Criticism follows powerful legal group to next project - a 'troubling' take on consumer contracts

By Nicholas Malfitano | Jun 26, 2018

PHILADELPHIA – Fresh off a controversial eight-year project that was criticized even after its passage, an influential group that advises judges on the law is seemingly about to do it all again.

With the American Law Institute’s recent passage of its Restatement of the Law of Liability Insurance after an odyssey of creation, discussion and revision, the Philadelphia-based legal scholarship group has also turned its attention to the field of consumer contract litigation with another Restatement – one whose intent and foundation are also being questioned by critics and observers.

The ALI publishes the Restatement of Torts, which serves as a standard that judges can use to decide the law in applicable cases.

The document is officially titled “Restatement of the Law, Consumer Contracts," and has been in the works for several years. The project seeks to address and close a perceived inherent information gap between the business and consumer parties to a contract, through reference to “the Restatement Second of Contracts, the Uniform Commercial Code, and on court opinions in cases involving disputes between businesses and consumers,” according to the organization.

Whether the group is restating the law or suggesting its alteration was up for debate as critics fought the liability insurance Restatement.

A draft version of the entire consumer contracts project has been completed and was presented for discussion at the ALI’s annual meeting last year. Though none of its nine sections have yet been approved by the ALI Council, the group’s website explains the project will tentatively appear on the annual meeting agenda in 2019.

“Almost every provision of this project is troubling, because it’s built not so much on case law, but rather on a blend of statutory law from consumer protection acts – which were never created to address contract law issues," said Shook Hardy's Chris Appel, an attorney who has closely followed the creation and development of the ALI's projects.

"They were created to address unfair practices in the marketing and sales of products. They weren’t focused on contracts and certainly not consumer contracts.

“What this project does is it takes aspects of statutory law which was created for a completely different reason, puts it in a Cuisinart and blends it with common law principles that are in contract law generally, and comes out with this new formulation – in our view, an aspirational formulation – of what the law of so-called consumer contracts is.”

Omri Ben-Shahar, an author in the field of contract law and consumer protection, is one of three Reporters working on the document. Ben-Shahar is the Leo and Eileen Herzel Professor of Law, and Kearney Director of the Coase-Sandor Institute for Law and Economics at the University of Chicago Law School.

“The fundamental issue that we’re dealing with, and that justifies a specific Consumer Contract Restatement, is the fact that we are not talking about parties who deal with each other at arm’s length from equal positions, negotiating a big transaction or something like this,” Ben-Shahar said.

“Rather, on the one hand stands a very sophisticated, well-counseled party who does these [contracts] many times, has experience and maybe has higher stakes, because everything that is in the contract will affect numerous transactions. 

"And on the other side stands the consumer, who does not have the [same] sophistication, knowledge, experience or stakes in the matter. The consumer is less knowledgeable, but not necessarily irrational or stupid. It’s very rational not to invest your lives spending [time] inquiring and investigating what’s in the fine print. People want to enjoy the product, not the contract.”

Based on the perceived lopsided divide in information and knowledge between business parties and consumers, Ben-Shahar termed the resulting environment of consumer contracts as “asymmetric.”

The Restatement has sections on unconscionability, deception and promises not part of standard contract terms.

Other sections include discretionary obligations and effects of derogation from mandatory rules.

Two specific areas of consumer contract law specifically addressed by the Restatement are the doctrine of mutual assent – rules that determine how contractual terms are adopted and the processes a business uses to introduce and to modify terms in the agreement – and the use of mandatory restrictions governing the contract, such as rules that limit business’ discretion in drafting contractual terms and setting boundaries for permissible contracting.

“What the members of the ALI will see in this draft and the way to think about the various provisions is that it represents a bargain – we call it 'The Grand Bargain.' On the one hand, the draft endorses rules of assent that are fairly lenient; they do not require too many clicks for terms to be adopted, they do not require too many boxes to pop up when consumers surf on the Internet. Meaningful notices are enough for the terms to be adopted,” Ben-Shahar stated.

In response to concerns that businesses may take unfair advantage of that proposed freedom in consumers adopting their contractual terms, Ben-Shahar pointed to the other side of the bargain outlined in the Restatement.

“(We also have) fairly strict limitations on how far businesses can go. We have adopted rules that have to do with unconscionability, what counts as unconscionable with deception, and how the promise that was made to the consumers, the representations that were made to the consumers that drove them to enter into the contract, how those can be vindicated and not be frustrated by the fine print,” Ben-Shahar said.

Appel, though, expressed a number of reservations with the intent of the Restatement, saying this is the first time that the American Law Institute has ever focused a product specifically on consumers, so there are no previous in-house works to reference in the Restatement.

“There is no Restatement of Consumer Torts or Restatement of Consumer Property, for example. Those are other subject areas where the ALI has issued Restatements, and this is the Restatement of Consumer Contracts. From the 50,000-foot level, that’s a problem in our view,” Appel added.

Appel opined when getting down to what the project does, he felt the document becomes even more problematic.

“It’s an aspirational work product, when the basic purpose of a Restatement is to restate existing common law. This project, the basic concept of it is that it turns the idea of what a Restatement is supposed to be on its head,” Appel said.

“It’s restating an area of so-called consumer contract law, where it doesn’t appear to any court as separated out of a different set of contract rules that already apply to consumer contracts, as opposed to the general law of contracts.”

Appel specifically pointed to the project’s proposal of expanding the doctrine of unconscionability as it relates to consumer contracts, creating “a broad and ambiguous” deceptive contract theory through taking aspects of state consumer protection statutes and transforming them into a common law doctrine, and allowing courts to rewrite contracts.

“On top of that, a lingering issue in the background is, how does this Restatement of Consumer Contracts address the issue and common practice of using binding, pre-dispute arbitration agreements in consumer contracts? Your cell phone (provider) might say, 'If you have any issues, you have to submit the claim to arbitration.' This project effectively proceeds as if that law doesn’t exist,” Appel stated.

Appel again referred to such a stance as “problematic” due to its appearance of ignoring the established presence of the Federal Arbitration Act, and numerous Supreme Court rulings and interpretations of that very same statute.

“This project is, in my personal view, one of the more damaging work products to the ALI’s reputation. It hasn’t been approved yet, but (it would be damaging) if it proceeded on its current course and did get approved in roughly its current form,” Appel stated.

Appel explained the ALI has been advised to turn the Restatement into a Principles Project instead, which in his opinion would allow its Reporters and the ALI to take a more aspirational view of the subject matter, especially when it comes to emerging areas of law, such as consumer contracts.

Precedent does exist for such a move, as both the ALI’s initial “Principles of the Law of Liability Insurance” became a Restatement, and an initially proposed Restatement later became the “Principles of the Law, Data Privacy” Project.

Appel further alluded to the possibility of the ALI stepping in and saying that the project needs more discussion and revision before being put up for a final vote at the next annual meeting, but said that remains to be seen in future meetings of the ALI’s membership.

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com

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Shook Hardy The American Law Institute Univ of Chicago Law School

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