Учебный год 22-23 / Binding Promises - The Late 20th-Century Reformation of Contract Law-1

depends on the facts of the case; however, the word I chose to describe that to which the consumer gives his consent was the same word that Keeton had chosen: the consumer’s “reasonable expectations.” I went on to say that the consumer’s reasonable expectations are also the producer’s, because a reasonable producer knows what the consumers who buy its products will expect. Therefore, one can properly speak of the parties’ reasonable expectations without distinguishing between consumer and producer, at least as a rule.

Thus my reasoning and Keeton’s analysis of insurance decisions led to the same result. Although I began with the consent principle, the consent principle led me to the principle of reasonable expectations, which was where Keeton began. In addition, I went one step further than Keeton had. I concluded that the reasonable expectations are the contract, because it is to them, rather than to the standard form, that the parties give their manifested consent. Under my analysis, there is no need to search for justifications for the doctrine, as Abraham, Keeton and others had thought there was. The doctrine is not really a doctrine after all; it is a conclusion one should reach by logical application of the principles of contract law. There is no more need to justify enforcing the parties’ reasonable expectations than there is to justify enforcing any contract.

Nonetheless, I added some economic justifications. Reasonable expectations or something like it is necessary if the product qualities that the consumer could not otherwise understand are to receive the benefits of competition. If producers are able to enforce contract terms even if consumers do not reasonably expect them, the producers whose contract terms provide consumers with less are not penalized by selling less, and the producers whose contract terms provide consumers with more are not rewarded by selling more. The tendency, as I explained in Chapter 2, is to reduce all the producers’ contract terms to the level of those that are least favorable to the consumer, because the producers that use the less favorable terms obtain a costless benefit. Their terms do not cost them any sales, and they save the costs of providing whatever the more favorable terms would provide the consumer.

Reasonable expectations, on the other hand, holds a producer liable for delivering an inferior product unless consumers expect the product to be inferior, and if consumers expect that, the producer will sell fewer prod- ucts—unless it offers what the consumers consider to be sufficient compensating advantages, such as lower prices. The necessity of choosing between losing sales because one’s products are inferior and incurring the costs of making one’s products equal or superior is, of course, competition. The members of the law and economics school of legal scholarship should become supporters of reasonable expectations when they come to understand this.

The insurance industry has used standardization of contract provisions to increase competition. Congress has exempted insurance from the federal antitrust laws to the extent the states regulate it. All states regulate insurance, but the regulation generally allows insurers to compete if they choose to, and competition is often vigorous. However, insurers have agreed on standard formulations for many policy provisions, and state regulators and legislatures have mandated many others. One of the rationales of the standardization is that it increases competition by making it easier for the consumer to tell which brand of insurance is the better bargain. Of course, it is the one that has the lowest price if all the provisions are standard.30 Standardization does indeed facilitate price competition, but at the cost of eliminating competition in the standardized provisions. Standardization is also inferior to reasonable expectations in that it does nothing to inform consumers about what they are buying.

Although Keeton’s articles, Leff’s article, and my first article all came out within a year of one another, we all wrote in ignorance of the others’ contributions. Keeton’s articles appeared first. Leff and I did not read them because we thought of Keeton only in connection with torts and insurance. Leff’s articles and mine were each submitted before the other’s appeared. The similarities among our three contributions and the proximity of their appearances must be attributable to the zeitgeist. The time had come for scholars to reassess the principles of contract law in the light of the widespread use of standard forms.

The only systematic analysis of standard contracts after 1974 was a 1983 article by Todd D. Rakoff.31 Rakoff concluded that standard contracts should be presumptively unenforceable, but he reached no clear conclusions about how the producer might rebut the presumption. He did say, however, that solutions to the standard contract problem would not be found in contract law but would require “a new legal structure.”32 He rested this conclusion on his analysis of the solutions others had offered, all of which he found inadequate, plus his confessed inability to come up with any good solutions of his own. However, he overlooked or misinterpreted the solutions almost everyone else had offered. He misinterpreted my first article, overlooked my second, overlooked Keeton’s, Abraham’s, and everyone else’s writings on reasonable expectations in insurance, and overlooked Blades’s article on the new approaches to employment contracts. He misinterpreted my article by assigning my proposals for dealing with the consumer’s lack of understanding to the conclusions I had reached about the quite different problem of the legitimacy of contracts that one party had no choice but to accept. It is not surprising that he thought my solutions would not work.

