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Contract Law as a Matter of Public Policy - Admission/Application Essay Example

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The paper "Contract Law as a Matter of Public Policy" discusses that Korobkin proposes that better drafting may overcome the Borat problem. Like Ben-Shahar, the key to a better understanding by consumers of contradictory terms is clarity within the document.  …
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Contract Law as a Matter of Public Policy
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?Introduction There is not a doubt that there are unequal bargaining positions between consumers and companies. Consumers are generally unsophisticated, and, even if they are literate and educated, often do not read the contracts because these contracts are long-winded, boring, and filled with terms which a sophisticated attorney would struggle to comprehend. This is a problem that may be exploited by unscrupulous corporations who will bury very important terms in thousands of words of filler. Unfortunately, it is a situation which has not been alleviated by any kind of meaningful statute or common law. As the commentators below suggest, there are remedies for this kind of unequal bargaining power, and the biggest equalizer is simply ensuring that important terms are displayed in such a way that the consumer will pay attention to them. However, it seems that, absent some kind of major overhaul of the contracting system, this kind of reform will not be forthcoming. This paper will analyze several of the problems that consumers face, as well as the potential remedies for these problems. Discussion The default rule in contract law is freedom of contract, which means that parties determine their own rights and obligations on the contract (Cserne, 2007, 1). This is the basic rule in contracts, and classical contract law is what is used when gaps need to be filled in the contract. Cserne (2007) states that breach of contract cases in the Western world are handled by the court determining “1) determine whether contract formalities are satisfied; 2) if so, determine whether there was real consent (no fraud, duress, mistake); 3) if so, determine what the contract says; 4) if there is a gap (that is if the contract does not address the contingency that caused the dispute apply a default rule; and 5) if an explicit or implied term was violated, award a remedy” (Cserne, 2007, 1-2). Further, Cserne states that the term “contract gap” is one that is not necessarily defined is not necessarily evident by looking at the contract itself. Rather, it is a matter of judicial interpretation on whether the gap concerns interpreting an existing contract clause or supplementing a term when the contract is incomplete. When the contract is ambiguous, then one rule that may protect consumers is known as the contra proferentem rule. This rule, according to Cserne, is the rule that, in the case of the ambiguous contract, the contract shall be construed against the party who is the most responsible for the creation of the contract. This method of interpretation benefits the consumer, as the consumer is not normally the person who creates the contract. Rather, it would be the large corporation who creates the contract. Cserne explains that, in the European Union, there has been, since 1994, a contract interpretive presumption in favor of consumers, and their 93/12/EC Directive on Unfair Terms in Consumer Contract states that any doubt as to the meaning of a contract term shall be construed in favor of the consumer. This would be tantamount to using the doctrine of contra proferentem (Cserne, 2007, p.14). Cserne goes to explain the policy reasons in favor of the contra proferentem. One of these is that, when a corporation does not make a term clear to a consumer, that this is wrong. To allow this contract term to stand and to construe it against the consumer would thus be tantamount to allowing the party to benefit from his or her own wrong. Another policy consideration is that the ambiguous term might have misled the consumer or induced him to sign the contract. Finally, there is unequal bargaining power between the parties. Therefore, the party with the most bargaining power should have the ambiguous contract terms construed against it (Cserne, 2007, p. 15). Cserne offers interesting scenarios for the use of contra proferentem. He states that judges may use this doctrine in the case of unfair terms which are otherwise clear. In other words, the judge may read the clause in an artificial manner so that the clause seems to be unclear, then construe it against the drafter. In this way, the judge is able to protect the consumer against unfair bargaining terms ab initio. Cserne states that judges who want to protect consumers may be “remarkably clever at discovering (or divining) ‘ambiguities’ in [contract terms]” (Cserne, 2007, p. 