Boilerplate Symposium Part XII: Jean Braucher on the Common Law of Contracts as Residual Law

This is the twelfth in a series of posts reviewing Margaret Jane Radin’s Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law.

Jean Braucher is the Roger C. Henderson Professor ofLaw at the University of Arizona.

Peggy Radin in Boilerplategives a rich, comprehensive account of contract law and theory as appliedto standard form terms. For anyone inclined to focus on the common law of contractas the primary way to think about the problem of nasty form terms, this book isan obvious go-to source.

My critique may seem odd for a contracts blog, buthere goes:  I don’t think the common lawof contracts is the right place to focus when thinking about unfairdeals, except as a history lesson to understand the origins of regulation thatis now more rigorous.  Emphasis on thecommon law tends to put a “freedom of contract” ideological spin on problemsthat are already regulated otherwise and in more effective ways, based on moresophisticated theory.  Radin includesperspectives other than those of standard contract theory, so my objection is asubtle one about emphasis.

We live in the age of the regulatory state andadministrative agencies. The theory and practice of this type of regulation arenow at the core of the law governing contracts, with judge-made common lawplaying a minor, residual role. Most important types of contracts are regulatedby more than common law. Radin devotes her last chapter to regulatory solutionsto overreaching in boilerplate, so she has certainly not missed that regulationmatters, but she gives primacy of place to the common law of contracts and its theory.Contracts scholars often do this, but we need to change if we are to theorizeabout current reality and not give law students the misimpression that thecommon law provides a nearly complete system of law for contracts, only touchedup around the edges with a little regulation.  In the 21^st century, and after aneconomic collapse brought on by mass exploitation by contracts, we should bespending less time on offer and acceptance or even unconscionability and moreon the vast existing statutory and administrative regulation of the substanceof contracts.

Consumer contracts illustrate well the point that statutes,often administratively applied, dominate the law applied to contracts. In herdiscussion of boilerplate, Radin features many consumer contract examples—Part Iof the book is headed “Boilerplate, Consumers’ Rights, and the Rule of Law.”Consumer contracts are governed by thousands of federal, state, and local consumerprotection statutes that provide stronger remedies than those of the commonlaw.  Some statutes are very specific andothers use general standards. When consumers’ lawyers draft complaints, theyput common law causes of action at the end, after statutory theories; statutoryremedies often could be better implemented (judges sometimes undermine them),but they are already way better than those of contract law. Public enforcementis also more powerful. When the Federal Trade Commission and state attorneysgeneral bring enforcement actions against unfairness and deception, they don’thave to worry about arbitration and forum clauses or class action prohibitions.  They aren’t parties to the contract.

So, when thinking about problematic consumercontracts today, two key points bear emphasis: (1) the common law of contracts is typically not the best or firstresort for protection of consumers and is therefore residual law, and (2) theDodd-Frank Act recently gave consumer protection law a huge shot in the arm bycreating a new regulatory power to address exploitation of consumermisperceptions in credit contracts. Consumer misperceptions are not limited to formterms but also come into play with salient terms such as price (a point alsomade by Oren Bar-Gill in his comment for this symposium).

Dodd-Frank created the Consumer Financial ProtectionBureau (CFPB) and gave it broad power to regulate not just unfair and deceptiveacts and practices (as federal and state statutory law has long done for manyconsumer contracts) but also abusive consumer credit contracts. (And, by theway, as Radin notes at the end of her book, CFPB also is required to study mandatorypre-dispute arbitration and has power to decide whether it serves consumerinterests and regulate if not.)

The powerful behavioral economics theory for theCFPB’s anti-abuse power is likely to suffuse consumer law over time.  For a fuller discussion, see my paper Form and Substance in Consumer FinancialProtection. This theory, backed up by extensive researchby many empirical scholars, is thatconsumers not only make systematic misperceptions, but also that businesses areforced by competition for investors to study and exploit the patterns of these misperceptionsto maximize their returns. Regulation is thus essential both to free businessesfrom a race to the bottom so that they can be straightforward with theirconsumer customers and to empower vulnerable consumers to get deals theyunderstand.

The CFPB does not use common law methodology. It addressesexploitative practices through the responsive regulation tool of examination offinancial institutions, backed up by enforcement actions.  CFPB examiners now pour through the recordsof financial institutions and consumer complaints for evidence that consumersdon’t understand credit products with complex tricks and traps. The power toregulate abusive practices is not limited to those set in boilerplate; it alsoapplies even if the exploitation is in plain sight but consumers do notunderstand their credit products, including how they will use them.  When we think about abuses in consumercontracts, we should start with the theory underlying the CFPB’s new power, notwith stale ideas about consent or choice.

Contracts teachers as well as law reformers, such asthe American Law Institute in its newly-launched Restatement Third of the Law of Consumer Contracts, should notforget that consumer protection law is the central and most powerful part ofthe law governing consumer contracts. ALI’s project description shows that it understands that consumer law isheavily statutory and administrative, but the question remains whether ALI will embrace our vast, popular statutoryand administrative law of consumer protection or inaccurately try to treat itas incidental to the common law.

Similar points to these concerning consumercontracts could of course be made about the regulation of many other types ofcontract. The general point is that the law of contracts is much broader thancontract law, and the common law is not the primary way to address overreachingin contracts, whether in boilerplate or not. Radin ends in agreement with thispolicy direction, but her focus on theory underlying common law rather than thetheory of regulation makes the analytical journey more difficult than it needsto be.  Contract theory needs updating toembrace regulatory theory as part of its core and not as an afterthought oradd-on.

Someacknowledgments: Nearly everything worth saying about consumer contracts was said longago, and much of the above is inspired by earlier work of others. In 1933, based on lectures given in 1928-29, KarlLlewellyn wrote in The Case Law System inAmerica (in German, only published in English in 1989; see at 67-68 for thediscussion in the English translation) that case law is inadequate to addressthe enormous problem of consumer protection. See also Arthur Leff, Unconscionability and the Crowd—Consumersand the Common Law Tradition, 31 U. Pitt L. Rev. 349 (1970) (arguing that commonlaw litigation will not root out unfairness and that administrative regulationis necessary to deal effectively with consumer contracts), and StewartMacaulay, Bambi Meets Gozilla:Reflections on Contract Scholarship and Teaching vs. State Unfair and DeceptiveTrade Practices and Consumer Protection Statutes, 26 Hous. L. Rev. 575(1989) (noting that consumer protection regulation is more powerful thancontract law in providing remedies and that contracts teaching should introducethat key point).

[Posted, on Jean Braucher’s behalf, by JT]