Although the scholars I have named were the chief sources of reasonable expectations in general contract, they were not the only sources. The insur-

ance decisions have been another source. Many courts adopted reasonable expectations for general contract after or as soon as they adopted it for insurance simply because they realized that there is no principled ground for limiting it to insurance. In still other cases, courts have construed a contract exactly as they would have done by using reasonable expectations without evidencing an awareness that this was what they were doing. I count these cases as additional sources of reasonable expectations because all it should take to make them literally reasonable expectations is my pointing out that this is what they amount to. The first of these other sources I will describe is one that, ironically, originated as an attempt to prohibit courts from denying contractual effect to standard forms in order to construe the contract on the basis of the parties’ reasonable expectations.

The Restatement (Second) of Contracts

The Restatement (Second) of Contracts, which was published in 1981, includes just one section, Section 211, dealing with contracts by standard form. Section 211 has favorably influenced the development of reasonable expectations despite the fact that courts have generally misinterpreted it. The section was drafted in early 197033 by people who were not—and given that Keeton and I first published in late 1970 and 1971, could not— have been aware of the scholarly literature on reasonable expectations. Robert Braucher, the first Reporter for the Restatement, drafted the section. He resigned his position as Reporter the following year in order to become a member of the Massachusetts Supreme Judicial Court, and apparently no one looked at the section again before the Restatement was published in 1981. Unfortunately, however, people since have generally assumed that the section takes reasonable expectations into account, presumably because the development of reasonable expectations was well under way when the Restatement was published.

Section 211 appears in Topic 3 of the Restatement’s Chapter 9. Topic 3 deals with the parol evidence rule. The parol evidence rule operates if, and only if, the written contract is an “integrated agreement,” which is an agreement the parties intended to be their final and complete expression of agreement on the subject. Section 211 reads as follows:

§211. Standardized Agreements

(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.

(2)Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of 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.

Subsection 1 states the rule for determining whether a standard contract is an integrated agreement. Subsection 3 states an exception to the rule of Subsection 1. Subsection 2 has nothing to do with the parol evidence rule. The record of the proceedings shows that Braucher included it for other reasons and that the members of the American Law Institute who were present when Braucher presented the section paid no attention to it.34 In effect, Subsection 1 makes a standard contract an integrated agreement if the recipient has reason to believe it is a standard contract. Because a recipient would have reason to believe this in virtually every case, the subsection makes standard contracts subject to the parol evidence rule virtually per se, a dubious honor the Restatement confers on no other kind of contract. Thus, Subsection 1 makes the recipient’s reasonable expectations less capable of overriding standard contracts than contracts that are not standard.

Braucher twice explained why he had drafted subsection (1) as he did:

When I came to put [the section] . . . together, . . . I stated first a rather reactionary proposition . . . that when you agree to a standard agreement, you agree to it, and that means everything that’s in it, subject, of course, to qualifying terms.35

Primarily I have talked about standardized agreements, and I think I regarded this as a good opportunity and a good place to write something in favor of these contracts, which seem to me to be essential to human life. I mean, one of the things we need is freedom from choice and freedom from information. (Laughter) We’re all absolutely swamped with things we would rather not know about, and it seemed to me a chance to say that was something worth having this in for.36

Braucher did not explain why he thought his proposition was “rather reactionary,” but in fact it was, even in 1970. Llewellyn had opined that the recipient gives a standard contract only “a blanket assent (not a specific assent) to any not unreasonable or indecent terms . . . , which do not alter or eviscerate the reasonable meaning of the dickered terms.”37 Moreover, there was also the doctrine of unconscionability, which the Code had recently introduced. Neither Llewellyn’s opinion nor the Code’s new doctrine gave the recipient’s agreement the sweeping effect that Braucher’s “rather reactionary proposition” gave to it.

