They Can Do What!? Limitations on the Use of Change-of-terms Clauses
| Publication year | 2010 |
Georgia State University Law Review
Article 1
3-21-2012
They Can Do What!? Limitations on the Use of Change-of-Terms Clauses
Peter A. Alces
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Recommended Citation
Alces, Peter A. (2009) "They Can Do What!? Limitations on the Use of Change-of-Terms Clauses," Georgia State University Law Review: Vol. 26: Iss. 4, Article 1.
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THEY CAN DO WHAT!? LIMITATIONS ON THE USE OF CHANGE-OF-TERMS CLAUSES
Peter A. Alces* and Michael M. Greenfield
Introduction
Contract is based on intent, specifically the intent to consent to some adjustment of rights and risk in exchange for a quid pro quo. We determine the enforceability of that allocation of rights and risk at the outset of the parties' undertaking. That is, whether a transaction is a contract, an enforceable promise, is determined by reference to the parties' exchange ab initio. We could not brook a contract law that accommodated the parties' weaving in and out of a contract as the vicissitudes of their transactional interests and positions changed over time. It is significant that contract fixes risk after it first allocates it.
Contract too is a supple device, and therein lies the source of some of its greatest value in the course of exchanges. The certain initial allocation of risk is leavened by the law's ability to accommodate the parties' interests in flexibility. Although there are gains to be realized from certainty, there are also benefits to reserving the ability to adjust the initial allocation of rights and responsibilities in order for both parties to capture as many benefits of exchange as they can. And that vindication of flexibility need not result in a zero-sum game. Even the weaker contracting party may benefit from contract doctrine that permits the stronger contracting party to effect adjustments in the initial allocation as changing circumstances warrant. So long as the dominant party is able to extricate itself from an allocation of risk that becomes less attractive, that dominant party is more likely to enter into the contract in the first place, or so the story goes.
* Rita Anne Rollins Professor of Law, The College of William & Mary School of Law. The authors are indebted to Brandon Murrill, J.D. 2011, and Matthew A. Welch, J.D. 2010, The College of William & Mary School of Law for their invaluable research assistance. Deficiencies of the finished product remain the fault of the authors alone.
t George Alexander Madill Professor of Contracts and Commercial Law, Washington University in St. Louis School of Law.
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But there is another side to the story. Contracts are relational1 and give rise to expectations between the parties. During the course of the contractual relationship, the parties may make investments based on those expectations and the initial allocation of rights and risk. If the dominant party then adjusts that allocation, no matter how good the reason, the weaker party may be profoundly prejudiced by the adjustment. That prejudice is not mitigated significantly by the fact that the contract explicitly reserved the dominant party's right to adjust the initial allocation as circumstances, or simply the dominant party's interests, dictate. So the provision of a unilateral right to amend the terms of a contract rests uneasily with fundamental assumptions about the nature of contract liability as well as, perhaps, with contract doctrine. There is a tension for the law to resolve, and the tools—viz., contract doctrine—available to resolve that tension may not be up to the task; they may lack the ability to refine the balance in ways that can resolve the tension between certainty and flexibility that contract law vindicates.
Although the phenomenon of unilateral adjustment of contract terms is not a new one,2 the uneasy fit between the dominant party's
1. Ian Macneil defines the relational contract theory:
A relational contract theory may be defined as any theory based on the following four core propositions:
First, every transaction is embedded in complex relations.
Second, understanding any transaction requires understanding all essential elements of its enveloping relations.
Third, effective analysis of any transaction requires recognition and consideration of all essential elements of its enveloping relations that might affect the transaction significantly.
Fourth, combined contextual analysis of relations and transactions is more efficient and produces a more complete and sure final analytical product than does commencing with non-contextual analysis of transactions. For purposes of this Article, relational contract theory means these four propositions, nothing more and nothing less. Ian R. Macneil, Relational Contract Theory: Challenges and Queries, 94 Nw. U. L. REV. 877, 881-82 (2000). Ian Macneil is the leading relational contract theory scholar. For elaboration on the relational contract theory, see also Ian R. Macneil, Contracting Worlds and Essential Contract Theory, 9 SOC. & LEGAL STUD. 431 (2000); Ian R. Macneil, Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 Nw. U. L. REV. 854 (1978); Ian R. Macneil, Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a "Rich Classificatory Apparatus," 75 Nw. U. L. REV. 1018 (1981).
2. See, e.g., Bakery & Confectionery Workers' Int'l Union v. Nat'l Biscuit Co., 177 F.2d 684, 688 (3d Cir. 1949) (upholding actions taken pursuant to a change-of-terms provision regarding pensions in employment contract); Badie v. Bank America, 79 Cat. Rptr. 2d 273, 278 (Cal. Ct. App. 1998) (expert
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ability to change terms and the weaker party's interest in the certainty and enforceability of the original terms has come into particularly stark relief as the fabric of consumer transactions is strained during challenging economic times. It is one thing to become upset with your credit card issuer and pay off the card by accessing your equity line; it is quite another when you become upset with your credit card issuer at a time in which the available credit on your equity line is reduced to the point that you cannot pay off and walk away from the credit card issuer. So once you lose the ability to walk away from new, less attractive terms, the right to do so is illusory.
This article will survey the numerous contexts in which one party reserves the right to unilaterally adjust the terms of a continuing contract, perhaps subject to the other party's right to terminate the contractual relationship.3 Our focus is on contracts that endeavor to fix the terms of the parties' deal across a series of interactions, rather than discrete but recurring transactions in which one party reserves the right to change terms in succeeding contracts. We have found examples of unilateral change-of-terms provisions in a range of consumer contracting settings including, perhaps most notably, credit cards, the subject of recent federal legislation designed to curb overreaching by card issuers.4 Not surprisingly, banks also typically
testified that "including a change-of-terms provision in account agreements ha[s] been the industry practice [in the credit card industry] since bank credit cards first became available in the 1960's"); Automatic Vending Co. v. Wisdom, 6 Cal. Rptr. 31, 33 (Cal. Dist. Ct. App. 1960) (finding contract and unilateral rate changes enforceable because of good faith obligation bestowed upon modifying party); State v. San Francisco Sav. & Loan Soc'y, 225 P. 309, 311-12 (Cal. Dist. Ct. App. 1924) (holding that depositors that signed an agreement with a bank which allowed the bank to change its bylaws at a later time were not bound to amendments eliminating the payment of interest on dormant accounts); Krupp v. Franklin Sav. Bank, 255 A.D. 15, 17 (N.Y. App. Div. 1938) (finding amendments to be binding on the consumer automatically because of "the express agreement between the parties to abide by amended bylaws").
3. The UCC distinguishes between "termination" and "cancellation." "'Termination' occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On 'termination' all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives." U.C.C. § 2-106(3) (2002). "Cancellation," on the other hand, "occurs when either party puts an end to the contract for breach by the other and its effect is the same as that of 'termination' except that the cancelling party also retains any remedy for breach of the whole contract or any unperformed balance." U.C.C. § 2-106(4) (2002).
4. On May 24, 2009, President Obama signed legislation designed to regulate credit card companies' ability to alter terms of contracts. The Credit Card Accountability Responsibility and Disclosure Act restricts credit card companies' ability to unilaterally increase interest rates. Credit Card
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include unilateral change-of-terms provisions in their account agreements, though this is not limited to the consumer setting.5 Similarly, providers of utility and utility-like services include unilateral change-of-terms provisions in their consumer agreements. We have found them in contracts for telephone service (both land-line6 and cellular7), and television service (both cable8 and satellite9).
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