WASHINGTON – Subsequent to the American Law Institute’s approval of a Restatement for law related to Consumer Contracts earlier this week, two of the group’s members expressed concerns that the document may be a step in the wrong direction for the legacy of the venerable legal scholarship group.
The “Restatement of the Law, Consumer Contracts” had been in the works for nine years and went through several drafts prior to its approval.
The project was helmed by its Reporters, professors Oren Bar-Gill of Harvard Law School, Omri Ben-Shahar of the University of Chicago Law School and Florencia Marotta-Wurgler of the New York University School of Law. The trio was advised by more than 30 fellow professors, practitioners and judges.
Containing 10 sections, the project sought 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 ALI.
The Restatement has sections on unconscionability, deception and promises not included in standard contract terms. Other sections include discretionary obligations and effects of derogation from mandatory rules, in addition to contract items consumers may encounter in online transactions, such as software licensing terms, privacy policies and potentially costly conditions of sale, such as restocking fees and early-cancellation charges.
In January, a collective group of general counsels representing major corporations – such as Comcast, Verizon, General Motors and General Electric, as well as trade associations like the Pennsylvania Chamber of Business and Industry and Pennsylvania Coalition for Civil Justice Reform – sent a letter to the ALI explaining why, in their view, the Restatement of Consumer Contracts should be dropped altogether.
In May 2019, the attorneys general of 23 states, led by the State of New York, also sent a letter to the ALI opposing the Restatement. They contended it ignores “established precedent and black-letter law, deprives consumers of a meaningful benefit and offers them no real protection.”
ALI Members Question Restatement of Consumer Contracts’ Legal Bases
Victor Schwartz and Chris Appel of Shook Hardy & Bacon in Washington, D.C., and both members of ALI, have previously expressed concerns as to this particular Restatement project – questioning its foundation and the aspirational view of the law that the project seemed to be espousing, though both were not surprised that the document was given the green light.
It was, however, a surprise that the document would receive further amending at the annual meeting on one of its key points.
“There was a motion approved at the annual meeting on the adoption of a rule regarding the interpretation of consumer contracts. This rule significantly alters what the project had previously said, by incorporating a ‘reasonable consumer expectation’ analysis into the interpretation of consumer contracts and interpreting contracts against the business that supplies the contract,” Appel said.
“That doesn’t reflect prevailing law and it really just moves the project further away from restating existing or prevailing law, and into really just setting forth aspirational ideas of what the law should be.”
Appel explained that the newly adopted rule could open up the possibility of consumers arguing that because they were not aware of certain terms and conditions in a contract, that the contract itself should then be null and void.
Schwartz added that the Restatement expands the concept of unconscionability, or the point where a contract is deemed one-sided to one of its parties and unenforceable under the law, and makes it far easier to apply.
“It adds another arrow to the bow of nullifying contracts,” Schwartz said.
Schwartz opined that if judges see the Restatement as merely the legal opinion of its authors, as opposed to a document with a foundation in established case law, that it would fail over time and damage the legacy and prestige of the ALI.
“A Restatement looks in a rearview mirror, it does not look out the front window, it does not look to just somebody’s opinion. Nevertheless, this thing passed with overwhelming support. I know of no issue in the entire project where business prevailed,” Schwartz said.
Appel offered that the Restatement does not say how novel and innovative a lot of its provisions are, and when judges see the word “Restatement” on a document, they expect “a certain level of unassailable common law support”, which is absent here.
“Judges would have to do their own homework to figure out that certain provisions are novel and untested,” Appel said.
Though, Appel added that Restatements have no inherent force of law, only that they serve as a “persuasive secondary authority that courts can decide to adopt as the law of the jurisdiction.”
During the group’s annual meeting, Appel proposed a motion to remove the Restatement’s sixth section pertaining to “Deceptive Practices” in contract law, on the grounds that it lacked legal foundation and instead sought to invent a common law doctrine for contracts by combining disparate legal principles with other sources of policy, including state consumer protection statutes.
That motion was defeated by a vote from the ALI membership.
Appel said that attendance at the annual meeting was impacted by COVID-19 and as a result, a far smaller contingent of ALI members were present when major decisions were made, such as the passage of this Restatement.
“For an organization that has 4,800 members, to have such a small percentage really making some pretty impactful decisions for the entire organization, it creates the potential for unsound provisions to slip through,” Appel said.
Schwartz concluded that contract law is supposed to be “stable, predictable and not litigation-producing” and offered that this Restatement puts the stability of such law and the contracts governing it, in jeopardy.
ALI Official Responds to Concerns over Restatement of Consumer Contracts
ALI’s Deputy Director Stephanie Middleton countered that the Restatement will serve as an instructional resource for judges on the relevant common law in this area.
“The Consumer Contracts Restatement is like other Restatements in that it tells judges and practitioners what the common law is, while rendering it clearer and more coherent. This can help courts to render their judgments in a consistent and reasonably predictable manner. ALI’s publications, including Restatements, are resources for courts, not controlling law and they do not displace statutes. They serve as useful guides to aid interpretation, or advance understanding more generally, and sometimes provide a basis for legislation,” Middleton said.
“This particular Restatement seeks to clarify how the courts have applied the principles of contract law as stated in the Restatement of the Law Second, Contracts, which ALI began in 1962 and completed in 1981, to transactions that were not contemplated or were not a substantial part of the economy in 1981. This includes online transactions. In many modern transactions, there is a significant imbalance of information as between sellers and buyers, and the contract terms are not negotiated by the parties. There are many benefits to online contracts, including efficiency of mass production and mass distribution of products and services, but these benefits are not without risks. To address these risks, the law places various minimum requirements to protect consumers against overreaching by businesses.”
In response to the concerns from attorneys like Schwartz and Appel, as well as other government and legal officials, Middleton emphasized that this Restatement will clarify case law and advise courts on how to navigate modern consumer transactions.
“We agree with some who have said that the rules of contract law are not different for transactions between consumers and businesses. But courts may need guidance on how to apply classic contract law to ‘modern’ types of transactions not prevalent when the Restatement Second of Contracts was being written, and this Restatement is based on the case law,” Middleton said.
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com