Moreover, Subsection 3 provides only a narrow exception. Braucher explained that he had originally drafted the subsection to refer to “bizarre or

oppressive terms” but had omitted the reference at the suggestion of Charles Hastings Willard;38 however, the purpose was still to provide a defense against the inclusion of bizarre or unusual terms to which the recipient’s objections were known, although these terms would not have to be unconscionable. Some of the other participants at the session pointed out that the subsection does not require that the terms be bizarre or unusual, but Braucher never revised or retracted his statement about the subsection’s purpose,39 and even repeated it later in the session.40

Ironically, the little effect the section has had on contract law has largely supported reasonable expectations. The highest courts of Arizona,41 Iowa42 and Massachusetts43 cited the section as support for adopting the doctrine. The Iowa court virtually equated the section with the doctrine in an early decision,44 although it went on later to give the doctrine its usual definition without trying to square it with the section.45 All the other highest-court decisions adopting the doctrine ignored the section. The only scholarly comment of which I am aware that deals with the effect of the section on reasonable expectations is Henderson’s, and he comes to the conclusion that although the section presents major difficulties, on the whole it has helped by demonstrating the American Law Institute’s support!46 The effect has not all been supportive, however. A federal district court47 and the U.S. Court of Claims48 have cited Section 211 as authority for refusing to follow the doctrine, although each decision also rests on the particular facts of the case.

Contracts of Adhesion

Edwin W. Patterson characterized standard contracts as “contracts of adhesion” in 1919.49 Only continental lawyers had used the name before Patterson imported it.50 Kessler’s classic 1943 article on standard contracts also used this name.51 We saw that Rakoff also used the term with this meaning in 1983. Of course this meaning of “contract of adhesion” makes it nothing more than a marker for using the doctrine of reasonable expectations, which is how the courts of California52 and Nevada53 use it. The Supreme Court of Hawaii used the term in this sense in a 1990 decision,54 but on all other occasions it seems to have said simply “standard contract.” There are lower-court decisions using “contract of adhesion” to mean simply a standard contract in Kansas,55 Missouri,56 and Pennsylvania.57

On the other hand, other writers have given the term a different meaning. They have used it to mean a contract prepared in advance by one party and offered to the other on a take-it-or-leave-it basis, which the other party has no reasonable alternative but to accept. For example, a contract prepared by an electric public utility and offered to its subscribers on a take-it-or-leave-

it basis would be a contract of adhesion in this sense, if the utility were the only provider of electricity in the area.58 Terms in a contract that a person accepts because he had no alternative do not receive the person’s consent, because consent must be voluntary. A contract of adhesion in this sense is not enforceable as such even if the party with no choice reasonably expected it. Whether the contract is enforceable in this case depends upon whether there are some noncontractual grounds for enforcing it. Approval by the relevant public utility regulatory commission would constitute such a ground, for example. There are decisions using “contract of adhesion” in this sense in Alaska, Colorado, Illinois, Michigan, Minnesota, New Jersey, New Mexico, South Dakota, and Texas.59

Unconscionability

Almost every state had enacted the Uniform Commercial Code by the end of the 1970s, and most had done so by the end of the 1960s. The most important change in contract law that Article 2 of the Code introduced was the doctrine of unconscionability. Courts generally adopted unconscionability into the common law of contract almost as soon as their state legislatures enacted the Code.

Generally speaking, unconscionability denies enforcement to a contract term that is very unfair to one party if that party did not have a reasonable opportunity to read and understand the term before committing to the contract. The similarity of the second part of the doctrine to reasonable expectations is apparent. If a person had a reasonable opportunity to read and understand the term, he would reasonably expect it, and if he did not have such a reasonable opportunity, he might not reasonably expect it (although he would still reasonably expect it if it stated something widely understood or ordinary).

But the first part of the doctrine distinguishes it from reasonable expectations and makes it much less effective against abuses of bargaining power. Whereas reasonable expectations gives the consumer his reasonable expectations in every case, unconscionability requires the court to conclude that the contract or contract term will operate very unfairly against the consumer in the particular case, and the consumer has the burden of persuading the court to reach this conclusion. The result is that unconscionability decisions are too particularized to the facts of the case to constitute precedents, and the doctrine fails to generate any sizable body of law to protect consumers. Nevertheless, their similarities made unconscionability and reasonable expectations each into a support for the other. Many of the early reasonable expectations decisions also rested on unconscionability, for example.60

Article 2 of the Uniform Commercial Code

The courts have also taken approaches similar to reasonable expectations under sections of Article 2 that they did not adopt into the common law of contract. One of these is Section 2-207, which Llewellyn intended to determine the contract the law would deem the parties to have made if each of them sent his own standard forms to the other. The first two subsections of 2-207 provide for composing the contract out of parts of each party’s forms, although the forms do not match, if the parties are deemed to have reached an agreement on the basis of them. Subsection 3 provides for making the contract if the parties did not reach an agreement on the basis of their forms but proceeded as though they had a contract anyway. In essence, Subsection 3 provides that the contract is composed of the parties’ forms insofar as they match and of “supplementary terms incorporated under any other provisions of [the Code]” insofar as the forms do not match.

