Indiana Law Review


THE AMERICAN CONTRACT SYSTEM: TODAY AND 2001

Justin Sweet*

I. Introduction

The American contract system^ has serious problems. "Free-
dom of contract"^ rules in a world of standardized^ forms and the
absence of a viable system for handling adhesion transactions

*Professor of Law, University of California, Berkeley. B.A., University
of Wisconsin, 1951; LL.B., University of Wisconsin, 1953.

^The contract system consists of these components: (1) the sources of con-
tract law, which include constitutions, legislation, administrative regulations,
appellate court decisions, and widely used standardized forms; (2) the con-
tract-making process, which takes into account the contracting parties, the
participants in the process (negotiator, technical advisors and lawyers), the
degree of actual bargaining, and the bargaining duties created by the process
(arm's length, good faith, fiduciary)

; (3) the contract, or the product of the

process, ranging from one to many writings, varying in formality, complete-
ness, comprehensibility, either individual or standardized; (4) contract dis-

putes resolution techniques, including both public and private processes.

^"Contract," as used in this paper, is a set of legal rules under which the
state delegates to the contracting parties the power to determine whether
contracts will be made, how they will be made, and what they must contain.
"Contract" is roughly equivalent to party autonomy (power given to the
parties to make the rules), private autonomy (power given to private parties
to make the rules), and freedom of contract (freedom of the parties to make
the agreements they wish and in the way they wish). Contract contrasts with
public controls, which, in varying ways, determine when contracts must be
made, how they must be made, and what they must contain.

For some recent discussions of "freedom of contract," see Dewey, Freedom
of Contract: Is It Still Relevant?, 31 Ohio St. L.J. 724 (1970) ; Wilson, Free-
dom of Contract and Adhesion Contracts, 14 Int. & Comp. L.Q. 172 (1965).
Some of the many articles on adhesion contracts are set forth in note 3 infra.

^Adhesion contracts must be differentiated from contracts made in stan-
dardized forms. Adhesion contracts culminate transactions in which there

is no meaningful bargaining over any or most of the contract terms. The
terms are dictated by the dominant party. See Ehrenzweig, Adhesion Con-

tracts in the Conflict of Laws, 53 CoLUM. L. Rev. 1072 (1953) ; Kessler, Con-

tracts of Adhesion—Some Thoughts about Freedom of Contract, 43 COLUM^
L. Rev. 629 (1943). Standardized forms are created to take care of similar,

if not identical, transactions so as to avoid repetitive bargaining or drafting

of most or all of the terms. Contracts made on standardized forms are not
necessarily adhesion contracts. The form may have been made by a trade
association of buyers and sellers, or it may have been drafted after lengthy
consultation with interest groups active in trade or industry affairs. See^

309



310 INDIANA LAW REVIEW [Vol. 7:309

frustrate the expectations of at least one contracting party. The
certainty"* so basic to contract law is slowly vanishing. Uncertainty
of results^ and the high cost of making standardized forms produce

e.g., New York Ass'n of Cotton Textile Merchants, Cotton Textiles
Sales Note § 4 (2d rev. ed. 1941).

For a case in which a trade association form was considered neutral, see
United Sales Co. v. Curtis Peanut Co., 302 S.W.2d 763 (Tex. Civ. App. 1957).
Some forms do result from tough bargaining and are drafted with the skill
found in well-drawn statutes. But generally, it is accurate to assume that
most standardized forms are used in an adhesion setting.

For some recent discussions of adhesion contracts, see Lenhoff, Contracts
of Adhesion and the Freedom of Contract: A Comparative Study in the Light
of American and Foreign Law, 36 TuL. L. Rev. 481 (1962) ; Shuclanan, Con-
sumer Credit by Adhesion Contracts, 35 Temp. L.Q. 125 (1962); Slawson,
Standard Form Contracts and Democratic Control of Lawmaking Power, 84
Harv. L. Rev. 529 (1971) ; Note, The Adhesion Contract of Insurance, 5 SANTA
Clara Law. 60 (1964).

For discussions of Israeli treatment of adhesion agreements, see Com-
ment, Administrative Regulation of Adhesion Contracts in Israel, 66 Colum.
L. Rev.- 1340 (1966) ; Note, Restrictive Terms in a Standard Contract, 7 Israel
L. Rev. 433 (1972).

For a discussion of the English doctrine of fundamental breach, see
Hickling, One-Sided Contracts, 108 Sol. J. 42 (1964) ; Leigh-Jones & Picker-
ing, Fundamental Breach: The Aftermath of Harbutt's *'Plasticine", 87
L.Q. Rev. 515 (1971) ; Meyer, Contracts of Adhesion and the Doctrine of Fun-
damental Breach, 50 Va. L. Rev. 1178 (1964).

The Italian law is discussed in Gorla, Standard Conditions and Form,
Contracts in Italian Law, 11 Am. J. Comp. L. 1 (1962).

"* Certainty was emphasized in a recent United States Supreme Court
decision, The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 13 (1972), in
which the Court held a forum selection clause binding on the parties in the
absence of any showing that enforcement would create undue hardship.

^The divergences of some recent cases have made it increasingly difficult
for the prudent draftsman to place reliance on the enforceability of any con-

tract provision. Compare Miller v. Lykes Bros. S.S. Co., 467 F.2d 464 (5th

Cir. 1972) (provision on steamship passenger ticket barring suit for personal

injury unless commenced within one year upheld), with Silvestri v. Italia

Societa Per Azioni Di Navigazione, 388 F.2d 11 (2d Cir. 1968) (similar pro-

vision held inadequate to bar suit), and Rehurek v. Chrysler Credit Corp.,

262 So. 2d 452 (Fla. App. 1972) (disclaimer of warranties clause on back page

of contract failed for lack of conspicuousness) . Compare Weaver v. American

Oil Co., 276 N.E.2d 144 (Ind. 1971) (exculpatory clause in service station

lease held unconscionable and unenforceable), with Lechmere Tire & Sales Co.
V. Burwick, 277 N.E.2d 503 (Mass. 1972) (exculpatory clause in credit card

application was to be strictly construed against drafter). Compare Bauer

V. Jackson, 15 Cal. App. 3d 358, 93 Cal. Rptr. 43 (1971) (clause limiting

carrier's liability held inadequate unless shipper given reasonable notice that

greater protection available at higher shipping rates), with Gellert v. United



1973] AMERICAN CONTRACT SYSTEM 311

an inefficient contract-making system. Finally, in consumer trans-

actions, the actual agreement often differs substantially from

the contract.*^ This Article will explore these problems and at-

tempt to predict how they will be dealt with in the next century.
Part II will concern itself with the role lawyers play in the contract-

making process. Part III will discuss the relationship between the

broad autonomy given contracting parties and increasing legal con-

trols on contracts. Part IV will appraise the present system from

the vantage points of its major participants. Part V will predict
how contracts will be made in the next century.

II. Lawyers and Contract Making

The high cost of legal services and the dominance of the ad-
hesion contract have sharply reduced the participation of lawyers

in the negotiation of contracts. Yet, lawyers still play a vital role

in contract making. They continue to draft the important nego-
tiated contracts, and they draft standardized agreements. While
many factors contribute to the present chaotic and inefficient con-
tract system, the education and training of lavTyers assumes a
crucial causal dimension. To ascertain the impact of lawyers, let
us contrast contract making without lawyers with contract mak-
ing with lawyers.^

A, Contract Making Without Lawyers

Let us construct two models : Model A, a transaction in which
legal sanctions are unavailable or only remotely considered by the

Airlines, 474 F.2d 77 (10th Cir. 1973) (carrier may reasonably limit extent
of liability by giving the shipper a reasonable choice to select the declared
limit, with the compensation thereby being commensurate with the risk as-
sumed).

^See Hester, Deceptive Sales Practices and Form Contracts—Does the
Consumer Have a Private Remedyl^ 1968 Duke L.J. 831. See also Agger,
Unconscionable Contracts under the Uniform Commercial Code, 109 U. Pa.
L. Rev. 401 (1961) ; Ellinghaus, In Defense of Unconscionability, 78 Yale
L.J. 757 (1969) ; Leff, Unconscionability and the Code: The Emperor's New
Clause, 115 U. Pa. L. Rev. 485 (1967) ; Murray, Unconscionability: Uncon-
scionability, 31 U. Pitt. L. Rev. 1 (1969).

^Compare Howell v. Coupland, 1 Q.B.D. 258, 259 (1876) (involving a
blighted crop of potatoes), with United Sales Co. v. Curtis Peanut Co., 302
S.W.2d 763 (Tex. Civ. App. 1957) (involving a peanut crop failure caused

by drought). In the first case the contract apparently was not drafted by
an attorney and contained no clause dealing with disruptive events or unfore-

seen circumstances. The second involved a trade association form which

had a force majeure clause. See also Warner Bros. Pictures, Inc. v. Bum-



312 INDIANA LAW REVIEW [Vol. 7:309

parties/ and Model B, a transaction in which sanctions are avail-
able and it is quite likely that such sanctions will be sought in the
event of nonperformance.

