Beyond Unconscionability: the Case for Using "knowing Assent" as the Basis for Analyzing Unbargained-for Terms in Standard Form Contracts
| Publication year | 2008 |
I. Introduction
People who sign standard form contracts(fn1) rarely read them.(fn2) Counsel for one party (or one industry) generally prepare standard form contracts for repetitive use in consecutive transactions.(fn3) The party who has the greater bargaining power usually writes the standard form contract and often presents it for signature on a "take it or leave it" basis.(fn4) Both contracting parties usually perform and are satisfied by standard form contracts in the vast majority of transactions.(fn5) Performance in some contracts may break down, but the parties are able to come to an amicable resolution of the problem.(fn6) Other broken deals go to arbitration, leaving no precedent behind because the results are unreported.(fn7) Still other cases are litigated and either settle or go to judgment; in either event, those results are also unreported.(fn8) After all of these cases are subtracted, only the reported cases remain. In the reported cases, litigation usually begins after a problem with contract performance arises and one party sues to compel the other to abide by one or more of the contract terms. At this point, the defendant may deny that the term is part of the parties' agreement. Alternatively, the defendant may argue that even if the term is part of the agreement, the court should not enforce it.
Scholars have suggested a variety of approaches to analyzing the enforceability of terms in standard form contracts since people first began to use them.(fn9) These approaches either accept or reject the traditional approach to analyzing all contracts, which relies largely on the objective theory of assent and a corresponding "duty to read."(fn10) The traditional approach usually leads to enforcement of the disputed terms.(fn11) Many contract scholars rationalize and support the enforceability of standard form contracts.(fn12) Others attack the enforceability of standard form contracts.(fn13)
Much scholarship questioning the enforcement of standard form contract terms offers interesting insights into possible approaches a court can take in analyzing the issue, but the literature largely fails to examine what courts actually do in these cases.(fn14) This Article identifies the gap between what scholars are saying about standard form contracts and what courts are doing about them. It notes that courts have not accepted the scholarship that urges a nontraditional approach to analyzing assent.(fn15) Rather-with but a few exceptions-what has emerged is a case-by-case unconscionability analysis in which courts focus narrowly on particular terms and conditions in standard form contract cases, and refuse to enforce only a limited number of provisions in a limited number of cases.(fn16)
Most courts continue to assert that mutual assent is necessary for contract formation.(fn17) These courts require some outward manifestation of assent, usually a form of oral or written communication.(fn18) Courts almost always find the requisite outward manifestation of assent based on the act of signing a standard form contract.(fn19) In cases in which the contracting parties have unequal bargaining power, courts refuse to enforce standard form contract terms only when the court concludes that both substantive and procedural unconscionability were present when the parties signed the contract.(fn20) Most contracts between parties with relatively equal bargaining power are enforced.(fn21)
Courts seem to enforce most terms in standard form contracts because of judges' underlying belief in the importance of such contracts in commerce. Scholars who support a unitary theory of contract analysis(fn22) bolster the judicial inclination to enforce such terms.(fn23) If courts analyze standard form contracts in the same way that they analyze contracts negotiated by parties with equal bargaining power, then courts will continue to find the requisite assent, and unconscionability or other broadly-stated "public policy" concerns will continue to be the only basis for excluding challenged terms.
This Article suggests that an unconscionability analysis is an unsatisfactory approach for courts to follow when they determine whether to enforce standard form contract terms. The unconscionability approach requires individual contracting parties to raise the defense and prevail in litigation. However, parties who lack bargaining power will generally also lack the knowledge that they have a legal challenge to the enforcement of terms, and the financial means to litigate. Furthermore, an unconscionability approach requires the challenging party to meet the extremely high burden of showing a serious defect in the bargaining process, in the substance of the challenged term, or in both.(fn24) Most plaintiffs will have a hard time making the necessary showing.
Courts should adopt an assent-based analysis for determining whether to enforce disputed standard form contract terms because such an analysis is superior to an unconscionability analysis. As many scholars and some courts have recognized, it is a fiction to characterize what occurs in the formation stage of a standard form contract as a party's assent to all contract terms.(fn25) Rather than continuing to perpetuate that fiction, courts should separately analyze a party's assent to particular unbargained-for contract terms in standard form contracts and that party's assent to undertaking a contractual obligation.
Courts should determine the enforceability of certain unbargained-for terms based on a concept I call "knowing assent."(fn26) Knowing assent means more than signing on the dotted line. Knowing assent requires the following: (1) that the unbargained-for term be conspicuous;(fn27) (2) that the importance of that term be explained so that the adhering party understands its significance; and (3) that the adhering party objectively manifests its assent to that term separately from its manifestation of assent to undertaking a contractual obligation.(fn28) Courts would impose the knowing assent requirement on contract provisions that unduly favor the form drafter or deprive the adhering party of a right or remedy that would otherwise be available to the adhering party in the absence of such a contract term or clause.(fn29) The knowing assent analysis is preferable because it would recognize the reality of the situation leading to the formation of a standard form contract.(fn30) An assent-based analysis would shift the burden from the adhering party to the form drafter by requiring the drafter to show that the adhering party knew the terms in the contract and knowingly agreed to those terms. Unlike unconscionability, a knowing assent analysis would not require a showing of extreme unfairness before a court could refuse to enforce a particular contract term.(fn31)
The seven parts of this Article reflect why an assent-based analysis is preferable to an unconscionability analysis. Part 11 describes the outer limits of courts' enforcement of standard form contract terms under traditional contract assent and unconscionability analyses. Part III reviews the scholarly literature that introduces and explains the variety of theories regarding enforceability of standard form contract terms. As will be shown, almost every scholarly theory supports enforcement of most standard form contract terms, leaving unconscionability as the main ground for attacking the enforceability of particular terms. Part IV describes some legislative and quasi-legislative attempts to formulate new approaches courts could take in analyzing the enforceability of standard form contract terms. Part IV reveals that legislatures have rarely intervened in this area of law by enacting new laws and that the battle over enforcement of standard form contract terms likely will continue to wage in the courts. Nevertheless, some of the proposed legislation offers a possible model of a knowing assent analysis that courts could follow.
Part V addresses the problems with standard form contracts, and discusses what the courts are doing about them. Specifically, Part V discusses selected standard form contract terms that parties repeatedly litigate. It includes a discussion of illustrative cases that demonstrate that courts rarely strike terms based on unconscionability and that support the need for a knowing assent analysis. Part VI looks at the relatively few instances where courts have used an assent-based analysis to excise standard form contract terms. Part VI demonstrates how other courts can, and when they should, adopt a knowing assent analysis. Finally, Part VII makes the case for a knowing assent analysis.
II. The Enforcement of Standard Form Contract Terms Under Traditional Contract Assent and Unconscionability Analyses
Traditional judicial analysis of standard form contract term enforceability is based primarily on two important concepts: assent and unconscionability.(fn32) An understanding of the deeply entrenched doctrine in these two areas is key to understanding the special challenges raised in the context of standard form contracts and the need for a knowing assent analysis.
A contract may be loosely defined as a voluntary...
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