Courts have interpreted the quoted phrase as referring to what are commonly called the Code’s “gap-filler provisions.” These provide for parts of the contract upon which the parties have not agreed. Some of them are quite specific, such as the provision setting the place of delivery if the contract does not specify one, but even the specific provisions are invariably qualified by a statement such as “unless circumstances indicate otherwise.” Most of the gap-filler provisions are very vague, doing no more than referring the court to the facts of the case it is deciding. For example, the gap-filler for the price says the price shall be a “reasonable price at the time of delivery.” In either case, the court proceeds as if it were following the reasonable expectations doctrine: it fills the “gaps” with the parties’ reasonable expectations. Courts have been increasingly deciding cases under Subsection 3 rather than under the other subsections, because the results under the other subsections are arbitrary. Courts are also deciding cases under Section 2-207 even if only one party uses a standard form.61 If all these trends continue to their logical conclusions, the result will be that reasonable expectations will apply to all contract formations under the Code, in effect if not in name, so long as at least one party uses a standard form.

Courts have also used reasonable expectations, in effect, under Section 2-316, the warranty disclaimer section, and Section 2-719, the section dealing with limitations of remedies. Section 2-316 generally invalidates warranty disclaimers unless they are clear and conspicuous;62 if they are clear and conspicuous, the buyers will ordinarily have reasonably expected them. Section 2-719 does not include a clear-and-conspicuous requirement, but courts have nevertheless read it into this section.63

The Covenant of Good Faith and Fair Dealing

The so-called covenant of good faith and fair dealing will be treated in Chapters 4 and 5, because it played a major role in the evolution of the relational torts and the tort of bad faith breach. I will also briefly mention it here, because it played a minor role in the evolution of reasonable expectations. Contract law has traditionally required a person to perform a contract in good faith. The courts sometimes express this requirement by saying that every contract implies a covenant of good faith and fair dealing. The covenant was traditionally limited to prohibiting people from taking unfair advantage of literal readings of their contracts.

In Patterson v. Meyerhofer,64 for example, the contract provided that Patterson would purchase certain properties being auctioned as inexpensively as he could and that Meyerhofer would repurchase them from him for a total price of $23,000. Patterson was betting he could purchase the properties for less than $23,000, and Meyerhofer was willing to pay $23,000 for getting the properties at that price with no risk of having to pay more. The contract did not say that Meyerhofer would refrain from bidding at the auction herself, but she did bid, and she succeeded in getting the properties for less than $23,000. Presumably if she had seen that she could not get the properties for less than $23,000, she would have let Patterson buy them. Thus, if one read it literally, Meyerhofer had trapped Patterson in a contract from which she could only profit and he could only lose. Patterson sued her for the profits she prevented him from making and won, on the ground that Meyerhofer violated the covenant of good faith and fair dealing.65

The courts in recent decades have expanded the covenant to include situations in which even a fair reading of the contract would permit a party to act unfairly. All these decisions, to my knowledge, involve standard forms, in which the party supplying the standard form did not bring the attention of the other to the provisions concerned or in which the party supplying the form could not reasonably have expected the other to understand the provisions. Thus, the courts used the covenant to give recipients of standard forms what they reasonably expected although the provisions in the forms would have defeated those expectations.