Even Model A agreements are likely to be expressed in tan-
gible form. Objective expression of an agreement tends to induce
performance. Contracting parties often feel a moral commitment
to agreements they have made or may not wish to gain a reputation
of going back upon their word. Ordinarily, such parties will per-
form as promised if they are shown objective proof that an agree-
ment was made and proof of its terms.

Tangible expression serves another important function in a

Model A transaction. Suppose, as is increasingly the case today,
the contract maker is a large organization. Such an organization
needs an efficient communication system. Centralized management
must know the extent of commitments and entitlements. Produc-
tion, distribution, sales, and finance components need similar in-
formation. The proper distribution of contractual information is
central to any effective internal communication system. Satis-
faction of this communication function can be accomplished by a
tangible, transferable manifestation of the agreement which ex-

presses the basic performances to be exchanged by the parties. For
example, in a goods transaction the contract need only con-

tain the description and quantity of the goods, the price, payment
terms, and delivery schedules. In a service transaction all that

would be needed would be a description of the services, the amount
and terms of pajnnent, and the date for performance.

Now let us move to a Model B transaction in which the par-
ticipants are much more likely to invoke legal sanctions in the
event of dispute. In this transaction, reduction of the agreement

to tangible form serves the additional function of insuring that
sanctions will be available. Suppose a Model B transaction occurred
in a period of minimal state controls over contract, a period best

typified by the nineteenth century. Clearly, a writing which con-
tained a clear expression of the basic performances to be exchanged

would be enforceable. Such an expression would satisfy the re-
quirement that there be manifestations of mutual assent, and in

garner, 197 Cal. App. 2d 331, 17 Cal. Rptr. 171 (1961) (writers' strike held

not to have prevented, materially hampered, or interrupted filmed television

series within meaning of force majeure clause).

^See Macaulay, Non-Contractual Relations in Business, 28 Am. Soc. Rev.

55 (1963).



1973] AMERICAN CONTRACT SYSTEM 313

most cases consideration requirements would be obviated.' Nor
would a transaction without lawyers raise any "more formal agree-

ment contemplated** problem. The Statute of Frauds would not
prevent enforcement. Either the transaction would be one not re-

quired to be expressed by a memorandum or the memorandum
would be clearly sufficient to satisfy the statute. ^° Such agreement,

clearly expressing the performances to be exchanged, would suffice

to ensure the availability of legal sanctions.

Realistically, in a transaction in which there are no lawyers,

the contracting parties would not go through the preceding anal-

ysis. Their concern would be with tangible evidence of the agree-

ment to furnish objective proof of the other party's commitment."
If proof of commitment is the objective, the contracting parties will
be satisfied with any writing which will make it difficult for the
other party to deny the commitment or the agreed terms. Clearly,
this is adequately established by a tangible expression of the basic
performances to be exchanged. As in a Model A transaction, the
participants in a Model B transaction may also need internal com-
munication, and this may be an additional reason to obtain a tan-
gible manisfestation of the agreement. Under either Model A or
Model B an expression of the performances to be exchanged would
satisfy the reasons for expressing the deal in tangible form.

B, The Lawyer Enters The Process

. In assessing the imprint lawyers make on American contracts,
we must ask ourselves what clients expect of lawyers and how law-
yers perceive their role.'^ Also, we must consider some aspects of
legal education and the practice of law.

Certainly, lawyers and clients would agree that lawyers are
expected to make the transaction "legal." Generally, contracting
parties wish to have the choice of obtaining legal sanctions even if
they say they will never seek them or that they consider their
future usefulness quite remote. So, at a minimum, the lawyer is
expected to insure that the agreement is legally enforceable, and

'The only possible obstacle to enforcement would be a finding that the
promise was "illusory", i.e., that the promisor did not obligate himself to
do anything. 1 A. Corbin, Contracts § 145 (2d ed. 1964).

^^See 2 id. §§ 498-501 (1950). See also Uniform Commercial Code § 2-201
(1) [hereinafter cited as UCC].

"Such an objective is exemplified by lay aphorisms such as "It will be
your word against his," or "Get it in writing."

^^See Sweet, The Lawyer's Role in Contract Drafting, 43 Calif. B.J. 362
(1968).



314 INDIANA LAW REVIEW [Vol. 7:309

that it complies with the increasing number of legal controls on
contracts. Also, most clients believe lawyers are more adept at
expression than they; the lawyer is expected to bring clarity and

completeness to the agreement. But more important, for our pur-
poses, most lawyers see their roles as extending beyond simply

making an agreement enforceable and using their skills with words.
This extension is crucial in evaluating the effect lawyers have upon

contract making and contracts.

Shattered transactions are an important part of a lawyer's

professional life. As a result, lawyers do not share the optimism
of their clients at the time contracts are made. The lawyer's ex-
perience causes him to focus upon the possibility of nonperformance
while contracting parties and their negotiators think principally of
performance. The lawyer anticipates the occurrence of events which
can disrupt his client's planning and seriously affect his client's
performance. To handle such risks, he will usually include a clause
which relieves his client if designated events occur which would
have a serious effect upon his client's performance.'^ Also, a
lawyer is more likely than his client to consider the possibility
of the other party's suffering serious losses if his client does not

perform as promised. To reduce his client's exposure, in addi-
tion to clauses excusing nonperformance, the lawyer may seek
to exculpate his client,'^ to limit his client's liability,'^ or, in a goods
contract, to limit or exclude warranties.'*

As for the lawyer representing a party who would suffer
serious losses if the other party does not perform, his education and
experience have taught him the difficulty of proving or collecting
damages. As a result, he will consider and seek to insert clauses
controlling the amount recoverable in the event of breach,"' and he

^^See cases discussed note 7 supra.

'""E.g., Tunkl v. Regents of Univ. of Cal., 60 Cal. 2d 92, 383 P.2d 441, 32

Gal. Rptr. 33 (1963) (hospital exculpation not upheld) ; Daniel O'Connell's

Sons V. Commonwealth, 349 Mass. 642, 212 N.E.2d 219 (1965) (soil dis-
claimer clause upheld).

^^E.g., Leather's Best, Inc. v. The Mormaclynx, 451 F.2d 800 (2d Cir.
1971) (carrier's liability limited to $500 per container) ; see UCC § 2-719
(l)(a).

'^E.g., Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962)
(disclaimer of warranties provision in seller's acknowledgment of buyer's

order)

.

^^E.g., Walter E. Heller & Co., v. American Flyers Airline Corp., 459
F.2d 896 (2d Cir. 1972) (liquidated damages clause used to limit damages
recoverable in event of breach).



1973] AMERICAN CONTRACT SYSTEM 315

will also use recitals to express the setting of the transaction to

preclude any finding that his client's losses were not reasonably-

foreseeable. '^ As for the difficulty of collecting damages, this law-
yer will focus upon methods of securing performance, such as
requiring that a bond be obtained,"' requiring that a solvent third

party act as a guarantor, ^° creating a security interest in specific

property, ^^ or setting up a provision authorizing his client to with-

hold funds as security for damage claims.^^

Also, the lawyer's legal education and experience are instru-

mental in his utilization of contract clauses to coerce performance,

such as provisions for express conditions to payment,^^ provisions

which, though disguised as liquidated damages or alternative per-
formances, are, in effect, penalty clauses,^"* and provisions allow-
ing termination."

Some contracts will create rights that will be transferred or
assigned. While the client may anticipate the need to provide for
a clause permitting assignment, it is the lawyer who is more likely
to anticipate the likelihood that the obligor may assert defenses and
it is the lawyer who will think of a clause waiving such defenses
against an assignee, creating negotiability by contract.^* Also, it is

^^Also, recitals are often used to prospectively establish liquidated dam-
ages. E.g., Bethlehem Steel Corp. v. City of Chicago, 350 F.2d 649 (7th Cir.
1965) (liquidated damages of $1000 per day for delay in construction of super-
highway supported by recitals that delay would cause great inconvenience to
the public)

.

^"^E.g., Socony-Vacuum Oil Co. v. Continental Cas. Co., 219 F.2d 645 (2d
Cir. 1955) (bond conditioned upon subcontractor's payment of all labor and
material obligations under contract).

^°E.g., Walter E. Heller & Co. v. American Flyers Airline Corp., 459
F.2d 896 (2d Cir. 1972) (president-guarantor's termination of employment
held not a failure of condition to liability of corporate debtor).

""'See UCC §9-107.

^^See, e.g., American Institute of Architects, General Conditions op
THE Contract for Construction, Doc. No. A-201, § 9.5 (1970) [hereinafter
cited as AIA Doc. No. A-201.]

"See, e.g., id. § 9.4.

^^See Sweet, Liquidated Damages in California, 60 Calif. L. Rev. 84, 120-
22 (1972).

^^E.g., Nu Dimensions Figure Salons v. Becerra, 340 N.Y.S.2d 268 (N.Y.
City Mun. Ct. 1973) (provision forbidding cancellation held a penalty clause).

''''E.g., Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967) (contractual
attempt to establish negotiability of promissory note given in conjunction
with conditional sales agreement).



316 INDIANA LAW REVIEW [Vol. 7:309

the lawyer who is more likely to anticipate a party's future desire
to assign his contract rights or to delegate performance. Such

anticipation will lead to the inclusion of a clause concerning

assignment.

