A MODEL FAIR BARGAIN ACT

This model law act was drafted by the North Carolina Fair Bargain Committee and is presented to anyone willing to consider its enactment in other states.* An earlier version was enacted in 2001 in New Mexico, and was introduced in several states in 2002 and 2003. It will be considered by the North Carolina and other state legislatures in 2004-2005.

The draft is a response to the use by large businesses of printed form contracts containing provisions having the apparent effect of stripping individual citizens with whom they deal of the procedural rights they would need to enforce their substantive rights against the firm drafting the form, rights conferred on them by Congress and state legislatures.

The basic policy of this Fair Bargain Act is not new. It was embedded in traditional English common law and in legal doctrine conventional in American states in the 19^th century. The common law doctrine was that a person cannot by contract waive procedural rights they may need in a dispute that has not yet arisen. Such waivers were revocable. The premise of the revocability doctrine was that citizens who waive their procedural rights before a dispute has arisen in all likelihood do not know what they are doing and are probably being exploited by a party who expects to be sued by at least some of the persons with whom it makes contracts. The Model Act merely restates that old revocability principle and brings it up to date in its application to standardized form contracts. With respect to consumer transactions, it is merely an elaboration of Section 2-302 of the Uniform Commercial Code.

Printed forms were not used by American business until the late 19^th century. It was soon recognized that such instruments were very useful, but also hazardous to the interests of the citizens who cannot read and understand technical legal prose in English, or who are inattentive to the details of what seem to them at the time to be minor transactions, or who have no real freedom to reject the printed terms offered.

By the early decades of the 20^th century, it was well understood everywhere in America that contracts between large enterprises and individuals must be regulated. The duty of corporate management is to shareholders, not to consumers or workers. Much law was enacted in the late 19^th and 20^th centuries to control the resulting impulses of corporate enterprise and protect workers and consumers. Much of that law was written to be enforced by injured parties serving as private attorneys general serving the public interest by their private actions. Examples of public law privately enforced are antitrust and franchise investment laws, civil rights laws, and laws to protect consumers, workers, and individual investors. Indeed, much of the law of torts developed in the 20^th century is public law in the sense that it serves regulatory aims. There are also many laws enacted to protect tenants, small loan borrowers, and medical patients that are privately enforced. Indeed, private law enforcement has become the primary means by which American corporate management is deterred from making business judgments that externalize the risks or costs of their business by imposing those costs or risks on consumers, tenants, small loan borrowers, medical patients, workers, or others with whom they deal routinely.

Increasingly in the last quarter century, corporate managers and their lawyers have been trying to evade enforcement of all these regulatory laws by imposing on the consumers, employees, and others with whom they deal printed forms containing diverse waivers of procedural rights. One cause of this trend may be the increasingly shrill demand of investment managers for short-term profits. Another may be that managers have been in recent times compensated with stock options that are valuable only if stock prices rise in the short term. Another may be emergence of the ADR movement that seemed to invite managers to save legal costs. Another may be globalization that invites the comparison of legal costs of doing business in the United States and in other countries; businesses making that comparison seldom take note that other competitive economies socialize other costs such as health care, a need that is extraordinarily expensive in the United States and is borne by the individuals with whom multinational firms must deal.

Whatever the causes, the trend has been marked, and every member of every legislative body has in recent years received many forms recording transactions that contained one or more clauses substantially disabling them from enforcing any rights they might have against the party writing the forms.

Often these rights-impairing clauses masquerade as arbitration agreements. The federal courts have in the last quarter century fashioned a “national policy” favoring arbitration. Given the decisions of the Supreme Court, it seems that the legislatures cannot proscribe arbitration clauses even if they were of a mind to do so. Few if any citizens or legislators would want to impede in any way the rights of parties to arbitrate disputes in lieu of litigation, for most states share the general policy favoring arbitration. But corporate managers and their lawyers are often not content with merely diverting cases from courts to arbitral forums to gain whatever cost savings might be effected by that step. As often as not, they add bells and whistles to make sure that the individuals with whom they deal are at a disadvantage should they later seek to enforce their rights against the corporate enterprise. It is these bells and whistles that are the subject of the Model Fair Bargain Act. In making those provisions – and not the arbitration clauses to which they are attached -- revocable, it aims to assure that arbitration is not used for the hidden purpose of preventing consumers, employees, and other individuals from enforcing the rights that Congress, state legislatures, and state courts have conferred upon them to protect them from the same corporate enterprises that are writing the forms being used to record their transactions.

