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Tuesday, May 21, 2013

Boilerplate Symposium VIII: Daniel Schwarcz on a Tort-Based Approach to Standard Form Contracts

Schwarcz.Daniel.798-webThis is the eighth in a series of posts reviewing Margaret Jane Radin's Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.

Daniel Schwarcz is an Associate Professor of Law at the University of Minnesota School of Law.

One of the most provocative arguments in Margaret Jane Radin’s bold and compelling book, Boilerplate, is that legal evaluation of contracts of adhesion should employ tort principles rather than contract principles.   As Radin acknowledges, this is an idea that I have explored in the specific context of insurance policies.  In this guest post, I hope to discuss some of the similarities and differences between Radin’s proposed approach and my own.

In some important ways, Radin and I make similar arguments for moving to a tort-based approach to standard form contracts.   For instance, we both argue that the lack of meaningful assent to boilerplate means that standard contract law doctrines are often an awkward fit for evaluating boilerplate.  Thus, people who “consent” to contracts of adhesion do not generally have any expectations at all regarding the specific terms to which they adhere.  Many rules designed to police unreasonable terms in standard form contracts, such as the reasonable expectations doctrine, consequently become analytically confusing.  Similarly, the familiar (and insurance-super-charged) doctrine that ambiguities are interpreted against the drafter is an odd fit for contracts of adhesion, given that (i) the rule is principally meant to encourage clearer drafting, and (ii) less ambiguous drafting does not actually promote better understanding among most consumers, who do not read or understand boilerplate in the first place.  

BoilerplateFrom this starting point, though, Radin and I develop quite different ideas for how tort law could help police standard form contracts.  Radin ultimately endorses a new tort of “intentional deprivation of legal rights” that would focus on the extent to which boilerplate deprived individuals of “market-inalienable” rights. Radin says that she prefers this approach to one employing products liability law because the nature of the consumer harm caused by boilerplate is not physical.   But an intentional torts approach also allows Radin to directly target her primary complaint with boilerplate: that it often undermines various democratically-granted political and individual rights.  Because these “market inalienable” rights are relatively specific and limited – encompassing, for instance, the right to a jury trial or legal redress for an injury – they can easily be protected by declaring their deprivation through boilerplate to constitute an intentional tort.  By contrast, Radin tellingly admits that her approach would have little to say about insurance policies, for instance, presumably because they tend not to contain arbitration provisions, forum selection clauses, or other terms that implicate political or individual rights.

By contrast, I embrace a products liability approach to boilerplate because I am much less concerned than Radin about “the deprivation of legal rights,” and much more concerned about the potential inefficiencies of boilerplate.  To be sure, Radin fairly lays out the standard law-and-economics analysis of boilerplate, which emphasizes that it is really just a product feature that is subject to market forces.  Whether these forces are sufficient to deter exploitive terms depends on market-specific factors, such as the information known to consumers, the heuristics and biases consumers face, and the ability of firms to segment sophisticated and unsophisticated consumers.  As such, the strength of efficiency-based defenses of boilerplate “will vary from market to market.”

Although Radin lays out all of these points eloquently, she uses them sparingly to inform her proposed tort-based approach to boilerplate. By contrast, I embrace a products liability approach to boilerplate because products liability law is focused on the very same issues that determine the efficiency of boilerplate: that consumers are ignorant of product safety problems, systematically misperceive the likelihood of these problems, and can be substantially injured by them.  A products liability frame for evaluating boilerplate thus focuses courts (and regulators) on the right questions, in my view: whether particular terms are likely to (i) be subject to inadequate market pressures and (ii) cause substantial consumer harm.  From this perspective, insurance policies are actually prime candidates for judicial (and regulatory) scrutiny: insurance policy terms are actively hidden from consumers, consumers generally must purchase coverage as a pre-requisite for some other transaction, consumers as a group are likely to be over-optimistic about their risk of suffering a loss, and the terms of insurance policies are particularly important because they are the only product that a consumer actually purchases.

On the other hand, the deprivation of legal rights caused by boilerplate is much less troubling for me than it is for Radin.  As Radin acknowledges, legislatures are perfectly free to limit the capacity of parties to contract around particular rights, as they do, for instance, in the case of the implied warranty of habitability. When legislatures do allow for the contractual modification of rights, the democratic process seems to me to be perfectly respected.  This, for instance, seems to me to be a fair description of the right to a jury trial and the Federal Arbitration Act. Of course, it may be that courts misinterpret certain laws to allow for greater contractual modification of rights than the legislature intended. But this type of risk is less about boilerplate generally than specific contract terms, and therefore seems to be of limited use in crafting a generalizable tort-based approach to standard form contracts.

[Posted, on Daniel Schwarcz's behalf, by JT]

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