The lawyer knows that misunderstandings can occur, despite
clear and complete contract language, and that he cannot anticipate

all contingencies. His experience teaches him that contracting par-
ties sometimes take dubious, if not dishonest, interpretation posi-

tions to avoid contract commitments. The virtual inevitability of
disputes in some transactions and the strong likelihood of disputes

in almost all transactions cause lawyers to consider dispute resolu-

tion. Also, legal education emphasizes dispute resolution processes.

Consequently, a lawyer will seek to structure the contract, if he

can, to control who will decide the dispute, where it will be decided,
and what rules will be applied. To accomplish this he uses the con-
tract to create an expert performance measurement process,^^ to
displace litigation with arbitration,^® to designate the forum court,'*'
to designate the applicable law,^° or to eliminate the jury.^' The
lawyer's education and experience have sensitized him to the risk
of false claims and charges made by the other party as a means of
avoiding a commitment. To give his client maximum protection,
the lawyer, in his role as advocate, relies heavily on contract clauses

to give his client advantages if litigation develops.

The extent to which the lawyer will deal with these matters
in a contract depends upon the relationship between the contracting

""^E.g., AIA Doc. No. A-201, § 9.4.

^^E.g., J.S. & H. Constr. Co. v. Richmond County Hosp. Authority, 473
F.2d 212 (5th Cir. 1973) (further proceedings stayed when contract required
submitting dispute to arbitration).

29£7.5r., The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). While
the law has not always been clear on the enforceability of forum designation
clauses, a recent case awarded the prevailing party attorneys' fees because
the appellate attack on such a clause, in a negotiated contract, was held
frivolous. Furbee v. Vantage Press, Inc., 464 F.2d 835 (D.C. Cir. 1972). See
Copperweld Steel Co. v. Demag-Mannesman-Boehler, 354 F. Supp. 571 (W.D.
Pa. 1973) (i>ost-Bremen case discussing the reasonableness of a forum designa-
tion clause).

^°E.g., Furbee v. Vantage Press, Inc., 464 F.2d 835 (D.C. Cir. 1972) (up-
holding district court's dismissal of action when contract provided that courts
of New York would be sole forum for resolving disputes).

^^E.g., David v. Manufacturers Hanover Trust Co., 59 Misc. 2d 248, 298

N.Y.S.2d 847 (N.Y. App. T. 1969) (upholding the validity of jury waiver

provision on bank account signature card).



I
1973] AMERICAN CONTRACT SYSTEM 317

parties and the likelihood that such problems may arise. If the
lawyer anticipates problems, he will include contract provisions de-

signed to protect his client. For example, if he anticipates the

possibility that the other party will claim fraud or misrepre-

sentation, the lawyer will incorporate a clause stating that there

have been no representations or, if there have been any, that they

have not been relied upon.^^ If the lawyer anticipates false asser-

tions by the other party that his client's agents have made rep-
resentations, he may negate the authority of any negotiating agent
or incorporate a provision stating that any representations or

promises made by an agent are not binding unless contained in the
contract. If the lawyer anticipates that his client's agents will make
an authorized commitment, he may include a clause stating that
only specific persons have authority to make or modify the contract
or accept substandard performance." The lawyer, by reason of his

education and experience, realizes that adjustments are likely to

be made in contract relationships which span any appreciable pe-
riod of time. If he anticipates the possibility of false modification

claims or claims that his client has waived contract terms, he may
seek to incorporate provisions specifying formal requirements for

modification^"^ and negating waivers.^^ If the lawyer can anticipate

damage claims, claims of the delivery of nonconforming goods, or
claims for time extensions, he may incorporate a clause setting up
a notice condition^* as a protection against false or delayed claims.

If he feels that the statute of limitations in his jurisdiction is ex-

32^.flr., Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 157 N.E,2d 597
(1959) (when contract for purchase of lease contained an acknowledgement
by purchaser that no representations had been made by seller as to normal
rents and expenses generated by the property, purchaser had no right of
action against seller for alleged false representations as to operating expenses

and profits).

^'E.g., C.I.T. Corp. v. Jannet, 419 Pa. 435, 214 A.2d 620 (1965) (contract

provision requiring written modification of contract terms upheld in the

absence of clear proof of claimed waiver).

^'^Id. Closely related to formal requirements for modification is the almost

universal construction contract provision requiring that all proposed changes

in design and materials be submitted in writing. See AIA Doc. No. A-201,
§ 12.1.

35See note 33 supra.

^^E.g., AIA Doc. No. A-201, § 7.4. See also Sweet, Extensions of Time and
Conditions of Notice: California's Needless Restriction of Contractual Free-

dom, 51 Calif. L. Rev. 720 (1963).



318 INDIANA LAW REVIEW [Vol. 7:309

cessively long and promotes delayed claims, he may insert a provi-
sion shortening the period of limitations.^^

The lawyer^s inclusion of such protective clauses may be moti-
vated by considerations other than those of shielding his client if
problems develop. Lawyers often see themselves as procedural ex-
perts. But whether such clauses have been inserted to protect the
client or to create efficient administration,^® they take up a good
portion of the contract and are provisions which would very likely
not be included in a contract drafted by nonlawyers.

American contracts are excessively long. Doubtless, there are
many reasons for this,^' but at least some of the responsibility can
be traced to legal education. The student is constantly told to ex-
press everything with utmost clarity. While clear expression is
obviously desirable, the incessant law school emphasis on bad
drafting as a prime cause of litigation often instills in students,
and ultimately lawyers, the pathological desire to cover every-
thing, including things which are unlikely ever to occur.'^° The in-
tense competition of law school and professional practice also leaves
its mark on contracts. The constant pressure to excel without,
unfortunately, a sense of professional responsibility and an appre-

^'E.g., Miller v. Lykes Bros. S.S. Co., 467 F.2d 464 (5th Cir. 1972) (up-
holding contractual provision on passenger ticket requiring that all claims
against carrier be commenced within one-year period of limitation).

^^See Inman v. Clyde Hall Drilling Co., 369 P.2d 498 (Alas. 1962). The
Inman case concerned a provision in an employment contract creating a
thirty-day condition of notice requirement. The contract also provided that
judicial proceedings could not be commenced until six months after the
compensation claim was filed. While these provisions could be justified on
grounds of administrative efficiency, in light of circumstances the provisions
appear to be designed to give the employer an unconscionable advantage in
compensation disputes.

^'Other possible reasons are: (1) the court's requirement that "dis-

favored" clauses, such as conditions in insurance contracts, remedial clauses,

and indemnification clauses, be drafted with extreme specificity, (2) the

increasing number and specificity of public law controls, (3) substantive rules
which, unless modified by contract, are unsatisfactory, such as doctrines of im-
possibility and frustration, and (4) elimination of uncertain factors in liti-
gation, such as clauses designed to control disputes.

"^^Many cases selected for inclusion in contracts casebooks are followed by
questions which ask how better drafting could have avoided the lawsuit.
While litigation sometimes results from poor drafting, other factors often
cause litigation, such as the desire to create a favorable case precedent, the

absence of good will, or the breakdown of a once close or friendly relation-

ship. Admittedly, imprecise drafting often forms the basis for a claim even

in disputes caused by the additional factors enumerated.



1973] AMERICAN CONTRACT SYSTEM 319

elation of the probable often causes harsh standardized terms. Un-
doubtedly, some clauses relied upon by lawyers are useful and
worthwhile. It is certainly desirable to plan a transaction com-

pletely and express it clearly. However, the len^hs to which law-
yers will go to eliminate chance and to protect their client produces
the unwieldly, often barbaric contracts we see today.

III. Contract and Control

Undoubtedly, adhesion recognition^^ tumbled contract from
the Olympian heights it occupied in the nineteenth and early
twentieth centuries. However, contract remains a durable"^^ and

useful legal doctrine. The key components of this doctrine should
be analyzed in appraising the present and predicting the future of
the contract system.

There are many possible reasons why contract dominated the
nineteenth century and early twentieth century and only recently
has been looked upon with disfavor. As for the nineteenth century,
contract meshed well with a market economy dominated by laissez
faire concepts.^^ A system with relatively few formal controls and
easy enforceability of agreements promotes contract making and
leads to more exchanges and economic activity. In addition, ex-
changes are encouraged if the parties believe that the deal

'^^ Judicial sensitivity to inequality of bargaining power has had a pro-
found impact on recent developments in the law of contracts. See, e.g., Fuentes
V. Shevin, 407 U.S. 67 (1972) ; D.H. Overmeyer Co. v. Frick Co., 405 U.S. 174

(1972) ; Lechmere Tire & Sales Co. v. Burwick, 277 N.E.2d 503 (Mass. 1972).

'^^The judicial recognition of plea bargaining opens up a new field. See
Santobello v. New York, 404 U.S. 257 (1971). For a discussion of a waiver
of a jury trial and the privilege of self-incrimination in the context of plea

bargaining, see Tiger, The Supreme Court, 1965 Term—Foreword: Waiver
of Constitutional Rights: Disquiet in the Citadel, 84 Harv. L. Rev. 1, 19-25

(1970).

Also, for better or worse, contract concepts are beginning to play a role

in regulating the relationship of college student and university. Appelgate v.

