Evolving Business and Social Normsand Interpretation Rules: the Needfor a Dynamic Approach Tocontract Disputes

• Publication year: 2021

84 Nebraska L. Rev. 506. Evolving Business and Social Normsand Interpretation Rules: The Needfor a Dynamic Approach toContract Disputes

506

Nancy S. Kim*

Evolving Business and Social Normsand Interpretation Rules: The Needfor a Dynamic Approach toContract Disputes

TABLE OF CONTENTS

I. Introduction ...................................................... 507
II. A Brief Summary of Contract Law Theories ......................... 510
A. The Individual Autonomy Theory or "Furthering the Will of the Parties" .......................................... 510
B. Economic Theories of Contracts ................................ 513
C. Distributive Justice or Achieving Fairness .................... 514
D. A Dynamic Theory of Contract Law .............................. 516
III. The Need For a Dynamic Application of Interpretation Rules ........................................................... 523
A. Overview of Contract Rules of Interpretation ................. 524
1. How Strict Application of Interpretation Rules Undermines Contract Law Objectives ........................ 528
2. The Interplay of Interpretation Rules with Evolving Business and Social Norms and Needs ..................................................... 531
a. Cultural Assumptions Underlying Interpretation Rules ................................... 531
b. The Problem of Form Agreements ......................... 539
i. The Limits of the Unconscionability Doctrine ............................................ 550
IV. A Dynamic Analysis of Contract Interpretation .................... 554
A. A Dynamic Analysis of Three Cases ............................. 554

507

1. Use of Custom and the Creation of Business Norms ...................................................... 554
2. The Normative Agenda Behind a "More Reasonable" Interpretation of Chicken ...................... 559
3. Ambiguity and Form Agreements--Justifying Policy with Rules .......................................... 561
B. Guidelines for a Dynamic Approach to Contract Interpretation ................................................ 565
1. Definitional Rules of Interpretation ....................... 565
2. Gap Fillers ................................................ 566
3. Evidentiary Rules .......................................... 567
4. Judicial Guidance Rules .................................... 567
V. Conclusion ........................................................ 568

I. INTRODUCTION

A consumer living in Ohio, using a credit card, purchases an expensive leather purse from a company based in Milan, Italy. In order to access the website, she must click on the electronic agreement, which she does without reading the terms. The purse that is delivered is of inferior quality to that which was described on the website. When the consumer contacts the Italian company, she is informed that the click agreement requires that all disputes be handled by arbitration in Milan.

A stay-at-home mom decides to open a business selling handmade soaps over the Internet. Her lawyer advises her that she should incorporate her business in order to protect her personal assets. She contacts a bank about setting up a merchant account in order to process credit cards electronically. The representative for the bank informs her that the fee for credit card purchases will be 3.5% of the total monthly charges and faxes an application to her. The mom/entrepreneur glances at the application, notes that the commission amount is accurate, and signs where indicated. She does not have the money to have a lawyer review the agreement. Unknowingly, she has executed a guaranty that makes her personally liable for her company's obligations.

A Korean-born business owner discusses renting retail space for a video rental store from a Russian-born property owner. Due to a miscommunication, the business owner believes that maintenance costs will be included in the monthly rental. The agreement is delivered by the property owner and the business owner signs it, anxious to start construction on the space. Six months after the agreement is executed, the business owner receives a bill for maintenance costs in the amount of $5,000.

This Article argues that rapid societal changes require a theory of contract that is capable of evolving with them and urges adoption of a "dynamic" approach to contract disputes.(fn1) In his essay, The Emergence of Dynamic Contract Law, Melvin Eisenberg states that princi

508

ples of dynamic contract law do not depend "solely on what occurred at the moment in time when a contract was formed, but instead turn on the moving stream of events that precedes, follows, or constitutes the formation of a contract."(fn2) By contrast, contract law principles are "static" if their "application turns entirely on what occurred at the moment in time when a contract was formed."(fn3) Although Eisenberg defines "dynamic" in relation to the time of contract formation, I use the term here to reflect his larger thesis that contract law should, where appropriate, be "individualized rather than standardized, subjective rather than objective, complex rather than binary, and dynamic rather than static."(fn4) In other words, dynamic contract law strives to establish the "best possible rules"(fn5) rather than hewing to formalistic principles. It views the contract not as a written text frozen in time with two purely rational actors as parties, but as an exchange of words and acts between two individuals with varying experiences, against a backdrop of changing circumstances.

Unfortunately, while many modern contractual disputes develop from a myriad of factors, contract law, which focuses on interpretation,(fn6) adopts a unitary approach to addressing such disputes. This emphasis on contract interpretation is likely derived from classical contract law, which adopted an objective theory of contract interpretation despite its proclamation that contract formation required a meeting of the minds.(fn7) Thus, the issue of what the parties subjectively intended was subordinate to the issue of what was reasonable to presume based upon their overt acts.(fn8)

While modern contract law strives to effectuate the understanding of the parties, the focal point of judicial inquiry continues to be the interpretation of the contract's written words, rather than the parties' subjective state of mind. The interpretation of the writing, word(s), or clause(s) usually proves determinative in the enforceability of the con

509

tract, the obligation of the parties, and the amount and type of damages available. Contract law sets forth many rules of contract interpretation or "default" rules to address contractual disputes. For example, the plain meaning rule requires that if the disputed writing or word "appears to be plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence of any nature."(fn9) Yet, where a party is unaware of this interpretation or default rule, the use of the rule may defeat or contradict that party's contractual intent. This Article further argues that, in many cases, these numerous rules of interpretation work to the disadvantage of the party with fewer resources, particularly when that party is a member of a cultural or language minority.(fn10) Traditionally, contract doctrine assumes that contracting parties are equals--that they are equally situated economically, experientially, and ethically--when entering into a contract. In reality, individuals entering into a contract have varying degrees of experience and bargaining power that affects their understandings of the nature of their contractual relationship. Cultural and linguistic factors may also play a role in each party's interpretation of the contract.

The interplay of interpretation rules with standard forms raises additional issues of fairness that may disproportionately affect already disadvantaged parties. Strict adherence to interpretation rules where the agreement is a form with standardized terms also undermines the three oft-cited objectives of contract law--autonomy, economic efficiency, and fairness. All three of these objectives involve both individual and societal interests. While the parties to a contract may be furthering their individual desires, they are also engaging in an act that has repercussions for third parties and the larger society. In particular, where the contracting parties are commercial entities and not individuals, there may be very little self-actualization at stake but significant economic implications affecting nonparties to the transaction. For example, a contract for the sale of software between two commercial entities should be enforced not because it enhances the will of living, breathing parties (as the entities are legal fictions), but because it affects the economic interests of living, breathing nonparties (such as the salesperson expecting a commission and the technology officer responsible for ordering the software) and stimulates commerce.

Melvin Eisenberg notes that the twentieth century has already witnessed the emergence of dynamic contract law although, as discussed in this Article, the adoption and advocacy of dynamic contract

510

principles by courts and scholars is neither uniform nor widespread. This Article proposes that adoption of dynamic principles furthers the primary objectives of contract law and is best suited to address evolving social norms and needs. By setting as the primary objective ascertainment of the parties' intent rather than review of words on a page, a dynamic approach better captures the context and the spirit in which the contract was made. Part II briefly summarizes the most commonly cited objectives of contract law and discusses why a dynamic approach to contract law is preferable to strict...