The Supreme Court has repeatedly affirmed that the Federal Arbitration Act leaves in place the state law of contracts, and that an otherwise valid arbitration clause in a contract of adhesion may not be deployed to impose increased costs on a consumer or employee.[1] The Model Act set forth below is an expression of state contract law, not state arbitration law. It may be important to keep that distinction clear by enacting the Model Act separately from the Revised Uniform Arbitration Act and not as a part of that act, as was done in New Mexico. The Model Act declares the policy that printed forms purporting to be contracts may contain valid arbitration clauses, but cannot be used by vendors of goods and services, lessors, employers, or franchisors to prevent or discourage consumers, tenants, employees or small businesses from enforcing their substantive rights. Waivers of important procedural rights in future disputes are declared to be revocable. As noted, that is not new law, but a recodification of ancient law, and it has been recently reaffirmed by numerous courts.[2] Pursuant to the Model Act, arbitration clauses in standard forms may be enforced, but not in a manner placing the party who did not write the form at a procedural disadvantage.[3] The Act provides clarity where it is needed. Some federal courts have mistakenly supposed that the law of contracts binds an individual who is sufficiently inattentive, ignorant, illiterate or weak that she does not reject a printed form to every provision in that form no matter how it may disable her from enforcing her rights.[4] That is not the law of any state, nor is it likely that any legislature in the United States would approve such an enactment.

The Act if understood should attract the support of almost everyone, for all individuals are potential victims of the misuses of contract law that this law is intended to correct. Even managers of aggressive multi-national enterprises may approve the law if they perceive that it relieves them of competitive pressure to impose harsh terms on consumers, employees, borrowers, franchisees, patients, farmers, livestock and poultry growers, and other individuals with whom they deal.

Section 1. Short Title. This Act shall be known as the Fair Bargain Act of 2003.

(1) standard form contracts, in whatever form recorded, do not necessarily express the voluntary and informed assent of both parties; and

(2) the party drafting such a form will often foresee legal disputes with one or more of the parties to whom it is submitted for acceptance, while the party accepting such a form will seldom foresee such a legal dispute or prudently evaluate the loss of procedural rights affecting its outcome; and

(3) the party drafting such a form can unless restrained by law exploit the inadvertence, imprudence, or limited literacy of the party to whom it is presented for acceptance by including provisions disabling that party’s procedural rights necessary or useful to the enforcement of substantive rights otherwise purportedly conferred by the contracts in which the provisions appear or by state or federal law; and

(a) a standard form contract or lease is one prepared by a party for whom its use is routine in business transactions with consumers of goods or services, borrowers, tenants or employees;

(b) livestock or poultry grower means any person engaged in the business of raising and caring for livestock or poultry in accordance with a growout contract, marketing agreement, or other arrangement under which a livestock or poultry grower raises and cares for livestock or poultry, whether the livestock or poultry is owned by the person or by another person;

(c) a rights enforcement disabling provision is one modifying or limiting otherwise available procedural rights necessary or useful to a consumer, borrower, tenant, livestock or poultry grower, employee, or small business in the enforcement of substantive rights against a party drafting a standard form contract or lease, including a clause requiring the consumer, tenant, borrower, franchisee, livestock or poultry grower, or employee to

(1) assert any claim against the party who prepared the form in a forum that is less convenient, more costly, or more dilatory than a judicial forum established in this state for the resolution of the dispute; or

(2) assume a risk of liability for the legal fees of the party preparing the contract, unless those fees are authorized by statute, reasonable in amount and incurred to enforce a promise to pay money; or

(3) forego access to evidence otherwise obtainable under the rules of procedure of a convenient judicial forum available to hear and decide a dispute between the parties; or

(4) present evidence to a purported neutral who may reasonably be expected to regard the party preparing the contract as more likely to be a future employer of the neutral than is that party’s adversary; or

(5) forego recourse to appeal from a decision not based on substantial evidence or disregarding his or her legal rights, or

(6) require commencement of a proceeding sooner than would be required by the otherwise applicable statute of limitations; or

(8) forego an award of attorneys’ fees, civil penalties, punitive damages, or of multiple damages otherwise available under the law.