Dumke, 25 Cal. App. 3d 304, 101 Cal. Rptr. 645 (1972) ; Zumbrun v. Univer-
sity of So. Cal., 25 Cal. App. 3d 1, 101 Cal. Rptr. 499 (1972).

^^See Wilson, supra note 2, at 173. For a modern treatment of contract as

a market supporting device, see Macaulay, Justice Traynor and the Law of
Contracts, 13 Stan. L. Rev. 812, 813 (1961).

The parties are often better able to determine the value of the per-

formances exchanged than is the state. The collective bargaining context is

dicussed in Swerdlow, Freedom of Contract in Labor Law, 51 Texas L. Rev.

1, 29-48 (1972) ; Wellington, Freedom of Contract and the Collective Bargain-

ing Agreement, 112 U. Pa. L. Rev. 467, 473 (1964).



320 INDIANA LAW REVIEW [Vol. 7:309

made will receive judicial protection. Also, contract is generally
more elastic and responsive to changing business needs when un-
constrained by governmentally imposed controls. As for overreach-

ing and unfair exchanges, the pastoral nineteenth century, un-

cluttered by mass produced forms and modern ideas of imperfect

competition, assumed that such difficulties could be handled by

competition.

Broad grants of autonomy to contract parties reduce state

costs. The creation and policing of modern state controls is a costly

process. According broad powers to contracting parties places most

rule making costs on the participants. Also, dispute resolution costs

are minimized when judicial intervention is generally limited to
interpretation and enforcement of the express terms of the con-

tract. Since the parties have made most of the rules, the judge
is relieved from any obligation to alter or restructure their basic

agreement. While he may have to interpret the rules and occasion-
ally decide whether the rules as expressed in the written contract

are the entire set of rules, his role is certainly easier than if he has

to "make a contract for the parties." Giving the parties almost
plenary rule making power also makes performance more likely.
Those who freely participate and voluntarily commit themselves
are more likely to perform without state coercion."*^

Contract can serve another important and useful function. If
it is given broad scope it can operate to correct and adjust other
unsatisfactory legal rules. When the contract goes beyond express-
ing the performances to be exchanged, it will often seek to change
existing legal rules of loss distribution and dispute resolution.^^
Also, when it seeks to control remedies, it can conflict with unjust
enrichment and forfeiture avoidance doctrines.^* While we may
question its legitimacy in adhesion transactions to regulate re-

sponsibility for personal harm"^^ or to control the dispute resolution

process, contract is a legitimate device by which parties should
be able to adjust loss distribution rules in certain contexts. For

"^^There is a political rationale for state coercion of promised performance
in a negotiated contract context. Sanctions are imposed because of "the
consent of the governed." Also, it is more democratic to allow the interested
persons to make up the rules which govern their relationship.

^^See cases cited notes 25-29 supra.

^^See cases cited notes 22, 23 supra. See also Freedman v. Rector, 37 Cal.
2d 16, 230 P.2d 629 (1951) (holding purchaser was entitled to receive the
amount of his down payment in excess of seller's damages following pur-
chaser's breach.)

^^Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960).



1973] AMERICAN CONTRACT SYSTEM 321

example, tort rules have been moving tov^ard finding professional

persons, such as soils engineers, liable to their clients and to third

parties for losses caused by their conduct, v^hether negligent or

not/^ This may look unfair to the soils engineer because of the fee
he charges for his services, the state of the art of determining

subsurface characteristics, the high risk of loss if he is incorrect,

and the lack of comprehensive liability coverage at a price he can

afford. To him the only solution may be a contract clause limiting
his liability to certain specified risks. The fact that it may not be
legitimate for automobile manufacturers to minimize their lia-

bility to persons injured by their defective automobiles should not

necessarily mean that a soils engineer should not be able to mini-
mize his exposure by contract for certain losses to certain persons.

As another example, it is often possible that construction losses
can be chargeable to a number of participants in the construction
process. As between those liable to the injured plaintiff, the rules
relating to contribution and quasi-contract indemnity are confusing

and often irrational."^' Contracting parties should be able to dis-

tribute these losses through express indemnification even if the

result is that one person can insulate himself from liability for
conduct tort law considers below the legal standard.^°

Furthermore, in civil proceedings one can seriously question

not allowing attorney's fees to the prevailing party,^' permitting

an unconscionably long period of time in which to commence liti-
gation, and denying a plaintiff any damages when he cannot sur-

^«C/. Rozny v. Marnul, 43 111. 2d 54, 250 N.E.2d 656 (1969). For a discus-
sion of the rights of third parties, see W. Prosser, Torts § 107, at 708-09
(4th ed. 1971). For a discussion of the rights of clients, see J. Sweet, Legal
Aspects of Architecture and Engineering 125-26 (1970). While the case law
has not yet gone to the extent of holding engineers to a standard beyond the

professional standard of care, there have been suggestions that architects

should be held "strictly" liable. Comment, Architect Tort Liability in Prepara-
tion of Plans and Specifications, 55 Calif. L. Rev. 1361 (1967). A recent soils
case would lend support to that position. Of. Avner v. Longridge Estates,
272 Cal. App. 2d 695, 77 Cal. Rptr. 633 (1969).

'^''For a few of the many difficult indemnity cases, see MacDonald & Kruse,
Inc. V. San Jose Steel Co., 29 Cal. App. 3d 413, 105 Cal. Rptr. 725 (1972)

;

Tatar v. Maxon Constr. Co., 31 111. App. 2d 352, 277 N.E.2d 715 (1972).
See also Dole v. Dow Chem. Co., 30 N.Y.2d 143, 282 N.E.2d 288, 331 N.Y.S.2d
382 (1972) (articulating a comparative fault rule).

^°E.g., Buscaglia v. Owens-Corning Fiberglas, 68 N.J. Super. 508, 172

A.2d 703 (1961) (holding that owner was entitled to restitution from con-
tractor, for claim settled with third person, when contractor assumed duty
to owner to protect persons on premises from injury).

^'See D. DoBBS, Remedies 194 (1973).



322 INDIANA LAW REVIEW [Vol. 7:309

mount the often frustrating "certainty" requirements/^ Arguably,
contracting parties should be able to agree upon the recovery of

attorney's fees," the creation of a reasonable period of limita-

tions,^^ and the allowance of an agreed measure of recovery for

contract breach/^

It is yet unclear whether any of these justifications was the
reason that contract emerged and continued as a powerful legal

doctrine. But the modern criticism of contract that has surfaced
with the recognition of the adhesion transaction ignores the un-

doubted advantages of contract. The twentieth century has wit-
nessed the explosion of mass produced standardized forms with
their potential for large scale abuse.^^ Also, as modern man began
to go into the market place and discover the realities of the bargain-

ing process, he became aware of contract's encroachment upon
other legal doctrines and institutions. Observers and participants

witnessed the development of aggressive, highly organized adver-

tising and selling techniques.^^ Deceptive or false representation

by salesmen has become routine in transactions involving certain
services and products. Also, sales and advertising literature often

makes assertions not included in the formal document.^® As a re-
sult, the reasonable expectation of the consumer often varies from
the formal contract. Some sellers use contract to shield themselves
from unauthorized, but often tacitly encouraged, representation.
Likewise, contract is used as a shield by purveyors of unscru-

^^See 5 A. Corbin, supra note 9, § 1020.

^^See D. DoBBS, supra note 51, at 201-04.

''See UCC § 2-725.

^^See Sweet, supra note 24, at 142-45.

'^See articles cited notes 2, 3 supra.

"See, e.g., Rehurek v. Chrysler Credit Corp., 262 So. 2d 452, 456 (Fla.
App. 1972). Recently the Supreme Court of California affirmed an award of
restitution to deceived customers in an action brought by the State Attorney
General for violations of a state statute on deceptive advertising. People v.

Superior Court, 9 Cal. 3d 283, 507 P.2d 1400, 107 Cal. Rptr. 192 (1973). Also,

it has been recently held that national advertising can create apparent au-

thority in a service station dealer, Gizzi v. Texaco, Inc., 437 F.2d 308 (3d Cir.

1971), noted in 33 U. Pitt. L. Rev. 257 (1971).

^^See, e.g., Bauer v. Insurance Co. of North America, 351 F. Supp. 873
(E.D. Wis. 1972) (group insurance) ; Miller v. Dictaphone Corp., 334 F. Supp.

840 (D. Ore. 1972) (pension plan) ; cf. Zumbrun v. University of So. Cal., 25
Cal. App. 3d 1, 101 Cal. Rptr. 499 (1972) (college catalogs) ; Standard Land
Corp. V. Bogardus, 289 N.E.2d 803 (Ind. Ct. App. 1972) (subdivision promo-

tional material)

.



1973] AMERICAN CONTRACT SYSTEM 323

pulous sales literature to avoid the creation of apparent legal

obligations.

