Most of us (if not all) have entered a contract with one or more terms that a court would not enforce. From non-compete agreements in states that prohibit them, to leases that purport to limit the implied warranty of habitability, to waivers that disclaim liability for injuries resulting from the drafting party’s negligence, contracts containing clearly unenforceable terms have become ubiquitous. The usual remedy (such as it is) for the inclusion of such a term is for a court to decline to enforce it.
That remedy, Daniel Wilf-Townsend argues, is woefully inadequate. In Deterring Unenforceable Terms, he proposes to supplement it with “a general, affirmative prohibition on clearly unenforceable terms in contracts offered by a sophisticated drafter to large numbers of unsophisticated counterparties.” That proposal might seem bold, but over the course of the article, it starts to appear quite restrained.
In support of his proposal, Wilf-Townsend draws on two large and expanding bodies of empirical research. The first demonstrates the ubiquity of unenforceable terms in contracts governing employment, housing, and other contexts. Separate studies of residential leases in Boston and Philadelphia showed that more than half contained at least one unenforceable term. Moreover, most of the leases were not bespoke creations of small landlords making idiosyncratic mistakes, but “were standard form leases, drafted by commercial publishers or by organizations of landlords or realtors.” The existing studies do not cover every context in which mass contracting is common. But taken together, they “paint a consistent, coherent picture of a world in which unenforceable terms are ubiquitous–including in form contracts disseminated to many actors and institutions.”
The second body of empirical research shows that most consumers believe themselves to be bound to the terms of their contracts as written, no matter how unfair or one-sided those terms might be. People who did not read the contract before assenting believe themselves bound, and the belief persists even among those whose assent was procured by fraud. Because they believe themselves bound, those unenforceable terms affect their behavior, often to their detriment. An employee with an unenforceable noncompete might decline a job offer with a better salary or benefits or a tenant with an unenforceable liability waiver might pay for repairs necessitated by the landlord’s negligence.
For some drafters, those behavioral effects appear to be the motivation for including unenforceable terms, although Wilf-Townsend is careful not to paint with too broad a brush. An unenforceable term might appear in a contract for relatively innocuous reasons; for example, a large company might seek to reduce costs by using a standardized form, notwithstanding that it contains terms that are unenforceable in a subset of the jurisdictions in which it operates. It is not “the intention of the drafting party,” but rather “the effects of unenforceable terms on consumers and workers [that] make them an appropriate target for regulatory policy.”
The piece would be valuable if it stopped there, but Wilf-Townsend expands its contribution by analyzing what an appropriate policy response should look like. He frames the underlying question as “how the law ought to distribute the costs of acquiring and applying legal knowledge,” which “implicates both the traditional private-law goal of cost minimization as well as the public-law goal of access to justice.”
With regard to cost minimization, under the status quo, a company that expects to enter a contract of adhesion with a large number of counterparties is likely to hire a lawyer to assist with drafting and review. As a result, the marginal cost of having the lawyer identify and remove any clearly unenforceable provisions should be fairly small. By contrast, a consumer or employee who is a counterparty to the contract would incur much larger costs in obtaining review of the contract, even after they became aware (as most are not) that it might contain unenforceable terms. Moreover, all counterparties would have to incur those costs to achieve the same effect as the drafter obtaining legal assistance once. The drafter is thus “the ‘least-cost avoider’ for preventing the harm that arises from mistaken beliefs about contractual obligations.”
With regard to access to justice, Wilf-Townsend notes “the huge disparities in access to legal knowledge characteristic of the United States.” He does not simply present the bare statistics about access to counsel that are, by now, depressingly familiar. Instead, he paints a more textured picture of the legal needs of people without high incomes or significant wealth. Not only do those individuals encounter more legal problems, but their legal problems are more likely to involve a contract drafted by a more powerful party–such as a landlord, employer, or financial institution. Allocating to them the costs of acquiring and applying legal knowledge about the terms of the contracts presented to them by more powerful parties exacerbates existing disparities.
After marshalling this support for the proposition that the status quo is untenable, Wilf-Townsend takes care not to overstate his case, noting that “there are likely to be at least some circumstances where the real-world harm from unenforceable contract terms is minimal or nonexistent.” Moreover, it is not always obvious whether a particular term is enforceable, because “unenforceability changes over time, is different in different jurisdictions, depends on particular factual circumstances, and can be adjudicated at different levels of abstraction.” Wilf-Townsend evaluates the pros and cons of different enforcement options in light of those complicating factors, proposing an enforcement regime in which public actors could seek statutory damages if a drafter with a large number of counterparties included contractual terms that were clearly unenforceable at the time of entering the contract.
I thoroughly enjoyed this piece and, despite having been familiar with some of the research it discusses, learned a great deal from it. The article weaves together an impressive range of scholarship and data into a seamless and persuasive argument for change, making a proposal that reflects a balance of hope and pragmatism. Both the quality of the arguments and the quality of the writing made it a real pleasure to read. I highly recommend it.
