The dark side of contract law.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This latter point was well understood until the 20th century, for it was almost universal law in the United States that a promise to arbitrate a future dispute was revocable. That rule was abrogated in the Federal Arbitration Act of 1925(15) and in much state legislation(16) to accommodate contracts for the sale of goods between distant merchants.(17) No one envisioned the use of dispute resolution clauses to strip workers, consumers, borrowers, and other powerless people of rights that were enacted for their protection.

State solutions

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

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

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

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

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

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

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

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

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

* forgo access to evidence needed to prove a claim;

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

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

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

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

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

Litigation group takes aim at arbitration abuse

Before they can get a case before a jury, attorneys for consumers, workers, and others are working hard to master a rapidly growing body of federal and state law relating to mandatory arbitration. To support these trial lawyers, ATLA created the Mandatory Arbitration Litigation Group.

Members are involved in cutting-edge litigation on this issue. Pending cases include

* Marsh v. First USA Bank, No. 399CV0783-T (N.D. Tex.), attorney Britt Monts, Dallas;

* Wells v. Chevy Chase Bank, FSB, No. 08159 (Md. Ct. Spec. App. Jan. 15, 1999), attorneys Paul Bland, Washington, D.C.; Michael Malakoff, Pittsburgh; and John Ward, Baltimore; and

* Bownes v. First USA Bank, NA, No. CV-99-2479 (Ala., Montgomery County Cir. Ct.), attorney Mark Englehart, Montgomery, Alabama.

Among other activities, the litigation group maintains a list serve where members share new court opinions on arbitration issues; examples of how forced arbitration can hurt workers, consumers, and victims, which can be used in educating the public and others about abuse of arbitration; information and documents about arbitration providers; briefs opposing motions to compel arbitration; discovery requests aimed at defendants and arbitration service providers; and expert affidavits used in resisting mandatory arbitration.

The group will host an educational meeting at the ATLA Annual Convention in Chicago in July.

Any ATLA member wishing to join the Mandatory Arbitration Litigation Group should contact its chairman, Paul Bland, at [phone] or by e-mail at [e-mail]. The onetime fee for membership is $100.

Notes

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

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

(3.) RESTATEMENT (SECOND) OF CONTRACTS [sections] 211 (1997).

(4.) U.C.C. [sections] 2-302 (1998).

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

(6.) U.C.C. [sections] 1-105 (1998).

(7.) RESTATEMENT (SECOND) OF CONFLICT LAWS [sections] 187 (1988).

(8.) Id. [sections] 80.

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

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

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

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

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

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

(15.) 9 U.S.C. [sections] 2 (1994).

(16.) E.g., UNIF. ARBITRATION ACT [sections] 1 (1955), 7 U.L.A. BUS. & FIN. L. 6 (1997).

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

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

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

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