There were and are legitimate reasons for mass produced con-
tracts. They are essential to a society which mass produces goods
and uses mass methods of advertising and distribution. They are
also essential for proper operation of large scale enterprises with

their need for efficiency and risk control. But contract gave large

scale contract makers immense power and many abused it. Recog-
nition of abuse of power caused public controls to erupt from
legislatures/' administrative agencies/^ and courts at every gov-
ernmental level.*'

To look at the present and predict the future, an exploration
of the range of controls available should be pursued. While they

overlap, it is useful to divide legal controls into those which

regulate the process of contract making and those which involve
the content of contracts.*^

As to process, a system could be initiated under which the state
would enforce all agreements and promises however made. At the
other extreme, only state-made contracts could be enforced or even

permitted. Between these extremes, in order to receive state sanc-
tions, the state could require that: (1) contracts be written or

memorialized in a designated concrete form; (2) the contract be

the result of good faith bargaining; (3) contract terms in the

writing be brought to the attention of and explained to the weaker
party; (4) the parties to a contract be represented in the forma-

^'At the federal level, recent examples are the Civil Rights Act of 1964, 42

U.S.C. § 2000e-2(a) (1) (1970), dealing with employment discrimination, and

the Consumer Protection Act of 1968, 15 U.S.C. §1601 et. seq. (1970). Cali-
fornia has extensively regulated retail installment sales, Cal. Civ. Code § 1801
et. seq. (West 1973) ; health studio contracts, id. § 1812.80 et. seq.; swimming
pool construction, id. § 1725 et. seq.; and credit cards, id. § 1747 et. seq.

^°At the federal level, see Mourning v. Family Publications Serv., Inc., 411
U.S. 356 (1973) (truth-in-lending) ; FPC v. Louisiana Power & Light Co.,
406 U.S. 621 (1972) (order of FPC) ; Thorpe v. Housing Authority, 393 U.S.
268 (1969); Zale Corp. v. FTC, 473 F.2d 1317 (5th Cir. 1973) (truth-in-lend-
ing) ; N.C. Freed Co. v. Board of Governors of Fed. Reserve Sys., 473 F.2d

1210 (2d Cir. 1973) (truth-in-lending); Rehart v. Clark, 448 F.2d 170 (9th

Cir. 1971) (Navy regulation used to interpret enlistment contract).

'''E.g., Tunkl v. Regents of Univ. of Cal., 60 Cal. 2d 92, 383 P.2d 441, 32

Cal. Rptr. 33 (1963) ; Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528, 236 A.2d

843 (1967); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69

(1960).

^'This differentiation is used in Nu Dimensions Figure Salons v. Becerra,
340 N.Y.S.2d 268 (N.Y. City Mun. Ct. 1973).



324 INDIANA LAW REVIEW [Vol. 7:309

tion stage by a lawyer or by a public official such as a notary;

(5) the contract be approved by a state official empowered to
regulate certain transactions.

The first alternative is, in essence, the traditional nineteenth
century system with principal reliance on the Statute of Frauds.

The second is largely formulated for use in specialized relation-
ships.*^ The third is used increasingly and is what could be
called the "notice" form of protection.*^ In order for the contract

to be effective, there must be knowing consent to its terms. In
theory, by clearly informing a party of what he is getting, the
market will enable him to shop around for the best deal." Com-
petition, then, will insure that the exchange is reasonable. This

is often the first step in public regulation of a contract. As we
are beginning to see, this approach is often inadequate and only a

stepping stone to more comprehensive regulation. The fourth is
used rarely in this country** and the fifth only in a limited, but in-

creasing, number of transactions.*^

As for controls over contract content or substance, at one
extreme, the state could dictate the entire contract. At the other,
it could enforce any agreement the parties have made as long as the
requirements of the process have been met. Even in the high water
mark of contract, the nineteenth century, there were some con-
trols over content.*® Between these extremes the law could single
out certain contract clauses and subject them to a standard of

^^See L. Fuller & M. Eisenberg, Basic Contract Law 449-51 (3d ed.
1972).

^^See Fuentes v. Shevin, 407 U.S. 67 (1972) ; cases cited note 5 supra.

"•^See N.C. Freed Co. v. Board of Governors of Fed. Reserve Sys., 473 F.2d
1210 (2d Cir. 1973).

^^^In Texas, under certain limited circumstances, an agreement to arbitrate

will not be enforceable unless the parties have obtained the advice of counsel

and their signatures appear on the contract. Tex. Rev. Civ. Ann. art.
224 (1973).

^''For example, many transactions affecting energy sources require ap-
proval in whole or in part by the Federal Power Commission. See FPC v.
Lousiana Power & Light Co., 406 U.S. 621 (1972) ; Monstanto Co. v. FPC,
463 F.2d 799 (D.C. Cir. 1972) ; Farmland Indus. Inc. v. Kansas-Nebraska
Natural Gas Co., 349 F. Supp. 670 (D. Neb. 1972).

^®For example, contracts for an illegal purpose, usurious contracts, and

contracts without consideration would not be enforced. As to specific clauses,
neither penalties nor unreasonable restraints would be enforced.



1973] AMERICAN CONTRACT SYSTEM 325

reasonableness or deny their enforcement.*' Contracts particularly

susceptible to abuse could be singled out for comprehensive con-

trols/° Legislatures are increasingly prescribing much of the con-
tent of such contracts. Whenever such contracts are controlled,
legislation usually states what is permissible and what is pro-
hibited. However, legislation rarely dictates the terms of the con-

tract.^' Sanctions for noncompliance can vary from nonenforce-
ment of the illegal portion,^^ denial of enforcement of the entire
agreement,^^ limitation of remedies in an illegal agreement,'"*

and, ultimately, imposition of penal sanctions for noncompliance.^^

From this brief overview, it is apparent that our present
system comprehends a blend of contract and control. Part IV will
seek to more closely explore some facets of today's system and
Part V will, hopefully, provide a glimpse into the status of contract
making in the year 2001.

IV. The Present System Appraised: Emphasis
Upon Standardized Forms

An appraisal of the present system of mass produced forms
entails: first, looking at the system through the eyes of some of
its participants ; secondly, taking a look in depth at a typical case

;

and finally, making a few concluding observations.

A. Views Of Some Participants
1. The Lawyer Drafting a Form

Increased public controls have made drafting a nightmare. In
order to do a competent job, the lawyer must check many potential

""""E.g., Kaye v. Orkin Exterminating Co., 472 F.2d 1213 (5th Cir. 1973)
(employment contract placing* unreasonable restraints on prospective reem-
ployment held invalid) ; Insurance Center Inc. v. Hamilton, 218 Ga. 597, 129

S.E.2d 801 (1963) (clause restraining franchisee's future sale of business held

invalid) ; Cockerill v. Wilson, 51 111. 2d 179, 281 N.E.2d 648 (1972) (contract

limiting terminability of associational charter held unenforceable).

'^^See statutes cited note 60 supra.

^^See High, ConsuTnei' Regulation in Texas—A Rejoinder by an Economist,
50 Texas L. Rev. 463, 470 (1972) ; Note, Standard Form Contracts, 16 Mod.
L. Rev. 318, 337-342 (1953).

72See UCC §2-302.

73M C/. Campbell Soup Co. v. Wentz, 172 F.2d 80 (3d Cir. 1948).

'^E.g., Anco Inv. Co. v. Spencer, 292 N.E.2d 726 (111. 1973) (seller allowed

to recover cost of goods sold even though contract failed for lack of signature).

'''E.g., People v. Superior Court, 9 Cal. 3d 283, 507 P.2d 1400, 107 Cal.

Rptr. 192 (1973) (civil penalties for misleading advertising).



326 INDIANA LAW REVIEW [Vol. 7:309

sources of legal controls. In addition, he must worry about the

lack of uniformity between states. He wonders how he can possibly
comply with varying state laws when his client's products are
marketed on an interstate basis. He longs for some sort of federal
system or at least uniformity of state laws.

The lawyer also has other difficulties, especially if he is in-
experienced in drafting the type of contract he has been asked to

prepare. He would like a source of information that would reduce
his drafting time by pinpointing problem areas and providing

appropriate language. Also, he would like information on business

custom and usage in varying tj^pes of commercial transactions,

because parties who do not have a fixed idea on a point are willing
to go along with what is "usually" done. The content of form
books rarely keeps up with practice. The forms that exist are
cumbersome and poorly drawn. If the lawyer is part of a large
drafting organization, such as a corporate department of a large

law firm, he may find contracts that have covered similar prob-
lems which can help him. However, even such organizations would

find an informational system covering the points mentioned use-

ful. Some conscientious draftsmen are concerned about their pro-
fessional responsibilities as lawyers. They may worry about par-
ticipating in drafting contracts which violate state rules or are
unenforceable.

Yet to the lawyer, the biggest problem is the uncertainty of
enforcement of some clauses and some contracts he drafts/* If
the legal controls are specified legislatively, he can comply if he
so chooses. However, many recent controls have come from court
decisions using vague terms such as "unconscionable" or "contrary
to public policy."^^ While many draftsmen do not worry about
enforceability, either out of indifference or a belief that the prob-

lem can be deferred until difficulties arise, the conscientious lawyer
does not know whether what he drafts will be enforced. Even if
he is unaware of or is willing to disregard his professional re-
sponsibility, he may entertain doubts about participating in a
system which permits the strong to coerce the weak into accepting
clauses which violate common decency.

2. The Forms User

The party who has requested an attorney to prepare a stan-
dardized form realizes that, although mass produced forms are less

'^^See cases cited note 5 supra.

''''See cases cited note 61 supra.



