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...significant differences remain. Furthermore, differences in interpretation among member states could lead to differences within the E.U.

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Legally enforceable contracts are the foundation of a capitalistic market system where voluntary exchange allocates resources. "Classical" contract law as developed during the 19th and early 20th centuries throughout the Western world placed particular emphasis on enforcing voluntarily formed contracts. Despite this respect for freedom of contract, courts do not enforce contracts if there is evidence that one party did not consent to the terms because of fraud, mistake, or coercion. More rarely, courts decide not to enforce contracts whose terms are so one-sided it is difficult to believe the disadvantaged party agreed to them despite no other evidence of fraud, mistake, or coercion (Beatson and Friedman 1995; Chitty 1999). This development in contract law is generally referred to as unfairness or unconscionability and is the subject of this article. Unfairness provides the legal system with needed flexibility to enforce the vast majority of contracts, while not enforcing a few contracts when it would be unfair or inappropriate to do so.

This article first examines the need for consumer protection from unfair contract provisions. It then provides background information on the development of consumer contract fairness law in the two largest consumer markets, the United States (U.S.) and the European Union (E.U.). Next the general standards for determining fairness from each source are compared, followed by a section presenting and comparing specific examples of unfair contract provisions. The implications section then summarizes both similarities and differences between the two regimes and suggests that the E.U. and U.S. have fundamentally different models of consumer policy.

THE NEED FOR CONSUMER PROTECTION

This "escape valve" of unfairness raises the question of whether consumers within a free market system need additional protection from unfair contracts beyond general unfairness principles available to all types of parties. It is not the intention of the authors to analyze the justifications for treating consumers as a separate class of contracting party (on this issue see further Trebilcock 1981; Ramsay 1984; Kennedy 1981). However, some authors (e.g., Alwitt 1996) have recognized that consumers appear to be disadvantaged in their exchange relationships with large businesses. Common sense suggests that consumers may suffer a lack of choice or a lack of knowledge about alternative choices when selecting certain products or services. Moreover, for exchanges involving lengthy and complex contracts, consumers may lack the time or interest to carefully review such contracts, particularly when limited purchases are planned. Lastly, consumers may lack the time, interest, and ability to effectively challenge terms they may not like and bargain for more favorable terms. For this reason, consumers often may be faced with "take it or leave it" contract terms.

In contrast to each consumer anticipating few purchases from any particular seller, each marketer anticipates a large number of sales to consumers. Marketers can therefore justify spending more resources in contract formulation than consumers. Furthermore, if consumers pay little attention to contract terms (preferring instead to focus on price and quality of the product or service), then there is little incentive for sellers to compete based on contract terms. Lastly, sellers may have a strong incentive to seek enforcement of their consumer contracts for fear they will develop a reputation for laxity that consumers will use to their advantage. Enforcing contract terms against the occasional purchaser contradicts the current interest in relationship marketing, but the latter may be more oriented toward large institutional buyers, who often make repeat purchases (McKendrick 1995; Beale and Dugdale 1975). Consumers on the other hand, have less incentive to develop a reputation for toughness since they are mostly anonymous to the large number of businesses with whom they deal. Consumers therefore may only enforce contracts when the cost of enforcement is less than lost value of simply giving up on the original contract (Ogus 1994, p.27; OFT 1996; FTC v Klesner 1929).

In contrast to this "pro-consumer-protection" view, marketers argue the importance of relationship marketing, the "customer being king," and the viability of non-legal approaches governing the exchange process (Gundlach 1994; Gundlach and Murphy 1993). This view holds that marketers tend to follow ethical norms suggesting that little consumer protection against unfair contract provisions is required. Such marketers should welcome a single, agreed-upon ethical and legal standard of consumer contractual unfairness. If the primary goal for most marketers is customer satisfaction, then regulatory agencies such as the FTC and OFT may be needed only to pursue fraudulent, unethical marketers.

However, anecdotal review of cases on both sides of the Atlantic suggests that at least some large firms that presumably would not wish to be identified as fraudulent or unethical marketers, have not voluntarily extended relationship marketing to the provisions of their consumer contracts. For example, in 1976, the Seventh Circuit Court of Appeals affirmed an FTC decision requiring a national mail order company, Spiegel, to sue consumers where they lived or signed the contract, rather than where the company was located (Spiegel v. FTC 1976). Ten years later, the FTC obtained a consent agreement with J.C. Penney requiring the same practice (J.C. Penney Co. 1987). Similarly, despite long standing UCC provisions requiring consent to change contracts, the largest pest control company in the U.S. was sued by the FTC for making unilateral changes in consumer contracts (Orkin Exterminating Co. v. FTC 1988). Both of these practices would have been condemned under the E.U. Directive as well.

Large companies in Europe also have been found using unfair contract terms that should have been caught by proper internal review, once the Directive had passed. For example, in the United Kingdom (U.K.), Ford Motor Company was found using contracts that (1) limited Ford's obligations to fulfill dealer commitments, (2) denied liability for circumstances it might specify after the contract was signed, and (3) forced consumers to accept Ford-specified arbitration (OFT 1996). Additionally, American Express charged an unspecified penalty for collection agency referral (OFT 1997). Hertz required disputes be litigated in a specified country, a provision unfair to tourists who might want to litigate in the country where they formed the contract with Hertz. Microsoft U.K. sought to unfairly limit consumer warranties in cases where the loss was foreseeable. It gave itself sole authority to determine whether an incident was caused by a problem with its product (OFT 1998). These are just a few examples of large, presumably reputable firms that the United Kingdom Office of Fair Trading required to change unfair consumer contract terms for violating provisions of the Directive.

Given these examples and the different incentives of consumers and marketers to focus on contract terms, it is not surprising that both the U.S. and E.U. have applied the concept of unfair contracts to consumer contracts. Since civil law countries prefer more detailed rules (e.g., civil codes) rather than broad-based general principles favored by common law countries (Petty 1996), it is not surprising that the E.U., rather than the U.S., has adopted a...

NOTE: All illustrations and photos have been removed from this article.




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