Freedom of Contract and the Kansas Supreme Court, 0217 KSBJ, 86 J. Kan. Bar Assn 2, 37 (2017)
| Author | Professor David E. Pierce Washburn University School of Law |
Professor David E. Pierce Washburn University School of Law
Freedom of contract is the foundation of the American economy and our capitalist society. Courts can either support or weaken this foundation. Legislatures can protect, limit, or eliminate freedom of contract.1 Having devoted most of my legal career to teaching contracts and property and that unique mix of the two we call "oil and gas" law, I have followed with great interest the Kansas Supreme Court's regard for freedom of contract. In this article I examine how the court has addressed difficult personal and commercial contract issues during the past fifteen years while remaining true to the freedom of contract principle.2 This article also highlights how lawyers can use this freedom to benefit their clients.
I. The Basic Principle
Contract is the product of an agreement parties enter with the expectation courts will enforce the agreement as made. "It is an ancient legal maxim that contracts freely and fairly made are favorites of the law."[3] To ensure contracts are the product of free will, courts protect the formation process from acts of duress, undue influence, and misrepresentation.4 Freedom of contract is meaningless if the contract is not the product of each party's free will. This includes the freedom to make good deals and bad deals. It even includes, for example, the liberty to adhere to the non-negotiable terms offered by a credit card company5
Once past the list of formation defects, courts readily enforce the informed and uninformed deal. Parties to a contract cannot insulate themselves from a bad deal by proclaiming they failed to read or understand the contract terms.6 As will be seen, the unconscionability analysis, when properly applied, provides a principled limit on contract terms that are, under certain circumstances, so grossly unfair as to warrant court intervention.
II. Formation Principles
It is easy to make a contract. The parties, by their outward appearances, must manifest agreement.7 In most instances consideration is required.8 The resulting contract may or may not need to be in writing.9
A. The Formation Process
Freedom of contract includes allowing a party to design how agreement will be signified and thereby control the offer and acceptance process.10 The Kansas Supreme Court explored the outer limits of the process in Wachter Management Co. v. Dexter & Chaney, Inc.11
In Wachter the issue was whether software license terms were part of the parties' original software purchase contract. The court's 4/3 decision resulted from varying interpretations of a letter accompanying the proposed contract stating "[t]he proposal includes modules and licenses."12 The majority noted the software licensing terms were not attached, incorporated, or otherwise revealed in the proposal. Therefore, the majority held the licensing terms, when later presented, were not part of the contract but rather an attempt to amend the contract.13 The dissent believed the reference in the cover letter was adequate to alert the buyer that licensing terms were part of the deal. Alternatively, the dissent believed the reference to licenses alerted the buyer it was being offered a "layered contract" requiring two acts of assent: the first when the proposal was signed and the second when the software was opened and used. Another alternative was that acceptance was not complete until the buyer assented to the proposal and to the licenses.14
The parties negotiated for purchase of a construction management software system and associated services that culminated in an Oct. 15 written proposal from Dexter & Chaney, Inc. (DCI) that was signed by Wachter in Kansas on October 17-15 DCI's offices were in Seattle; DCI was incorporated in Washington. Wachter was a Missouri corporation with offices in Kansas.16 The dispute arose from the subsequent shipping and installation of the software which was packaged with a "shrink-wrap" agreement stating that "opening this sealed disk package" resulted in agreement to the terms presented when the software was loaded.17 Among the terms were choice of law and choice of venue provisions making Washington law applicable to the transaction and requiring "that any disputes would be resolved by the state courts in King County, Wash."18 These terms were not mentioned in the October 17 contract.