1973] AMERICAN CONTRACT SYSTEM 327

expensive than individual drafts, they do not come cheaply. Legal
fees for drafting are high, especially if the form is, as is typical,
drawn by a large law firm or by highly paid in-house counsel. In
order to prepare for drafting a standardized form, the lawyer

must spend a considerable amount of time gaining an understand-
ing of the transaction, checking old forms, and finding the often
applicable public controls. As a result, many drafts are often
needed for a good standardized form. Also, the user is becoming

increasingly aware of the more frequent need to revise such
forms, both to respond to new controls and to stay "competitive."
The perceptive user who looks at his legal costs will want answers
to the "benefit" side of a cost-benefit analysis. Although effec-

tiveness data on standardized forms is difficult to find, it might

be helpful to consider one problem from a cost-benefit standpoint,

the vexatious nonmatching forms transaction.^*

Suppose the seller submits his form and refuses to assent to
the buyer's, while the buyer will sign only his buyer-oriented form.

Suppose the user (either buyer or seller) asks his attorney whether

the forms are examined if a dispute arises. It is likely his attorney
will inform him that the representatives of each side will attempt
to adjust the dispute relying mainly on commercial practices, good

will, and good faith without adverting to the "fine print." The
attorney will probably inform the user that even if he, the attorney,

were brought into the picture, he would seek to handle the matter
with the attorney for the other party by the use of common sense
and what he would call "common-law" rules. If the dispute ends
in court, the attorney will inform the user that the transaction is
likely to be governed by the terms upon which both forms have
agreed and the balance will be controlled by the Uniform Commer-
cial Code.''' Suppose the form user asks his attorney to justify
the continued use of forms when, in reality, they are not looked
to and are not likely to govern the transaction if litigation develops.
The attorney will respond that there is no harm in using the
forms and in rare cases, especially in dealing with an inexperienced
or dishonest businessman, they may be of some value. Most com-
mercial users would not be impressed.

^^See Jones & McKnight Corp. v. Birdsboro Corp., 320 F. Supp. 39 (E.D.
111. 1970), in which the court described the problem as "the legal abyss created
in contract formation by industry's perennial battle-of-the-forms." Id. at 41.

See also Application of Doughboy Indus., Inc., 17 App. Div. 2d 216, 233 N.Y.S.
2d 488 (1962).

'''See UCC §2-207.



328 INDIANA LAW REVIEW [Vol. 7:309

Suppose the form seeks to substantially reduce the user's risk

exposure by the use of exculpation, liability limitation, disclaimer

of warranties, and the like. Here there can be danger in using

the form. If a clause seeks to control initial liability for harm to
persons and there is inequality of bargaining position, it is not

likely that the clause will be enforced. But here the cost factor

is not limited to the unlikelihood of enforcement. Clauses of this

type may be taken t©o seriously by nonlawyer employees of the
form user. This can increase the cost of settlement procedures,

incur ill will, and cause a large court award. Also, public exposure

of their use can lead to more repressive public controls. A less
scrupulous user might be persuaded that it is helpful to use such

clauses since many matters never get to an attorney and, as a re-
sult, claims will be discouraged or avoided. However, sophisticated

form users are becoming more aware of their responsibility to the
public and are more likely to appreciate the danger of using these
contract provisions.

Suppose the client asks about transactions which begin with

advertising literature or brochures and culminate with a "formal"

agreement. A lawyer who is asked whether the formal contract
controls the ''deal" will have to answer that the law is increasingly

giving legal effect to the promotional and advertising literature.®^
Dispute-control clauses, such as selecting the forum court®' or
designating a shorter period of limitations,®^ will be enforced only

if reasonable. While this may be better than the public law rules,
reasonableness as a standard does not provide the certainty clients

expect from contract.

A forms user who is given honest answers will conclude that
many printed terms will be enforced only if they are reasonable
and, in the case of an adhesion contract, brought to the attention
of the weaker party and, even then, only if they do not offend public
policy.®^ With this devastating assault on the once all powerful
written document, the user will begin to wonder if it is worth the
cost and the effort.

^^See cases cited note 58 supra.

^'E.g., The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) ; Furbee v.
Vantage Press, Inc., 464 F.2d 835 (D.C. Cir. 1972).

^^General Elec. Co. v. Lexington Contracting Co., 292 N.E.2d 874 (Mass.

1973) (provision limiting time period for commencement of action for breach

held valid). See also UCC §2-725(1).

^^See cases cited note 5 supra.



1973] AMERICAN CONTRACT SYSTEM 329

3, The Forms Receiver

How does the system look to the members of the public who
must face mass produced forms daily ? Most receivers of adhesion

contracts would not understand them if they had the time and in-

clination to read them. The rare receiver who took the trouble
to read it would almost never find himself dealing with a person

authorized to change it. If he went to others who supply similar
services or goods, he would face similar forms. The receiver knows
that anything on the form is likely not to be in his best interest.

Yet he will sign the form and hope for the best. If he is told that
legislatures, administrative agencies, and courts are protecting

him, he will be cynical. He doubts that the rules will be followed.
If a consumer is articulate and willing to fight or retains a lawyer,

he can prevail. But the form will continue to be used. As to the
possibility of governmental sanction of the violators, the forms

receiver will either assume a **fix" or that wrong-doers, shielded

by their batteries of lawyers, will run circles around well-meaning

enforcement officials. If the forms receiver is shown the laws that
can protect him, he will reply that vindication of his legal rights

will cost him more than what is at stake. If told that class actions
will shape up unscrupulous businessmen, he will assume that the
lawyers are likely to end up with all the money.®^

In addition to a "what's the use" attitude toward the fine
print, the average receiver of such forms will complain vociferously
about the fraud and deception of businessmen and their salesmen.
These receivers contend that promises and representations are
often made, but are either not included in the agreement or, if in-
cluded, not performed or honored by the other party.®^ If asked
why he did not see that these promises and representations were
incorporated into his contract, he will say either that he trusted
the other party or that he knew it would be useless to ask that the
form be changed. If the receiver seeks enforcement of these
promises or representations, the form will be a serious obstacle.
In such a setting the form is a weapon to protect the dishonest.

Finally, the receiver will complain that the form does not tell
him where to go or whom to see if he does not get what was prom-
ised or is unable to obtain satisfaction from the seller. While the
aggressive consumer may retain a lawyer if he can afford one or

®^C/. Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir.), cert, granted,
94 S.Ct. 235 (1973).

^^See, e.g., Nu Dimensions Figure Salons v. Becerra, 340 N.Y.S.2d 268
(N.Y. City Mun. Ct. 1973).



330 INDIANA LAW REVIEW [Vol. 7:309

see a public official, many will do nothing because they do not
know where to go.

4. The Judge

How does the present system look to a judge called upon to
deal with forms? A strong contract doctrine is attractive. It is
easier for the judge to enforce the contract before him than to
"make a contract for the parties" or decide which clauses are un-
conscionable or offend public policy. But the conscientious judge

recognizes that the adhesion transaction has changed, if not obliter-

ated, the underljdng assumption of contract, that the agreement

was arrived at through arm's length bargaining. Such a judge
was probably never happy when asked to enforce harsh clauses
that he believed were improperly obtained. As a result, reluctant
as he may be to intercede, a judge probably welcomes increased
public controls. But mushrooming public controls make the judge's
research task more difficult. While it is burdensome enough to
merely collect all the legislative controls, many of the statutes
require that he determine what is reasonable, unconscionable, or
against public policy.®^ He may not receive much help from the
attorneys on these matters, and the rules of evidence are often
restrictive. Furthermore, the judge also realizes that increased

public controls mean longer contracts with an increasing likelihood
of inconsistent language. The judge may often welcome the power
that adhesion recognition has given him, but he is likely to desire

greater assistance from the legislature and the bar in exercising
that power.

5. The Legislator

The perceptive legislator, while acknowledging the need for
controls, is beginning to recognize the limitations of legislation.

Political pressure upon the legislative process often results in mean-
ingless compromise, such as the enactment of largely inadequate

"notice" controls. Also, the legislator wonders whether even
sensible reform, which is not easy to create, will have any effect
on the problem without extensive and costly policing. He recognizes
that the frequent legislative compromise—good reform on paper
with no funds appropriated to insure compliance—often disad-

^^Compare Lechmere Tire & Sales Co. v. Burwick, 277 N.E.2d 503 (Mass.
1972) (adhesion contract construed against drafter), loith Henningsen v.

Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960) (adhesion contract

held unenforceable).



1973] AMERICAN CONTRACT SYSTEM 331

vantages honest businessmen. Moreover, he may possess mis-
givings as to the efficacy of control as a device to limit competition.

Our perceptive forms legislator recognizes that the feeling of

accomplishment which accompanies passage of consumer forms

legislation can create a substantial danger. The danger is that one

will ignore more basic causes of inequities in contract making
and unfair contractual risk distribution. Finally, the legislator

is asked to deal with many pressing social problems. Does control
over contract forms take priority over crime, public welfare, taxa-

tion, and environmental problems?