16). Cserne goes on to state that judges now have the power to strike out unfair terms without using this subterfuge, so the practice of using contra proferentem in this manner is more limited. Beyond the fact that contra proferentem acts as a kind of consumer protection mechanism, Cserne states that the doctrine is useful because it forces companies to be clear in their terms and complete in their contract drafting. The ubiquity of standard forms makes this especially important, as these forms are sent to every consumer who deals with a certain company. It is crucial that these forms are clear and unambiguous, because these forms are read by many consumers, and these consumers might be taken advantage of it the terms are unclear. By ensuring that large corporations do not have unambiguous terms in their contract, and do not leave out important information, the consumer is further protected by this doctrine. Beyond the problem of ambiguous contract terms, Ben-Shahar states that consumers are disadvantaged in the market place because they do not read the contracts that they sign. Ben-Shahar states that the consumers have good reason for this – contracts are “boring, incomprehensible, alienating, time-consuming, but most of all pointless” (Ben-Shahar, 2008, p. 1). Ben-Shahar states that reading the contracts are pointless because of the unequal bargaining power of the consumer – the consumer simply does not have the power to alter the contract, so, if they want the product, then they have to go along with the contract terms. Therefore, according to Ben-Shahar, “Dedicated readers can expect only heartache, which is a very poor reward for engaging in such time-consuming endeavor” (Ben-Shahar, 2008, p. 1). Issacharoff (2010) states that there is substantial proof that individuals do not read contracts, and one of the most striking proof is in the terms of a computer software maker. This software maker produced a mandatory disclosure about its product that all consumers must sign. At the very end of this this mandated disclosure, the software maker put that they would give $1,000 to anybody who would call this company and ask them for this money. For four months, nobody called to inquire about this $1,000, and, after this period of four months, one person finally did call the company and ask. According to Issacharoff, this is substantial proof that nobody actually reads what they sign (Issacharoff, 2010, p. 7). Because Ben-Shahar believes that most consumers do not read the contracts that they sign, and, indeed, this seems to be the case, Ben-Shahar states that true assent to the contract is somewhat of a myth. This is because assent depends upon both parties having read the contract, and thus agreeing to be bound by its terms. Ben-Shahar acknowledges that any contract which is not readable, or contracts in which the consumers were not given an opportunity to read, are unenforceable. In general, contract terms are readable if they give “notice and physical presentation of unread terms or reasonable access to terms on the web so that they can be read” (Ben-Shahar, 2008, p. 2). Protections of the consumer in this regard are supposed to make the contract assent more meaningful and robust, according Ben-Shahar, but this is not necessarily so. People still do not read the contract terms, even if given the chance to read and have terms explained to them, and this is the way that they manifest their assent to the contract – by not reading the contract terms. After all, not reading the contract terms is a conscious choice, so assent may be implied from this. The problem with the opportunity to read, according to Ben-Shahar, is that not everybody has the capacity to read. Different people have different levels of literacy, and, Ben-Shahar asserts, even simplified contract terms may be too complicated for the unsophisticated consumer to understand. Moreover, Ben—Shahar points out that most contracts are not simplified. For instance, the Microsoft XP End User License Agreement is 4000 words long. This means that there are important terms which are buried within 16 paragraphs of text that well-paid attorneys might be able to interpret, but the layman should not even attempt. Moreover, the language is not the only limitation – the significance of certain contract terms are made unclear to the consumer. For instance, a contract may have limitations on its liability for consequential damages, but the consumer cannot envision or foresee these types of consequential damages, so the significance of signing this particular clause is unclear to the consumer. Moreover, a contract might contain an arbitration clause, and the unsophisticated consumer cannot know what this means or the impact of such a clause. They might not have the capacity to understand that the ability to litigate would be beneficial for them, and that arbitration might be detrimental. In other words, a consumer may understand what the term “arbitration” means, but might not understand how this is harmful to them (Ben-Shahar, 2008, p. 16). To this end, Ben-Shahar recommends some alternatives to the opportunity to read. One is by using the rating system. Just like E-Bay rates the sellers on its sites, and Expedia.com rates hotels, contracts may be rated by the quality of their boilerplate terms. These ratings may come from consumers who have had experience with the company offering the contract, and the kinds of terms that they might rate would be the quality of the warranty and repair service; how difficult it was to return the goods for replacement, repair and refund; how effectively problems were resolved; whether there were hidden fees and burdens in the contract; whether there were restrictions on the types of permitted uses; whether the contract was modified post-purchase in a detrimental way; and whether arbitration limited the rights of the consumer (Ben-Shahar, 2008, p. 30). In this way, the consumer can immediately ascertain the quality of the company, and the quality of the terms which are on the contract and what the impact and significance of these terms are. Labeling is another remedy for the problem of unreadability of contracts, as proposed by Ben-Shahar. Labeling would mean that the important terms are summarized and presented in a uniform way, and would work much like labeling regarding food nutrition. Just like food must have a clearly readable label which is understandable to the consumer, summarizing the important aspects of the food that the consumer is going to buy, the contract can have labeling which helps their consumer decipher the terms and what is inside the contract. Ben-Shahar envisions labeling of contracts as having uniform boxes with a handful of important categories (Warranty, return policy, choice of forum), and each being summarized with standard meaning phrases. In this way, the consumer may be privy to negative terms which may otherwise be buried in the contract - these terms would have to be prominently displayed, much like cigarette packages which have prominent warning labels (Ben-Shahar, 2008, p. 33). Another problem with contracts between corporations and consumers is what Korobkin (2011) dubs “The Borat Problem.” This moniker was gained because the producers of Borat convinced the people in the movie Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan to appear in the film under false pretenses. As one person tells it, the producer approached him to give driving lessons to Borat, and agree to be in a documentary which details the integration of foreign people into America. When this person, named Michael Psenicksa, arrived on the set to be a part of this “documentary” he was handed a form to sign which stated exactly what he would be participating in. Included in the form is the explanation that Psenicksa agreed not to sue for fraud (this was buried in a lengthy waiver clause). Psenicksa and others stated that the verbal agreement would be that they would appear in a serious documentary about the foreign way of life in America, and that they were not told that they would be appearing in a Borat comedy routine. The studio responded that the terms of the agreement were in the consent forms, and that any prior communication made between the parties is irrelevant (Korobkin, 2011, p. 4). These cases ended up in court. The cases of Pesnicksa v. Twentieth Century Fox, 2008 W.L. 4185752 (S.D.N.Y., 2008); Martin v. Mazer, 08 Civ. 1828 (S.D.N.Y. 2008) and Streit v. Twentieth Century Fox 08 Civ. 1571 (S.D.N.Y. 2008) originated from these complaints. Korobkin states that the Borat problem arises when there is an inconsistency between what was told to the consumer before signing the contract, and the content of the contract itself. The case of Williams v. Spitzer Autoworld Canton, 913 N.E. 2d 410 (Ohio 2009), concerns this. In Williams, the consumer was verbally promised $16,500 for a trade-in for his vehicle, then the contract stated that he would only get $15,500 for the trade-in. The consumer signed the contract without reading it, then brought a suit alleging a violation of the Consumer Sales Protection Act, stating that the dealer engaged in unfair practices when the dealer gave him $1,000 less for his trade-in then was promised. The jury sided with the consumer, as did the appellate court, the Supreme Court of Ohio reversed, stating that the parol evidence rule barred any evidence of prior negotiation which was not incorporated into the contract. This court stated that fraud or mistake must be shown before the parol evidence rule could be invoked. The Borat cases concerned much the same facts as did Williams v. Spitzer. As in the Williams case, the Borat cases concerned a verbal agreement made prior to the signing of the contract. As with the Williams case, the Borat cases concerned the presentation of a contract which was in direct contradiction to the verbal agreements made