For a more detailed discussion of the new Restatement, we encourage you to also listen to the episode of the Consumer Finance Monitor Podcast released today with Ballard Spahr’s Alan Kaplinsky (who is on the ALI Board of Advisers to the new Restatement) and special guest Steven Weise from the ALI Council.
The American Law Institute (“ALI”) is expected to approve the Restatement of the Law, Consumer Contracts (the “Restatement”) tomorrow, May 17, 2022 at ALI’s 2022 Annual Meeting in Washington, DC. The Restatement culminates an 11-year project by ALI to address how contractual terms are adopted, modified, and enforced in contracts between businesses and consumers. The Restatement of the Law, Consumer Contracts, sets forth a series of rules that are intended to represent the current black letter law for consumer contracts. The foundational principal behind the new Restatement is that consumer contracts are asymmetrical in nature, with sophisticated business parties entering into numerous identical transactions with unsophisticated consumers. While acknowledging there are benefits to standard form contracting, the new Restatement diverges from the Restatement Second of Contracts in some key areas, including changes in terms, assent, parol evidence, and defenses to enforceability. The new Restatement only covers these and a few other select common law contract issues, and, will override the Restatement Second of Contracts where there is a conflict between the two. Because courts often look to Restatements of the Law to guide their decision making, all companies that contract with consumers will need to familiarize themselves with the new Restatement as it may require immediate changes to consumer contracts.
According to the ALI, Restatements of the Law are primarily addressed to courts and reflect the common law as it presently stands or might appropriately be stated by a court. In contrast, Principles of the Law, another category of ALI publications, are intended to be aspirational statements of best practices. The distinction is important because the controversy surrounding the new Restatement emanates from numerous instances where many believe the Restatement’s Reporters (the authors) have attempted to set forth black letter authority on issues for which there is a dearth of relevant case law and that goes beyond what most courts have actually held. Some critics have also pointed out that much of the case law relied upon consists of federal court decisions, which are not binding authority on state courts. This is problematic because Restatements are expected to present the common law as developed on the state level.
Interestingly, there has been almost universal criticism of the new Restatement throughout the project from both consumer- and business-affiliated interests. In 2019, 23 State Attorneys General urged ALI members to reject the draft Restatement, concluding it “represents an abandonment of important principles of consumer protection in exchange for illusory benefits.” This past January, a coalition of general counsels of major corporations and representatives of leading trade associations (including those in the financial services industry) wrote to the ALI urging it not to approve the Restatement on the grounds that it is conceptually flawed and riddled with major public policy changes that are completely at odds with the common law that has actually been adopted by courts. Previously-released episodes of our Consumer Finance Monitor Podcast, available here and here, include substantive discussions of many of these criticisms and responses from the ALI. Some of these concerns have been addressed by the ALI in the current draft, including clarifications concerning mutual assent that seem to have appeased criticism from consumer groups.
The new Restatement is broken down into nine sections and also includes an appendix summarizing the black letter law. Section 1 provides definitions used throughout the document, a statement regarding the scope of the project, and an outline of the substantive issues. The other sections, like other Restatements of the Law, begin with a succinct statement of the black letter law on a particular issue, followed by commentary from the Reporters and “illustrations” presenting various use cases. Each section concludes with detailed Reporters’ Notes, with include citations to the cases underlying their conclusions and analysis. The sections include:
§ 2. Adoption of Standard Contract Terms
§ 3. Adoption of Modification of Standard Contract Terms
§ 4. Discretionary Obligations
§ 5. Unconscionability
§ 6. Deception
§ 7. Affirmations of Fact and Promises that Are Part of the Consumer Contract
§ 8. Standard Contract Terms and the Parol Evidence Rule
§ 9. Effects of Derogation from Mandatory Provisions
Potential issues abound for any company that contracts with consumers. Just a few examples include:
- The need to ensure clear notice to consumers of key contractual terms and any subsequent modifications of those terms in clickwrap or other online agreements §§ 2, 3).
- The elevation of deception (§ 6) as a universal, black letter common law defense to a consumer contract term. While many businesses are already subject to state and federal consumer statutes prohibiting deceptive acts or practices, the Restatement holds that material terms of a contract may be unenforceable even where the actions of the business do not satisfy the elements of fraud.
- While the common law of many states considers a contract or term unconscionable only where it is both substantively and procedurally unconscionable (with the degree of each determined on a sliding scale), the new Restatement holds that it is sometimes sufficient to only prove one of these factors to challenge a contract (§ 5b). This opens the door for consumers to strike down contracts and terms on the grounds that they are unsophisticated and didn’t understand what they were agreeing to, thereby rendering the contract or term procedurally unconscionable.
- In addressing contract terms that are substantively unconscionable in limiting consumer redress (§ 5), the Reporters acknowledge that the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the Federal Arbitration Act preempts state law and allows arbitration agreements with class action waivers, but then state they take no position on preemption and cite to a handful of cases in concluding that arbitration clauses can be unconscionable under state common law.
- In § 8, the Restatement dilutes the parol evidence rule in holding that standard consumer contract terms that contradict or unreasonably limit prior affirmations or promises of a business do not constitute a final expression of the agreement. While the Reporters state in the comments that the parol evidence rule still applies, the black letter law and illustrations open the door for courts to entirely ignore merger and integration clauses in striking down contract terms on the basis of prior written or oral understandings of the parties.
It remains to be seen how the new Restatement will be received by courts in light of the controversy surrounding it and the apparent paucity of case law supporting some of its conclusions. However, once adopted, the Restatement will create new potential defenses for consumers and a litigation risk for any business that has not reviewed its consumer contracts for compliance with the black letter law as formulated by the Restatement. Beyond reviewing specific forms of contracts, companies should review their entire process for entering into consumer contracts, as well as the methods used for modifying them. The good news is the use cases provided in the illustrations should be helpful in developing and refining best practices to address these risks. Additionally, the case citations throughout the various sections represent a generally comprehensive collection of precedent, useful for any litigator addressing claims or counterclaims that are colored by the Restatement’s formulation of the black letter law of consumer contracts.