B. A Typical Forms Case

Weaver v. American Oil Co.^^ exemplifies a typical forms case.
In 1956, Howard Weaver, a forty year-old filling station employee
with one and one-half years of high school education, learned that

American Oil Company had a filling station available for lease.
Weaver told Campbell, an agent for the oil company, that he had
worked part-time in three filling stations and that he had sufficient
funds to finance the inventory. Shortly thereafter, American Oil
agreed to lease the station to Weaver. After the inventory was
taken, "Campbell took a lease from his pocket, laid it on a table
and said 'sign.* Weaver signed."®® This was the only conversation
relating to the lease. Evidently, Howard Weaver had not read the
lease nor did Campbell call his attention to Clause 3, an exculpatory
and "hold harmless" clause.®^ The lease was renewed each year

^^276 N.E.2d 144 (Ind.), affg on other grounds 261 N.E.2d 99 (Ind. Ct.
App. 1970), noted in 6 Ind. L. Rev. 108 (1972).

»«261 N.E.2d at 101.

^^Clause 3 read:

Lessor, its agents and employees shall not be liable for any
loss, damage, injuries, or other casualty of whatsoever kind or by
whomsoever caused to the person or property of anyone (including
Lessee) on or off the premises, arising out of or resulting from
Lessee's use, possession or operation thereof, or from defects in the
premises whether apparent or hidden, or from the installation,
existence, use, maintenance, condition, repair, alteration, removal

or replacement of any equipment thereon, whether due in whole or
in part to negligent acts or omissions of Lessor, its agents or em-
ployees; and Lessee for himself, his heirs, executors, administrators,
successors and assigns, hereby agrees to indemnify and hold Lessor,
its agents and employees, harmless from and against all claims,
demands, liabilities, suits or actions (including all reasonable ex-

penses and attorneys' fees incurred by or imposed on the Lessor in
connection therewith) for such loss, damage, injury or other casualty.
Lessee also agrees to pay all reasonable expenses and attorneys' fees



332 INDIANA LAW REVIEW [Vol. 7:309

until 1961 through the use of the initial 1956 assent procedure. In

1962 Homer Hoffer, an employee of American Oil, came to Weaver's
station to repair some gasoline pumps. During Hoffer's postrepair
demonstration, he sprayed gas over Weaver and his employee,
Donald Miller. The gasoline ignited, burning both Weaver and
Miller.

Each brought an action against Hoffer and American Oil for
personal injuries. American Oil instituted an action for declaratory
judgment and requested the trial court to determine whether the
exculpatory and indemnification provisions of Clause 3 were
binding. The trial judge received evidence of Weaver's educational
and business background, the size and structure of American Oil,
and the fact that American is a wholly-owned subsidiary of Stan-
dard Oil of Indiana. The judge also admitted evidence relating
to the way in which the lease was presented to Weaver and signed
by Weaver. The judge noted that Weaver's net yearly income from
the operation of the filling station ranged from $5,000 to $6,000,
and that the indemnification provision imposed upon Weaver "a
potential liability far greater than, and completely out of proportion
to, the benefit flowing to [Weaver] from . . . [the] lease agree-
ment."'° After listening to evidence of the respective size and ex-
perience of the parties and the risk entailed in the crucial clause,
the trial judge concluded nevertheless that the clause was enforce-
able against Weaver.

The Indiana Court of Appeals recognized the adhesive nature
of the clause. But the court, in agreeing with the trial court on the
indemnification provision, noted that liability insurance was avail-
able, generally used, and could adequately protect Weaver from
risk of liability to third parties, including American. However, the

court did have trouble with the exculpatory clause. The judge
noted that public liability insurance would not protect Weaver
from injuries to himself. The court of appeals then stated:

Traditionally, a contract is thought to be the product

of the free bargaining of parties who meet as approximate
bargaining equals. In this context, courts are extremely

reluctant to declare contracts void as against public pol-

icy, because if there is one thing which, more than an-

incurred by Lessor in the event that Lessee shall default under the
provisions of this paragraph.

276 N.E.2d at 145 (emphasis added).

'°M at 152.



1973] AMERICAN CONTRACT SYSTEM 333

other, public policy requires, it is that men of full age and
competent understanding shall have the utmost liberty of

contracting, and that their contracts when entered into
freely and voluntarily shall be held sacred and shall be

enforced by courts of justice. ...

Unlimited and unchecked "freedom" of contract, how-

ever, treats modern industrial and commercial problems

as if they were a matter of two neighbors bargaining over

the price of a horse in the 19th Century—a desirable and
Utopian approach, but often unrealistic in terms of 1970

commerce.*"

How should the court have dealt with this adhesion contract?
While other solutions were available, it held that the validity of

an adhesion contract must be dependent upon the weaker party's
possession of full knowledge of the contract terms, and erected

a rebuttable presumption that sufficient comprehension could not

be present in an adhesion transaction.'^ Since there was no show-
ing that Weaver was aware "of the clause or of its implications,"
the court concluded that the exculpatory provision was not enforce-
able.

A petition to transfer to the Indiana Supreme Court was
granted. The supreme court, over a strong dissent,'^ refused to
enforce either the exculpatory or the indemnification aspects of

Clause 3.'^^ The supreme court concluded that it was inconsistent
to enforce one part of Clause 3 without the other. Evidently, it

was unconvinced by the court of appeals' argument that one risk
was usually insurable while the other was not.

After sketching the usual adhesion contract background the
court stated that "[t]he superior bargaining power of American
Oil is patently obvious and the significance of Weaver's signature
upon the legal document amounted to nothing more than a mere
formality to Weaver for the substantial protection of American
Q-j >,95 rj^Yie supreme court, while noting that section 2-302 of the
Uniform Commercial Code relating to unconscionability was not
applicable, stated that this was an "unconscionable contract."'*

^'261 N.E.2d at 103.

92/d. at 104.

9^276 N.E.2d at 148 (Prentice, J., dissenting).

""^Id. at 144.

"M at 146.
''Id.



334 INDIANA LAW REVIEW [Vol. 7:309

The court opined that no sensible person would make such a con-
tract unless he lacked mental capacity or was under extreme

duress. Moreover, it was impressed with the disparity between
the obligation Weaver assumed under Clause 3 and the $5,000 to

$6,000 a year he earned working seven days a week at long hours.

The court also noted that the clause was in fine print and contained
no title heading. The Weaver court concluded:

It seems a deplorable abuse of justice to hold a man of
poor education, to a contract prepared by the attorneys

of American Oil, for the benefit of American Oil which

was presented to Weaver on a take it or leave it basis.

The burden should be on the party submitting such "a
package'* in printed form to show that the other party had
knowledge of any unusual or unconscionable terms con-

tained therein. . . . Only in this way can justice be served
and the true meaning of contract preserved.'^

To be enforceable, according to the court, clauses of the type
included in the Weaver-American contract must be knowingly and
willingly made.

The dissenting judge stated that adhesion contracts were
limited to those transactions which were not subject to negotiation
and concluded that this transaction did not satisfy the adhesion
test. The dissenting judge recognized the economic disparity be-
tween Weaver and American and the former's limited educational
and business background. But, amazingly, he found no indication
"that the printed lease provisions were not subject to negotiation

or that, with respect to this particular lease. Defendant was not
in a bargaining position equal to that of American."'® In addition,

the dissenting judge concluded, with the now familiar litany of
dissenting judges in such cases, that this was a matter for the
legislature.

The reader should note that American is unlikely to redraft
the clause because the language is not deficient. It was drafted
about as completely as it could be drafted, although perhaps it

could have been written in a more lucid and understandable fashion.
The astute attorneys for American will probably conclude that the

'^/d. at 147-48.

"^Id. at 154.



1973] AMERICAN CONTRACT SYSTEM 335

Indiana Supreme Court merely invited them to use a better notice

technique in safeguarding the validity of such clauses. One might
easily envision a memorandum from the attorney for American
to all personnel of American who negotiate such leases. This
memorandum would instruct the agents who negotiate such leases
to direct the attention of prospective lessees to Clause 3 and to

explain to them the import of the clause, perhaps even suggesting
that the lessee obtain insurance."^' The memorandum might go
further and suggest that the agents have lessees initial or sign

opposite Clause 3 to show that the matter has been brought to the
lessees' attention.

In any event, suppose American can comply with the notice

requirement and force such clauses on prospective lessees. A more
difficult question is whether the law should permit a contract to

allocate risks in this context. Of course, if the prospective lessee
were intelligent, educated, and knowledgeable in business matters,

he could handle both the exculpation and indemnification aspects

of this transaction. He could, as the Indiana Court of Appeals sug-
gested, obtain public liability insurance to handle third party

liability. ^°° As for losses to himself, he could secure health, dis-
ability, or business interruption insurance. However, it is quite
probable that if the lessee has the clause pointed out and explained

to him, he will not bargain any differently than did the lessee in
the Weaver case.

Suppose further that the lessee were to be injured and un-
able to recover from American or an insurance carrier. Probably
Weaver would go on public welfare. Surely this is a legitimate
matter of state interest, and the State can decide that Weaver
(and the State) should not take this risk.

Suppose the Indiana Supreme Court were to hold Clause 3
void as against public policy either because of the adhesive nature

of the transaction, or because enforcement might encourage Ameri-
can to be careless. Would American still insert Clause 3 in its
leases ?