When software problems arose Wachter sued DCI in Kansas for breach of contract and other claims. DCI moved to dismiss, asserting improper venue based upon the choice of forum clause in the software licensing agreement. The district court denied DCI's motion, finding the additional software licensing terms were not part of the parties' contract.19 The Supreme Court affirmed, holding the shrinkwrap terms constituted a proposal to modify the parties' existing contract that was never expressly accepted and "Wachter's actions in continuing the preexisting contract do not constitute express assent to the terms . . . ."20
Nationally, a division of authority exists whether shrinkwrap terms will be given effect. The point of contention is the degree of advance notice required to alert the customer that shrinkwrap terms are part of the original offer. If the customer is made aware, during the contract formation process, that to-be-disclosed software licensing terms are part of the deal, the customer can either accede to the revealed terms or return the product for a refund. If the www.ksbar.org | February 2017 37 c ustomer is not made aware of the terms during the contract formation process, the later disclosed terms are deemed to be proposals to modify the existing contract that require new assent rather than the mere use of the previously contracted-for software.21
The majority and dissent both allow for broad freedom of contract in contract formation. The difference of opinion in Wachter is whether the offeror effectively exercised the available freedom. It did not. This is not a failure by the court to provide the necessary freedom, it is a failure by the parties to use it effectively. The rules for contract formation are simple. When, however, they are not effectively used, courts are reluctant to fill in the gaps at the critical contract formation stage. Because it is easy to make a contract, courts should expect the parties to make proper use of the available contract tools to effectively manifest their intentions.
This case also highlights the importance of beginning any contract analysis by determining the body of law that governs the agreement. In this case the choice was between general contract law and Article 2 of the Uniform Commercial Code. The substantive contract rules vary considerably between general contract law and Article 2, particularly when it comes to contract formation.22 In Wachter the court applied a predominant factor test to conclude that the contract was a sale of goods governed by Article 2 of the U.C.C. The court found the contract was predominantly a sale of a software product -"goods" - with services being incidental to the sale. Therefore, the U.C.C. would apply to all aspects of the parties' contract.23
B. Policing the Formation Process: Too Much Freedom?
A document that has all the appearances of an agreement may be unenforceable because of a defect in the formation process, such as fraud or misrepresentation.24 In theory no language within the document at issue can be used to avoid the defect because a contract was never formed.[25]
The problem commonly arises when a seller of a home makes false material statements regarding the condition of the home, such as the "dry basement." Two of the four elements of a misrepresentation claim are that the statements are false and material.26 To recover, however, the buyer must also prove it relied on the statements and that its reliance was reasonable.27 The issue is whether terms of the challenged contract can be used to negate buyer's reliance. The document at issue typically contains many disclaimers that the buyer is accepting the home "as is" or that buyer is not relying upon anything the seller or real estate agent may have said but instead has the ability to conduct an inspection. The problem is that often the buyer is likely to rely upon the seller's misrepresentation in determining whether to make further inquiry. 28
Nationally, there is disagreement among courts whether contract terms tainted by misrepresentation or fraud can be used to evaluate the buyer's reliance.29 The Kansas Supreme Court, in 2004, addressed fraud and contract formation in Alires v. McGehee,30 The court used terms in the agreement to evaluate the buyer's reliance and thereby negated what was otherwise a material misrepresentation regarding the dry base-ment. The agreement terms instructed the home buyer to inspect the home and not rely upon the seller's representations. It also stated that a failure to inspect constituted a waiver of any claims associated with defects that would have been revealed by an inspection.31
In Alires the buyer did not have the house inspected because the seller's disclosure statement indicated there were no major problems with the house.32 "Mr. Alires testified that he did not have the foundation inspected because he trusted Mrs. McGehee's representation that the basement did not leak."33 The reliance issue should focus on whether there was any reason for Mr. Aires to believe that Mrs. McGehee's statements were false or otherwise unreliable. The language of the document Mr. Aires was induced to sign in response to the representation should be considered only to ascertain whether McGehee was lying or it reveals she knew nothing about the subject matter of her representation. For example, it would be a duty-to-read issue if the disclosure document stated: "I am a liar, don't rely on anything I say" or...
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