prior. Another case which concerns this is Hamade v. Sunoco Inc. 721 NW 2d 233 (2006). In this case, the plaintiff acquired an existing gas station and obtained a verbal agreement that no competing gas stations would be in the exclusive territory of the plaintiff. Hamade testified that he had asked for this provision to be placed in writing in the contract, but the representative for Sunoco assured the plaintiff that Sunoco would never do that. When a competing gas station was placed in the territory of the plaintiff, the plaintiff sued on that ground and other grounds. On the issue of the verbal agreement, however, court found that there was not fraud in the inducement, and refused the evidence regarding the prior verbal agreement. Korobkin asserts that courts have handled the Borat issue in different ways that are often contradictory. For example, some courts have stated that there should be a line drawn between fraud in the inducement, which is what the Borat problem concerned, and fraud in the execution. In the case of fraud in the inducement, the parol evidence rule trumps, and the party who was induced by fraud to sign a contract would not be able to introduce evidence about this fraudulent inducement. On the other hand, if the party who drafted the agreement verbally told the consumer that there were terms in the contract which were not actually in there, then the parol evidence rule may be used to prove this. Korobkin asserts that the Borat problem presents numerous problems to consumers. As Ben-Shahar noted, consumers do not typically read contracts, which means that relying upon oral representations would be the norm in a case like the Borat case. The individuals in these cases state that the producers of Borat told them that they were going to appear in a serious documentary, not a “mockumentary,” and they took the producers at their word. Therefore, even though the writing stated otherwise, the consumers didn’t read this writing. Moreover, because the producers assured the individuals that they were going to be appearing in a serious documentary, this created a “confirmation bias” in these individuals, in that that individuals would be compelled to believe that the forms that they were signing conformed with what the terms of the verbal agreement were. Any ambiguous information in these written contracts would be construed in favor of their already-existing bias, which was that they were appearing in a serious documentary (Korobkin, 2011, 30-31). Moreover, because the Borat problem creates a classic “bait and switch” issue, where the verbal agreement is one thing, then the actual agreement is something different, Korobkin asserts that the consumer in this case would be psychologically compelled to take the new deal. This is because the consumer, excited about the potential deal, would feel loss at not getting any deal at all. Known as “status quo bias,” the drafter of the contract may use this to draft unfavorable terms to the party after verbally telling them about more favorable ones. The consumer would sign the new terms, even if he knows that the new terms contradict the previous oral terms, because they do not want to lose the deal (Korobkin, 2011, p. 40). Korobkin proposes that better drafting may overcome the Borat problem. Like Ben-Shahar, the key to better understanding by consumers about contradictory terms is in clarity within the document. Specifically, the drafter of the document must make the contradictory terms well-known to the consumer. The document must clearly state that this writing takes precedent over any and all prior agreements. Moreover, the document must give notice of the contradictory term, and this notice must be realistic, in that it must be incorporated into the contract in a way that takes into account that virtually no consumers will read the entire boilerplate contract. For instance, Korobkin proposes that there should be a separate signature signed by the non-drafting party that specifically assents to the contradictory term (Korobkin, 2011, p. 48). In addition to these problems, there is another problem which is stated by Ben-Shahar (2009). This problem is that the contracts that consumers sign are actually one way contracts, in that they are only enforceable against the consumer, not against the business. Ben-Shahar argues that when a consumer signs a contract for goods that the consumer must abide by the terms of this contract or risk getting sued by the business. On the other hand, the business is not bound the contract, so, if the business breaches the terms of the contract, such as by failing to make timely delivery, or by delivering goods and services which do not conform, the consumer does not have the option of suing the business. Ben-Shahar proposes remedies for the inherent problem of consumers being unable to sue businesses who breach contracts. One of these is redesigned transactions. By this, Ben-Shahar envisions contracts which