A lot of contracts between companies and customers these days are not worth the paper they are printed on -- literally. That's because, while the companies continue to use forms developed in response to the traditional concept of what a contract is, courts have been fast throwing out that approach for a new one in which the written words are no more than a clue to the essence of the deal.
Under most contracts, each side is satisfied with the way the other performs, and there's never a need for an arbitrator or court to step in and decide whether the agreement was valid and, if so, just what each side had promised. But when there's a dispute and a contract is subjected to judicial examination, the key question is what the two parties have agreed on. If you thought you were promising to make an annual payment in return for a monthly weeding job and the lawn service company thought it was collecting monthly payments for an annual weeding job, there was no meeting of the minds and therefore no contract.
The simplest way to ensure that you both had the same understanding of the deal can be to put the reciprocal promises in writing; by the 19th century, writing contracts that would withstand the pickiest judicial examination had become a fine art. Contract disputes continued, of course, but when the words of a written document were clear, that ended the matter and all that was left was to tote up who owed whom how much under those black-and-white terms.
It's a good bet that most businessmen think that is still the law. But for the past decade, judges have been replacing it with a radically new approach. Now, judges hold the parties to what they thought the deal was, and that can be something quite different from the legal jargon contained in the formal contract. This new definition has its primary impact "where one party uses a standard form when it reasonably ought to know that the other party will probably not read or, at least, understand it," says University of Southern California law professor W. David Slawson, one of the intellectual forefathers of the new approach.
It's not a case of the layman versus the expert knowledgeable in the law. Slawson believes complex forms have become such an everyday part of our lives that "even lawyers probably do not read their insurance policies. And if health insurance is offered through a lawyer's firm, chances are that the lawyer has never even seen the policy."
So the contract terms become not what the fine print says, but what the customer has come to expect from advertising and news articles and the comments of friends, and what the seller, on the other hand, has let the customer believe. The bank making a mortgage loan or the store delivering a warranteed product is not bound to perform the way "everyone" says it will. But if it isn't going to live up to those general social expectations, it has to make that very clear to the customer. And simply giving him or her a contract to sign -- even one written in everyday language -- just doesn't pass the test of making it clear.
Ironically, it was the 19th century's enshrinement of the written contract that led to its downfall. No longer was a contract a document drawn up by lawyers for the affluent to cover a major transaction, but a conventional document printed en masse and sold by stationers. All the seller did was fill in the blanks. But if this was a standard form purchased by the gross, how could it truly reflect the deal worked out by two individuals? And, especially, how could it reflect the deal when the seller increasingly was using other means -- advertising, sales brochures, public relations -- to communicate promises to the would-be buyer?
Before World War II, at least one scholar, Karl Llewellyn, was pointing out the unfairness of giving too much weight to standard forms that were simply shoved in front of customers' faces. In response to his arguments, the Uniform Commercial Code spelled out that contracts with "unconscionable" provisions would not be enforceable. That helped curb the scoundrels, but did little to aid consumers who had a different view of a deal they were striking with a legitimate business.
More recently, courts have begun using several approaches to go beyond the contract language to the underlying beliefs. Some states -- including Iowa, Rhode Island and Arizona -- have added to contract language any promises implied by the deal. Others have interpreted UCC rules on how to construe "gaps" in written contracts to include "gaps" between the contract's words and what the parties thought they were getting. And still others have broadened an old rule -- that a customer gets "reasonable expectations" from a contract if the language is ambiguous -- to use that yardstick even when the contract language unequivocally does not provide for it.
Not everyone subscribes to the new interpretation. Lawyers and economists of the conservative Chicago school argue that it makes more sense to rely on the written words of contracts and let market forces punish sellers with tough terms and reward those who are generous. And when the prestigious American Law Institute published a new codification of contract rules in 1981, after 21 years of work, it endorsed the validity of standardized forms. So far, the new approach has been adopted by only a minority of the states.
But the real measure of the new thinking's success, as Slawson notes, is that not a single court has considered and rejected it. Last month, in a publication of the Association of Trial Lawyers of America, Slawson urged lawyers in states that have not adopted the new, looser approach to written contracts to base their cases on that theory and urge it on their state courts. That virtually assures companies in every state that they cannot comfortably rely on contract language to hand them automatic victories in later disputes.
In another case, a court ruled that:
*A company's obligation to arbitrate questions of dismissal end when the collective bargaining contract containing them expires. In general, laymen might think that all contract obligations end when the contract is over, but that rule does not apply uniformly in labor disputes. Companies have a continuing duty to go to arbitration on rights the workers have won during the life of the contract, such as pensions or disability benefits. And some jurisdictions have included firings on that list. But the Michigan Supreme Court, in a split decision, ruled that if the pink slip is handed out after the union contract expires, there is no requirement that the company go to arbitration on the issue.
(County of Ottawa v. Jaklinski, Nov. 7)owitz covers legal affairs for McGraw-Hill World News.