For example, in Silberg v. California Life Insurance Co.,66 a 1974 decision, the disability insurance policy allowed the insurer to withhold payments until the insured and the appropriate authorities had resolved the question of the insured’s entitlement to workers’ compensation benefits. The plaintiff and the authorities were unable to resolve this question for almost two years, during which the plaintiff was compelled to lie and use

other subterfuges to obtain medical treatment, because he could not pay for it. He suffered two nervous breakdowns and was eventually financially ruined. The Supreme Court of California held that the insurer had violated the covenant of good faith and fair dealing as a matter of law. The policy application form declared in large, heavy type, “Protect Yourself Against the Medical Bills That Can Ruin You.” This was the protection the plaintiff reasonably expected to get. The provisions in the policy allowing the insurer to withhold payments until the question of workers’ compensation benefits had been resolved were not enforceable because under the circumstances they conflicted with this expectation.67

Unknowing Uses

Courts have also occasionally used reasonable expectations without knowing it.68 Judge Richard A. Posner’s opinion for the U.S. Court of Appeals for the Seventh Circuit in Morin Building Products Co. v. Baystone Construction, Inc.69 is an example. Baystone was the general contractor to build an addition to the General Motors Chevrolet plant in Muncie, Indiana. Morin was a subcontractor, engaged to supply and erect the aluminum walls. The contract required that the exterior siding of the walls be of “aluminum type 3003, not less than 18 B & S gauge, with a mill finish and stucco embossed surface texture to match finish and texture of existing metal siding.” The contract also provided:

[A]ll work shall be done subject to the final approval of the Architect or Owner’s [General Motors’] authorized agent, and his decision in matters relating to artistic effect shall be final, if within the terms of the Contract Documents. . . . [S]hould any dispute arise as to the quality or fitness of materials or workmanship, the decision as to acceptability shall rest strictly with the Owner, based on the requirement that all work done or materials furnished shall be first class in every respect. What is usual or customary in erecting other buildings shall in no wise enter into any consideration or decision.70

When viewed from an acute angle in bright sunlight, the exterior siding that Morin erected did not give the impression of having a uniform finish. General Motors rejected it after Morin had erected it, required Morin to tear it down and remove it, and obtained another contractor to build another. Morin argued that there were no objectively reasonable grounds for the rejection: there was nothing to show that the walls were to serve anything other than a strictly utilitarian purpose, and the trade usage of “mill finish steel” meant “‘sheet having a nonuniform finish which may vary from sheet to sheet and within a sheet, and may not be entirely free from stains or oil.’”

Indiana law enforces a subjective standard of satisfaction if the contract provides for it, even if the subject matter is susceptible to an objective evaluation. A subjective standard requires only that the expression of dissatisfaction be honest. Morin presented no evidence that the General Motors representative’s expression of dissatisfaction was not honest. The district court nevertheless held for Morin, and the court of appeals affirmed. The court of appeals reasoned that although the language quoted above may have been sufficient to express an intention to have a subjective standard of satisfaction, the district court judge was right to ignore it. It appeared only as item 17 in a list of conditions in a general purpose form contract. This in turn was incorporated by reference into the form contract the parties used, in which it appeared as Paragraph 35. Under these circumstances, the court of appeals concluded:

We do not disparage form contracts, without which the commercial life of the nation would grind to a halt. But we are left with more than a suspicion that the artistic-effect and quality-fitness clauses in the form contract used here were not intended to cover the aesthetics of a mill-finish aluminum factory wall.71

Judge Walter E. Hoffman’s opinion for the U.S. Court of Appeals for the Ninth Circuit in Nanakuli Paving and Rock Co. v. Shell Oil Co.72 is another example. Nanakuli signed a long-term requirements contract with Shell for the asphalt Nanakuli would use for its paving contracts for the public roads and highways of the island of Oahu. The contract provided that the price of the asphalt would be Shell’s posted price at the time of delivery. However, Nanakuli showed at trial that it was the practice in the paving trade on Oahu for suppliers of asphalt, aggregate, and other paving materials to provide “price protection” to their customers. A paving contractor could take as much as two years to perform a paving contract, but the government agencies that let the contracts required that the contractor perform for the price at which it was awarded the job despite any increases that might occur in the prices of paving materials before the job was finished. Under price protection, a supplier would provide a contractor’s requirements for a paving job at the posted price in effect when the contractor bid for the job, regardless of what the posted price might be at the time of delivery. Nanakuli also showed at trial that Shell had given it price protection on the only two prior occasions when it needed such protection under its requirements contract.

The district court gave judgment for Shell despite a jury verdict in Nanakuli’s favor. The court of appeals reversed and reinstated the verdict on the ground, among others, that “agreement” as the Code defines it73 “is broader than the written paper” of the contract and includes all the circumstances under which the contract was made, including any relevant trade practice or usage.74 The court’s argument is illogical if one accepts the principles of