are broken into small pieces, and the consumer retains the right to rescind the contract during specified times. For instance, a computer may be bought in a rent-to-own way, so that the consumer makes payments on the computer and may at any time give the computer back until such time as the computer is paid for. Another remedy that Ben-Shahar proposes is that of private bonds and assurances. In this, if the retailer is not responsive to consumer complaints, then the consumer may proceed against the assurance or bond company for redress. Ben-Shahar states that this type of model is already existent in the form of SquareTrade, which warrants internet purchases of electronics in a cheap and hassle-free way. The use of insurance is another way that consumers may be protected, in that, if the business refuses to honor its obligations, the consumer may proceed against the insurance company. Ben-Shahar states that this would be, in effect, “an insurance arrangement against bad performance by the business” (Ben-Shahar, 2009, p. 27). Ratings is the final remedy, and this was explained in Ben-Shahar’s other article cited above. Conclusion The evidence attests that consumers can be defrauded by large corporations because the consumers are relatively unsophisticated about contract terms, both their meaning and their implications. Moreover, courts have increasingly refused to allow parol evidence in cases where verbal assurances and agreements directly contradict the writing that the consumer signed. That a consumer would rely upon verbal agreements and assurances, and not read what is actually written, is to be expected, because the evidence clearly shows that consumers do not read contracts. There a number of reasons for this, not the least of which is that there is often too many terms, and it is difficult for the consumer to tell what is important. Also, the consumer does not have the power to alter the contract. They must either accept the terms or walk away, and they are often reluctant to walk away because they are excited about the deal and walking away from the deal would be viewed as some kind of loss. Additionally, consumers are at a disadvantage in business contracts because the contracts have one-way enforcement, in that the consumer cannot sue the business, but the business may sue the consumer. To alleviate this problem, there are a number of remedies which have been proposed by the commentators regarding this issue of unfair contracting. One is that contracts must be more clear, and by this, it means that the important terms must be brought to the customer’s attention in such a way that is succinct and noticeable. These terms should be in a box and should be able to be read like a nutrition label. For the problem of verbal agreements which contradict the written agreement, the solution is to make sure that the contract makes clear that any prior agreements are superseded by the terms of the contract, and, in addition to this, the consumer must sign the contradicting terms separately. Ratings is another remedy, as the contract may be rated, as might the business itself. Contra proferentem is another protection that consumers have, as the doctrine states that ambiguous contract terms must be construed against the drafter. While these are all excellent ideas for remedies, they are only ideas, and the reality of the situation is that contracts continue to be wordy and confusing, continue to use terms that the lay person cannot understand, continue to bury important terms in writings that are up to 4,000 words and continue to not explain terms properly. Additionally, consumers cannot possibly know the impact of many of the terms, like arbitration clauses. Because of this, the consumer is disadvantaged in the marketplace, and this will not be alleviated until there is substantial contract reform law put into place that will, in effect, force businesses to make more comprehensible contracts. Bibliography Hamade v. Sunoco Inc. 721 NW 2d 233 (Mich. 2006) Williams v. Spitzer Autoworld Canton, 913 N.E. 2d 410 (Ohio 2009) Ben-Shahar, Omri. “The Myth of the ‘Opportunity to Read’ in Contract Law,” The Chicago Working Paper Series. July 2008. Web. 15 Feb. 2012. Ben-Shahar, Omri. “One Way Contracts: Consumer Protection Without Law,” The Chicago Working Paper Series, October 2009. Web. 15 Feb. 2012. Cserne, Peter. “Policy Considerations in Contract Interpretation: The Contra Proferentem Rule from a Comparative Law and Economics Perspective,” Paper presented at the 3rd ISLE Conference, 9-10 Nov. 2007. Web. 15 Feb. 2012. Issacharoff, Samuel. “Disclosure, Agents and Consumer Protection,” New York University Law and Economics Working Papers, 1 July 2010. Web. 15 Feb. 2012. Korobkin, Russell. “The Borat Problem in Contract Law: Fraud, Assent, and Standard Forms,” UCLA Law and Economics Working Paper Series, 8 Aug. 2011. Web. 14 Feb. 2012. Read More
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