Contracts Class Notes 1/14/04


More on boilerplate contracts


Say you agree to buy something or make some kind of a deal.  The merchant with whom you’re dealing has a form and says: “Here’s where you sign”, and you sign.  Then we start with the approach that you’re bound by what you agreed to.  Even if you didn’t read it, you ought to have known that you were making a deal on the merchant’s (non-outrageous) terms.


But that’s not the end of the story.  Three cases we looked at last time show that if the “contract” is more in the nature of a “claim check”, we won’t hold the consumer to “surprise” terms.


Mundy v. Lumberman’s Mut. Cas. Co.


The Mundys had a homeowners’ policy that covered silver.  However, the insurance agent said their renewal policy only covered $1,000 worth of loss of silver stuff.  The Mundys sue.  What’s the worst fact you have to deal with if you’re the Mundys’ lawyer?  Mr. Mundy is a lawyer!  He’s an assistant D.A.!!!  If anyone ought to pay attention to writings, it’s a lawyer.  He would have a better chance of winning if he were a truck driver or otherwise not as educated as he is.  But this is someone who ought to be skilled with words and skilled with reading pieces of paper.


The line most quoted from this decision is a quote from another case: “Even a casual reading of the mailed material would have given the plaintiffs adequate notice”.  If you’re the insurance company, you want to make clear enough in the writing you send the customer so that anyone would get the message and thus be on notice.  Then, whether they read it or not, you can claim that they should have and could have read and understood it.


Does the change to $1,000 of coverage for silverware on the renewal policy change the dickered deal significantly?  It’s not uncommon that an insurance plan doesn’t really insure.  There are often deductibles or limitations on large losses.  Is there anything wrong with that?  No.  That’s okay.  The only serious question is: What did the parties agree do?  As policy, it’s okay because it allows people to buy just the insurance they need at an affordable rate.  The insurance company can do this, but the question is whether they actually did it.  That is, did the insured people get the message?


How does a renewal policy differ from the original policy?  When, as in this case, we have a renewal policy which changes the rules on the insured, the insurer has a burden of flagging the changes and putting the insured on notice that the rules have changed.  Breyer thinks that it was adequately done in this case such that even a casual reading would have conveyed adequate notice.


Weisz v. Parke-Bernet Galleries, Inc.


Weisz and the Schwartzes go to Parke-Bernet and they’re successful bidders on some “Raoul Dufy” paintings.  These were big-time purchases.  The paintings turned out to be forgeries[1].  Weisz tried to get his money back from Parke-Bernet.  He was successful at the trial court level, but they failed on appeal.


Why did they succeed at trial?  What did the trial judge say?  The catalog said that the paintings were sold “as is”.  Why shouldn’t Dr. Weisz have read that and be bound by it?  Could the disclaimer have been made any more simple?  On the other hand, doesn’t the “tonyness” and general fanciness of the place implicitly warrant the authenticity of the painting?


The trial judge says that if you want to sell paintings “as is”, you have to really rub your customers’ noses in it.  Parke-Bernet would just as soon not do it that way because it would be sort of uncool and unchic.


What does the appellate court say?  Why do they reverse and allow no recovery for Dr. Weisz and the Schwartzes?  They point to the warranty in the catalog.  They also say that this is an auction of old paintings, thus the painters aren’t around to ask whether they really painted the paintings.  The best you can do is say: “We think the guy painted these paintings.”  But nobody knows for sure!


There are two ways to think about this case: (1) There was a flat out warranty that these paintings were genuine, and then it was disclaimed.  But the better argument for Parke-Bernet was: (2) Of course they didn’t warrant they were genuine, and you, the buyer, should have known that too.  Everybody knows there are a lot of forgeries going around and you can’t be absolutely certain about anything.  Even without the condition of sale, it ought to be a case decided for Parke-Bernet because all they promised was that there is some expert somewhere, who might be wrong, who thinks the painting is authentic.


What we have here is a case where the deal could have been anything the parties wanted to make it.  Parke-Bernet could have made a deal such that they absolutely won’t be responsible if they’re fakes.  That’s an okay deal.  But what deal did the parties actually make?


Look at the additional facts.  Think about how high the prices were.  Both purchasers fancied themselves as serious collectors who both hired their own experts to look at the paintings before they bid.  This tells us that there is a certain amount of risk involved in collecting art.  The bargain is: They look genuine and the expert thinks they’re genuine, but there are fakers out there and they might be fakes, in which case we, the gallery, aren’t responsible.


If we’re talking about objective mutual assent, there is no question that Parke-Bernet intended not to be held responsible for forgeries.  If the bidders believed that Parke-Bernet did intend to be held responsible, then we have to see which party’s interpretation is more reasonable.


