At the American Law Institute (ALI) annual meeting in Washington, DC on May 22-24th, members had the opportunity to review a discussion draft of the Restatement of the Law Third, Consumer Contracts.  The draft is the result of the ALI’s 2012 initiative to supplement the Restatement Second of Contracts and Uniform Commercial Code (UCC) with a Restatement dedicated to transactions made solely by consumers for personal or household purposes.

The ALI generally undertakes four types of projects—Restatements, Legislative Recommendations (i.e., Model Codes), “Principles,” and Studies.  Its “Principles” projects have historically been used for emerging areas of the law where the ALI seeks to “unify a legal field without regard to whether the formulations conformed precisely to present law or whether they could readily be implemented by a court.”  For its Consumer Contracts project, reporters to the project chose to draft a more formal and ambitious Restatement.  The Consumer Contracts draft purports to look to both common law and statutory law, including the Uniform Commercial Code and consumer protection statutes (e.g., Dodd- Frank), to address transactions that were either not contemplated or insufficiently addressed by the Restatement Second of Contracts and the UCC.  However, the discussion draft does not faithfully and consistently reflect prevailing common law as Restatements are supposed to do.  As such, the reporters should consider converting the document into a Principles project.

The draft recognizes that the use of standard terms in consumer contracts has enabled businesses to offer a greater number of consumer goods and services at lower prices.  Moreover, the draft recognizes that courts have generally resisted creating special or restrictive consumer-specific rules because the increased efforts to obtain relatively more informed consent (including enhanced disclosures) would “increase transaction costs without producing substantial benefit” for consumers.  Nevertheless, the draft expresses a willingness to undermine these price and distribution efficiencies by advocating for changes to our current legal framework.

Specifically, the draft advocates for expanded judicial review of consumer contract terms to police whether consumers are receiving a fair bargain, including:

• Unconscionability: Section five encourages courts to more broadly identify and more closely scrutinize terms related to consumer remedies (e.g., choice-of-forum, choice-of-law, and arbitration agreements), business remedies (e.g., termination fees), and price.  In particular, the draft Restatement largely ignores the Federal Arbitration Act, its preemption of contrary state law, and the long history of Supreme Court decisions establishing a strong federal policy in favor of arbitration.
• Deception: Section six provides an expanded notion of deception by incorporating the language of consumer protection statutes. In particular, the draft permits consumers to void an agreed-to term if the term is the result of a “deceptive act or practice” that is “likely to mislead the reasonable consumer.”  Additionally, the draft bestows consumers with the option to void the entirety of an agreement if an alleged deception undermines the value of the contract.  A consumer may allege deception even where the business does not intend to deceive the consumer, and where the challenged contract term may have been the result of a negligent act or practice.  Deception may also extend to price, particularly where the transaction includes fees, add-ons, and other “multidimensional” pricing.
• Enforcement: Section nine proposes enhanced consumer remedy provisions and enshrines liberal rules allowing judges to re-write contract provisions.  The draft emphasizes several mandatory rules—rules that cannot be deviated from by agreement of the parties—including assent, notice, and an opportunity to terminate.  The draft instructs courts to limit the enforcement of any deviating term, but in certain circumstances also allows a court to replace a deviating term with one that “operates against the business.”

The draft presented at the annual meeting was not voted upon.  The ALI Reporters managing the project are to incorporate feedback from the discussion into a subsequent draft, which will be presented to the Council and then to the general membership for approval.