A rights enforcement disabling provision as defined in Section 3 that is included in a standard form contract or lease is revocable by the consumer, borrower, tenant, employee, livestock grower or small business. Revocation shall be in writing and communicated within a reasonable time after a dispute between the parties to the contract has arisen and the consumers of goods or services, borrowers, tenants, livestock or poultry growers, franchisees, or employees has had an opportunity to seek counsel on the effect of the provision. A party seeking to enforce such a provision after it has been revoked shall be liable for any resulting legal costs, including a reasonable attorney’s fee.

(a) for the sale or lease of property or for the delivery of services having a value in excess of two hundred thousand dollars, or for a loan in excess of that amount; or

(b) of employment providing for compensation in excess of one hundred thousand dollars a year; or

(c) that is an agreement to maintain a local business franchise having gross receipts in excess of a million dollars a year; or

Nothing in this Act shall preclude parties from making a binding agreement to arbitrate a future dispute provided that the arbitration agreement does not impose on any consumer, borrower, tenant, franchisee, or employee any of the rights enforcement disabilities identified in Section 2 of this Act as unconscionable.

The provisions of this Act are severable; the invalidity of any application of any provision of this Act for any reason shall not affect other applications, nor shall the invalidity of any provision affect the validity of other provisions.

[1] Green Tree Financial Corp. of Alabama v. Randolph, 531 U. S. 79 (2000).

[2] Recent cases affirming that this is so include Armendariz v. Foundation Health Psychcare Svs, Inc., 24 Cal. 4^th 83, 6 P. 3d 669, 690 (2000); Circuit City Stores v. Adams, 2002 U. S. App. Lexis 1686, cert. den. 122 S. Ct. 2329 (2002) (applying California law); Choice Hotels International, Inc. v. Ticknor, 265 F. 3d 931 (9^th cir. 2001), cert den. 2002 U. S. Lexis 725 (2002) (applying Montana law); Graham Oil Co. v. Arco Products Co. 43 F3d 1244 (9th cir 1994) (applying California law); Iwen v. U.S. West Direct, 293 Mont. 512, 977 P. 2d 989 (1999); Kloss v. Edward D. Jones & Co, 2002 Mont.Lexis 413 (Montana 2002); Burch v. Second Jud. Dist. Ct., 49 P. 3d 647 (Nevada 2002); Williams v. Aetna Insurance Co., 83 Ohio St. 3d 464, 700 N. E. 2d 859 (1998), cert. den. 526 U. S. 1051 (1999); Lytle v. CitiFinancial Services, Inc., 2002 Pa. Super. 327 – A. 2d – (2002); Mendez v. Palm Harbor Homes Inc., 111 Wn. App. 446, 45 P. 3d 594 (2002); State ex rel. Dunlap v. Berger, 567 S. E. 2d 265 (West Virginia 2002); Ting v. AT&T, 182 F.Supp. 2d. 902 (N. D. Cal. 2002). Cf. McCaskill v. SCI Management Corp., 298 F. 3d. 1677 (7^th cir 2002); Milon v. Duke University, 559 S. E. 2d 789 (N.C. 2002); Harold Allen’s Mobile Home Factory Outlet, Inc. v. Butler, 2002 Ala. Lexis 16 (2002); but cf. Metro E. Ctr. for Conditioning & Health v. Qwest Comm. Int’l, 294 F. 3d 924 (7^th cir. 2002).

[3] E.g., Cole v. Burns International Security Services, 105 F. 3d 1465 (D. C. cir. 1997); Shankle v. B-G Maintenance of Colorado Inc., 163 F. 3d 1230 (10^th cir. 1999); Hooters of America, Inc., 173 F. 3d 933 (4^th cir. 1999).

[4] Charles Davant IV, Note, Tripping on the Threshold: Federal Courts’ Failure to Observe Controlling State Law Under the Federal Arbitration Act, 51 Duke L. J. 521 (2001).