destined to disappear into the doctrine of reasonable expectations, because the newer doctrine makes the older one unnecessary.

Employment Contracts

The employment relationship was a primary target of the freedom of contract principle. Courts often interpreted employment contracts to be terminable at the will of either party even when they expressly promised employment for life or other tenure rights. The U.S. Supreme Court forbade legislatures from improving wages or working conditions on constitutional grounds during the Lochner era. Consequently, it should not be

surprising that employees were among the chief beneficiaries when classical contract began to change.

Lawrence E. Blades was the first to discover the new employment cases. In 1967, he reported that courts were taking two new approaches.15 In one, they counted it a tort for an employer to violate a well-established public policy in taking adverse action against an employee. I will treat these cases in Chapter 4. The other approach Blades reported was similar to that which Keeton had discovered courts taking in insurance cases. Courts were inferring employment contracts from the employer’s conduct and informal expressions of intent even if the implied contracts contradicted explicit provisions in the formal written contracts and even if the employer accompanied its conduct or informal expressions of intent with explicit disavowals of contractual intent. In one case, for example, the court enforced seniority rights which it found in the employer’s personnel manual although the manual expressly stated its provisions were without legal effect. The court said the employer ought reasonably to have expected the employees to rely on them anyway.16 Many more jurisdictions have taken a reasonable expectations approach to employment contracts since Blades first reported the trend.17

Origins and Justifications in General Contract Law

Although Keeton’s analysis and support greatly accelerated the development, courts originated the reasonable expectations doctrine in insurance law and have continued to lead its development there. Scholars, on the other hand, originated the development in general contract law. But of course scholars cannot literally originate a law; they can only propose that courts or legislatures make it. Another difference between scholars and courts is that when scholars originate proposals, they usually work out the justifications before the proposals become law; they have to, as a practical matter, in order to convince the courts or legislatures to make them into law. Therefore, whereas I treated the origins and justifications of reasonable expectations separately for insurance, I will treat them together for general contract law.

Karl N. Llewellyn and Friedrich Kessler made the first contributions. Llewellyn first characterized the problem with the standard contract as the consumer’s lack of consent in 193918 and elaborated on the point in 1960,19 but he made no proposals for changing the law in either writing. Llewellyn’s great achievement was the creation and enactment of the Uniform Commercial Code. He put his proposals for changing the law of contract into the Code insofar as he could. I will explain later how the Code and reasonable expectations each influenced, and was influenced by, the other.

Kessler’s contribution was a long and masterful socioeconomic analysis of how and why businesses use standard contracts, published in 1943.20 He included a proposal for changing the law, which he phrased in the deferential manner that was then characteristic of legal scholarly writing:

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.21

A reader in 1943 presumably would have realized that Kessler was proposing that courts ignore the terms of standard contracts and give effect instead to the consumer’s reasonable expectations based on the “typical life situation” and the producer’s “calling.” However, although legal scholars have come to regard the article as a classic, the proposal never generated the kind of discussion and support it needed to become law. Apparently the only court decision to cite it is one by the California Supreme Court in 1966, using it to support an application of contra proferentem.22

Arthur Allen Leff made the next contribution in 1970 in “Contract as Thing.”23 Leff showed that in many of the situations in which people used standard contracts, the consumers thought of them not as contracts but as the things they had purchased. According to Leff, for example, purchasers of insurance typically thought of the insurance policy as representing the insurance itself rather than as the contract by which they purchased the insurance. One result of this attitude was consumers’ acceptance of their inability to change the contractual terms. According to Leff, a purchaser of insurance would no more try to change the terms of the policy than a purchaser of an automobile would try to change the automobile’s engine design or body shape. Thus, Leff thought, the problem with standard form contracts was the consumers’ failure to engage in term-by-term bargaining; they accepted the contracts as they were, as though they were “things.”24

Leff’s observation was accurate, but he attached the wrong significance to it. Standard contracts do indeed discourage term-by-term bargaining, but contract law does not make the validity of a contract depend on the parties’ negotiating it term by term. People often make even nonstandard contracts without bargaining term by term, such as the contracts they make by accepting offers that were made by mail, in catalogues, or in media advertisements. The only necessary element of a contract that standard contracts characteristically lack is the consent of both parties, as Llewellyn realized. People can consent to a contract without having bargained term by term.

Leff’s proposed solution was for law teachers and others to start calling standard contracts “things.” He hoped this would eventually persuade legislators to create administrative agencies for regulating the terms of standard contracts, just as they had already created administrative agencies

for regulating the content and qualities of other “things.” Administrative agencies already regulated the content and qualities of foods, drugs, and various services, for example.25 The weaknesses in this solution are apparent. The law is not importantly changed just by renaming things; at least it never has been. It would require a huge and consequently very expensive bureaucracy to provide meaningful oversight of all the standard contracts in common use, and there is no assurance that it would be effective. Administrative agencies have been regulating the terms of insurance contracts for more than fifty years now. Yet it has been the courts, not the agencies, that have made progress toward solving the standard form problem for insurance.

I published articles on standard contracts in 1971 and 1974. The first and more important was “Standard Form Contracts and the Democratic Control of Lawmaking Power.”26 The second carried my analysis further and made some applications specific to California law.27 I began with what I believed was the first principle of democracy, that a person not be governed without his or her consent. A contract is a form of private governance. It governs the parties after they have made it. Therefore, a contract is not a democratic government unless both parties consented to it. The classical definition of a contract is to the same effect, that a contract is the parties’ manifestations of mutual assent.28

However, this does not mean that a contract must receive the parties’ actual consents. It is enough if each party has given the other reasonable grounds for thinking he has given his consent. Contract law refers to this as the parties’ “objective manifestations” of consent.29 The law grounds all consensual processes on manifested rather than actual consent. Voting is an example. A person who drops a ballot in a ballot box or raises a hand during a floor vote cannot retract the vote later on the ground that he thought the ballot box was a wastebasket or that he was only reaching for his hat. One has to determine consent objectively for any situation in which the consent of one person affects another person’s rights.

First, I asked whether it was reasonable to conclude that the typical standard contract receives both parties’ objectively manifested consents. I concluded it did not, for the reasons I set out in Chapter 2. Producers and others who provide standard contracts generally cannot reasonably expect the consumers to read them, understand them, or appreciate the significance of their terms. Many societal conditions have contributed to this situation, but the chief one is technology. Consumers are no longer capable of understanding the products they buy well enough to protect their interests in the contracts by which they buy the products.

If the consumer does not objectively consent to the standard form, is there anything to which he does give his objective consent when he buys or contracts for something? This is a factual question, the answer to which