Karl Llewellyn on boilerplate form agreements


This was a vexing problem in his time and it remains a vexing problem.  You have actual, subjective meeting of the minds on the dickered terms in most cases.  Then there will be a non-specific, blanket assent to deal on the seller’s rules because the buyer signs the seller’s form.  The deal is on the seller’s rules, but not outrageous rules.  Nothing that’s oppressive, unconscionable, or contrary to public policy will be allowed.  The seller also won’t be allowed to go way out of line from the dickered deal.


Check out § 211 of the Second Restatement.  You’ll find that the comments to this section track Llewellyn’s comments pretty closely.  This section tries to do pretty much what he suggested.


However, not everyone agrees with Llewellyn.  Rakoff thought that contracts of adhesion ought to be presumed unenforceable.  The considerable weight of scholarly opinion is “No, we ought to treat the boilerplate as presumptively unenforceable and have the judge make the contract.”  Which approach do we favor?  When the revisions to Article 2 were being made, the academic view didn’t carry the day, and the new Article 2, like virtually all courts, will pay attention to the terms in the writing.  Is that wrong?


One way to think about the question is: do you want your contracts made by your seller, a profit-oriented organization, or do you want them made by a judge, interested in fairness and decency?  One problem with the “fairness approach” is that you’d have to litigate “standard” contract terms frequently, at least at first.  You can’t simply read the writing and plug in what’s there.  What’s another problem?  Sellers will compensate by charging consumers more.


If you buy into economics, you will find that the sellers maximize profit by giving customers what they want.  If buyers want different provisions, the sellers will have an incentive to provide them and thus make more money.  Why do merchants provide the provisions that they do that limit liability?  They think that most consumers want that because it lets the seller sell at a lower price.  If the judge makes the contract, he has no similar economic incentive.  He would want everything very “upscale”, with everything that goes wrong compensated.


Clovis thinks there are excellent arguments for having your contracts made by merchants rather than judges.


ProCD, Inc. v. Zeidenberg


What does this case have to add?  This is a case of “deal now, terms later”.  What we were talking about in Mundy is “deal now, terms now too”.  The consumer had a chance to look at the piece of paper and see what they were getting into beforehand.


Easterbrook calls this a situation of “money now, terms later”, and he says there’s nothing wrong with that, which is a controversial stance.


In Zeidenberg, the transaction takes place in a store.  He pulls a package off the shelf.  The package is designed to be informative and eye-catching.  It’s probably a supermarket-style store where he takes his purchase to the counter and pays for it and then walks away.  Has a contract been formed at that point?


Hill v. Gateway 2000, Inc.


In this case, it’s not face-to-face, but rather done by mail order.  The Hills negotiate a deal over the phone.  Inside the computer box, there is a notice with an arbitration clause.  When was the contract formed there?


In both situations, Easterbrook notes that a license pops up when you start using the software (Zeidenberg) or you see a license inside the packing box (Hill).  Easterbrook makes the terms inside the box part of the deal.


Zeidenberg tried to argue that putting the product on the shelf is an offer that he accepts by taking the product off the shelf, paying for it, and walking out.  If that’s the case, there’s no license restriction on Zeidenberg’s use of the software, because he didn’t know of any such restriction before the contract was formed.


The Hills would argue that they didn’t know about the arbitration clause at the time they purchased the computer.


The big questions are: (1) When was the contract formed?  (2) What are the terms of that contract?


It seems that contracts ought to be formed early on.  Why is it that the terms of them ought to include terms that come later, after contract formation?  How do you support the Easterbrook position here?  There are arguments that acceptance occurred at the store in Zeidenberg and over the phone in Hill.


This is sometimes called a “rolling acceptance”.  One thing that will help this be enforceable is the opportunity to return the goods within a certain amount of time.


What does Article 2 have to say about this?  Not much that will help Easterbrook.  One approach in the Hill situation is you have § 2-206.  When people call in to buy goods over the phone or electronically, they’re typically forming a contract when they order.  How do we get terms later?


Another approach is found in § 2-209, where you have a contract without these terms originally, but then the contract is modified by agreement.  The agreement comes when the consumer fails to return the goods within 30 days.


The Easterbrook opinions suggest that “cash now, terms later” is standard, garden variety contract law stuff for which no new doctrine is needed.  But what doctrine is being applied?  What can we say about this kind of situation?  What’s the best argument you can make in favor of the Easterbrook position?  Well, it’s a useful way to do a lot of business and it would be tiresome at best and burdensome in many ways to have all the terms laid out at the time of the deal because we’re dealing with complicated products.  It would be difficult to get all the terms out on the outside of the package and make everybody read a lot of stuff.  There is a lot of utility in “deal now, terms later”.  How do we fit this into the existing law?  Without making people read all the terms, you can flag the idea that the purchase is subject to some terms which will follow later.  You can make the purchase subject to such-and-such terms to follow later.


Zeidenberg probably knew exactly what he was doing in trying to cheat ProCD.  The Hills probably didn’t know what was going on.


Is it unnecessary?  Is it inappropriate?  Compare to Parke-Bernet.


Back to Class Notes

[1] By Fred Faker, expert art forger