#7288 - Identifying Express Terms Casebook Summary - Contracts 2

Standard-form contracting in the electronic age (2002) NYULR 429

1. Basic issues in SFCs

1. The Paper Paradigm

   • Standard forms are common to both infrequent (land lease) and frequent transactions (hire car)

   • Hillman cites a number of factors (consumers inability to understand SFCs, comparable terms, un-authoritative agent etc.) which together, after a reasonable cost-benefit analysis often leads to the consumer dispensing with reading the SFC.

   • Additionally there may be pressure by the business’ agent to sign quickly – downplaying the significance of the SFC

2. Costs and Benefits of Enforcing Standard-Form Contracts

   • Courts generally consider that enforcing SFC terms as appropriate, a clear rule being that all parties should read and understand terms before signing.

   • The economy provide by the SFC allows businesses to best allocate risks between themselves and the consumer and thus minimize the costs of goods or services that business offer

   • Often a competitive industry will lead to similar SFCs – also because junior entrants will follow senior firms

   • If an SFC allocates risks efficiently, renegotiations aren’t required, however the characteristics of SFCs allow firms to exploit consumers by making them accept contracts that inefficiently shift risks to consumers

   • This creates a dilemma for courts because failing to enforce SFC terms may undermine efficient allocation of resources – resulting in a socially inefficient net loss to the business and consumer (higher prices). But on the other hand it may ratify business’ efforts to take unfair advantage of consumers

3. The Role of Competition

   • Theoretically it is the consumer’s acumen and vigilance that should lead to efficient SFCs. Aggregate decisions of consumers who refuse to transact inefficient SFCs pressure businesses into providing efficient SFC terms

   • And even if most consumers lack the skill and time – even a small percentage of savvy consumers will create incentives for business to make SFCs competitive.

   • But if the number of savvy consumers is too small – businesses don’t find it worthwhile to compete. They may also isolate the savvy consumers (Telstra)

   • Reputation provides another barrier to exploitation, also allowing consumers to protect themselves (search)

   • This may also be insufficient since the market might be managed by short-term players unconcerned with reputation

   • Courts are generally mindful of business reputation and competition and their inability to distinguish exploitation from sensible business practices

2. Market Failures and Standard Form Contracts

   • Imperfect markets can fail to sufficiently protect consumers because consumers can reach an incorrect conclusion in cost-benefit analysis, social pressures (arranged by businesses) and irrational reaction to exploitative terms

• ‘Rational’ Market Failures

  • Legal jargon, small print and a general understanding of important terms (price and quantity) and a recognition by the consumer of an inability of the agent to negotiate, business reputation and a belief that courts will strike down unreasonable terms of the SFC are all contributing factors to consumers simply signing SFCs (“free-rider problem”)

• Social Forces

  • Business induce consumers to sign SFCs quickly without reading, reading can seem confrontational and businesses can also manipulate consumers by making concessions in social exchange which encourage consumers to sign the “boilerplate”.

• Cognitive Factors

  • Consumers engage in satisficing (relying on partial information sufficient to make them comfortable with their choice),

  • Consumers have difficulty in engaging in a complex cost-benefit analysis of many factors (some people say this is preferred – simple models are always better than complex models [parsimony principle]),

  • Consumers engage in motivated reasoning based on the price and quality which will lead them to believe that the boilerplate is reasonable,

  • Consumers underestimate adverse risks they voluntarily take (safely discounting low probability risky terms in the SFC)

JJ Savage & Son Pty Ltd v Blakney (1970) 119 CLR 435

Relevant Facts: The respondent (B) contemplated buying a motor boat from the appellant (J). During the course of negotiation B requested J to produce in writing his views on various engine: fuel consumption, estimated speed etc. – the latter of which was 15mph. Relying on J’s advice, B placed a formal order for the boat which was executed. Nothing in the contract stipulated its maximum speed. The boat wasn’t capable of moving faster than 12mph.

Case History: The respondent sued for breach of warranty, submitting that the representation was a condition, warranty of the contract or a collateral warranty to the construct for construction sale. The trial judge upheld neither of these grounds. The Full Court held that the statement was a collateral warranty that the boat would obtain an approximate speed of 15mph

Issue: Did J’s statement give rise to a collateral warranty

Decision: No. IFF B sought from J a promise expressed as an assurance, guarantee, promise or otherwise that the boat would attain the speed as a prerequisite to him ordering the boat – would there be a collateral warranty.

Ratio and Significant Obiter (Barwick CJ, Kitto, Menzies, Owen and Walsh JJ):

• The Full Court erred in construing the word ‘estimate’ as ’approximate’ rather than as ‘an expression of opinion as the result of approximate calculation based on probability’

• The Full Court erred in treating the fact that the contract would not have been made but for the statement as sufficient to give rise to a collateral warranty

• There were three courses available to the respondent:

  • Requiring that attainment of the speed be inserted in the specification as a condition of the contract

  • (Condition 2 from decision above) – only this would give rise to a collateral warranty

  • He could be content to form his own judgement relying on the appellant’s opinion.

• There is only evidence that the respondent took the third course. Though it can be conceded the statement was intended to be acted upon – this does not warrant the conclusion the statement was promissory

Order: Appeal allowed

Oscar Chess Ltd v Williams [1957] 1 WLR 370

Relevant Facts: The defendant’s mother purchased a car in 1954, believing it was a 1948 model. The registration book showed the car to be first registered in 1948. The plaintiffs described the car as a “1948, 10 horsepower Morris”, and produced the registration book. After finding out that the car was a 1939 model they claimed the difference of how much they would have paid for it had they known – alleging it was an express term, in the form of a condition, or alternatively it was a warranty and hence they were entitled to damages for breach of warranty. The trial judge held that it was a condition of the contract that the plaintiffs would have rescinded from had they known the true facts before the property in the car had passed.

Issue: Whether the words of the defendant was a term of the contract amounting to a warranty or whether it was an innocent misrepresentation

Decision: No, an intelligent bystander would say that the seller did not intend to bind himself as to warrant that it was a 1948 model

Ratio (Denning LJ):

• Both buyer and seller wrongly believed the car was a 1948 – the effect of such mistake would provide relief in equity but the claim was brought too late. Hence the only available remedy would be in breach of warranty

• The trial judge erred in focussing on whether or not the representation was fundamental to the contract. The crucial question is whether it was a binding promise (intended to be a warranty) or an innocent representation.

• A warranty is “something to which a man must be taken to bind himself” – this question depends on the conduct of the parties, and their words and behaviour rather than their thoughts

• “If an intelligent bystander would reasonably that a warranty was intended, that will suffice” – this is a question of law

• It was obvious to both the seller and buyer that the seller had no personal knowledge of the year which...