Suppose American's attorney were asked by his client whether
American should continue to use Clause 3 in its leases. Even if
the attorney stated that it was not enforceable, suppose he were

""""See Boryk v. Argentinas, 332 F. Supp. 405, 406-07 ( S.D.N.Y. 1971)
(lessor relied on memo advising prospective lessees of necessity for liability
coverage).

^°°261 N.E.2d at 102.



336 INDIANA LAW REVIEW [Vol. 7:309

asked whether there was any harm in using it. The attorney might
state that he could see no harm in using the clause. If a claim were
made, and if the claimant were represented by an attorney, the
attorney might point out the unenforceability of such a clause.
In that case, the clause would not be relied upon in negotiations
or in litigation. But the attorney might reason that not all claimants
are legally represented and, even if the claimant were legally repre-
sented, the claimant's attorney might not be aware of the unen-
forceability of the clause. In such a case the clause could be of

some value to American. For that reason, the attorney might con-
clude that there is no harm and possibly some benefit in using the
clause. The attorney might even convince himself that clause
would not be used if a legitimate claim were made against Amer-
ican but only if a false claim were presented.

It is most unlikely that counsel for American would consider
the legal ethics involved.

^°^ Should an attorney advise a client

that such a clause be used or participate in the creation of a con-

tract with such a clause? If the clause is used, the contract can

frustrate loss distribution rules, exert unfair control over the

litigation process, and destroy the reasonable expectations of the

weaker contracting party. In this situation, the general ignorance
and disinterest in legal ethics is compounded by the failure of the
ethical canons to deal with this problem specifically.

What can we learn from Howard Weaver's troubles? First,
and most obviously, courts are not sympathetic to exculpatory
and indemnification clauses in an adhesion setting. Secondly,
courts are paying considerable attention to the bargaining context

and the way in which contracts are made. The Indiana Supreme
Court did so, and it is not a court noted for radical departures
from existing law. Thirdly, the ^'notice'' technique of handling
adhesion transactions is of doubtful value in this context. '°^ Amer-
ican and other forms users will simply adjust their contract mak-
ing techniques to ensure that unfair provisions are made con-
spicuous and apparent to prospective forms receivers. In addition,

^°^The American Bar Association's Code of Professional Responsibility
fails to deal explicitly with the propriety of drafting such clauses. The Code
states that the lawyer should refrain "from all illegal and morally reprehen-
sible conduct." ABA Code of Professional Responsibility, Ethical Considera-
tion 1-5 (1969). "Misconduct" is defined to include "fraud" and "conduct that

is prejudicial to the administration of justice." Id. Disciplinary Rule 1-102.

Arguably, "misconduct" could be interpreted to include the use of contract

clauses which the lawyer knows to be unenforceable.

^°^A notice system presupposes some competition and the ability or desire
to shop around. In many adhesion transactions this is not present.



1973] AMERICAN CONTRACT SYSTEM 337

even if clauses of this sort are unenforceable without regard to

notice, such a rule may have a limited impact on contract making
practices. If it is void as against public policy, there should be

sanctions to insure that such clauses are not oppressively used.

Finally, contract should not play any role in loss distribution in
this context. '°^ Such losses are too important to leave to an ad-

hesion transaction.

C, Some Observations on the Current System

Clearly, contract can no longer be given its prior high and
exalted status. It still serves a legitimate function, and it is

often better left alone than saddled with meaningless or cumber-

some state controls. But the awesome power it can create in
today's world of mass produced forms is too susceptible to abuse.
It has become clear that the usefulness of alternative controls,

including their respective limitations, must be carefully scru-
tinized. Notice controls, as a rule, make little sense in today's
market. We must control the contracts most subject to abuse and
the clauses most likely to frustrate orderly administration of jus-
tice and loss distribution. When we do enact controls, they should
be: (1) clearly expressed, (2) self-executing and not left to the
party who is being controlled, (3) policed properly, and (4) re-
viewed periodically. In addition, we desperately need a recording
system which can accurately memorialize and store the events
relevant to the contract formation process. To sum up, the present
system is occasionally oppressive and often inefficient.

V. The System In 2001

Assuming that (1) the present system has serious defects,

(2) these defects will be considered serious enough to warrant
drastic change, and (3) the technology described will be available,
it is appropriate to consider how the system will function in the
next century.

A. Negotiated, Tailor-Made Contracts

There will be a modest number of tailor-made, negotiated
contracts. They will memorialize nonroutine transactions, either

^°^A look at auto accident risk distribution indicates that "no fault" is al-

most with us. Beyond the horizon we can see that national health insurance or
some form of compulsory private health care insurance will replace much of
tort law. Interestingly, "no fault" insurance will broaden the scope of contract
law since most of the disputes will be centered around an insurance policy—^the
paradigm of adhesion contracts!



338 INDIANA LAW REVIEW [Vol. 7:309

quite important or unimportant, in which each party has relatively-

equal bargaining power. If important, the stakes will justify

having attorneys draft the agreement. The traditional Nineteenth
Century notions of contract make sense in such agreements. Inter-
pretation should be confined to honest effectuation of the probable

or actual intention of the parties. Gap-filling through implication

should only be used when necessary to clarify terms which the
parties thought too obvious to require expression or to give effect

to unexpressed intention. Only when disruptive and reasonably un-
foreseeable events arise should the dispute resolution process make
a conscious allocation of risk.

According contract considerable, if not plenary, scope in such

transactions will not eliminate formal rules. Rules comparable to

the Statute of Frauds and integration aspects of the parol evidence

rule will continue to exist. However, rules of form will be altered
to accommodate the different methods of recording information
and formalizing agreements which will be common in the next
century. For example video tape may be used to record the actual
formalizing of a negotiated contract. '^'^ While such contracts

dealing with important transactions will generally contain the

entire agreement, problems could develop over asserted oral agree-

ments made at the time the contract is signed. A better system of
recording the events leading up to or at the time of making the
formal agreement will assist the adjudication of such disputes.
The less important individualized transaction would also profit
from a system of recording events or contracts. Often, such
contracts may not be complete and the use of technology to record
and store events could provide an accurate memorial that would aid
in dispute resolution.

There will be other forms of state control even in negotiated
transactions. The state will allow only minimal tampering with
public law rules relating to dispute resolution. The law of contract
has gone too far in this direction and its power in this field will
be sharply curtailed or eliminated. Only if the public rules are
unclear, will reasonable, bargained provisions be given effect. '°*

In addition, in the next century there will be less need for
contracting parties to deal with rules for dispute resolution. Juries

'^''See Ellis Canning Co. v. Bernstein, 348 F. Supp. 1212 (D. Col. 1972)
(tape recording satisfied Statute of Frauds).

'^^E.g., The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). See
Comment, Enforceability of "Choice of Forum" Clauses, 8 Calif. L. Rev. 324
(1972).



1973] AMERICAN CONTRACT SYSTEM 339

will very likely be eliminated in resolving commercial disputes and

used only as expert fact finders. As a result of this and for other

reasons, the dispute resolution process will be more accepted and

trusted, making clauses relating to rules of evidence, burden of

proof, remedies, and other clauses designed to compensate for

deficiency in or distrust of the administration of justice unnecess-

ary. Also, greater confidence in the public dispute resolution

system should persuade lawyers of the twenty-first century that

they need not cover every possibility nor anticipate every possible

event. This may be expecting the millenium, but even today lawyer-
draftsmen are beginning to realize that they cannot cover nor

anticipate everything and that they must have confidence in the

dispute resolution system.

Some negotiated contracts are of great importance to the state
and will require another form of public control. Even today, some
negotiated transactions must, realistically, be approved by public

officials.' °^ In the next century there will be more negotiated con-

tracts which will require approval by public authorities. For ex-

ample, contracts between space user associations and space sup-

pliers will require approval by public authorities if they affect a

sufficient number of users. Similarly, negotiated contracts such as
group insurance plans that affect a sufficiently large number of
persons will likewise require public approval. When approval is
required, the twenty-first century will develop efficient methods

of reviewing important negotiated contracts. The contract will
be transmitted to the approving authorities through computers

which will scan the contract, determine whether it is consistent
with public rules, and single out questionable contracts and clauses

for closer scrutiny. A principal disadvantage of present approval
controls is delay. Technology will facilitate rapid approval con-

trols. Such an approval system will be designed to protect the

confidentiality of the arrangements made, provide a system for

recording and storing such contracts, and assist public policy-

makers in making resource allocation decisions.

There will be tailor-made, negotiated contracts which are not

important enough to require approval. While marketing methods

in the next century may virtually eliminate less important nego-
tiated transactions, contract is a durable concept. Less important

negotiated contracts will be filed for information, planning, and
recordation purposes even though they need not be approved.

106See note 67 supra.



340 INDIANA LAW REVIEW [Vol. 7:309

The contemporary contract making system lacks a storage
and retrieval technique which can assist those who draft negotiated
contracts. Lawyers need a better check list system, data on what
are customary ways of handling certain commercial problems, and
specimens of drafting language. Negotiated contracts of the kind

described, filed in an efficient storage and retrieval system, will
provide valuable, nonconfidential information to contract makers.

B, Mass Produced Contracts

Prediction of future developments in the realm of form con-
tracts necessitates a brief consideration of certain features of the

present system. There are some transactions in which weaker par-
ties cannot bargain on anything, such as consumers dealing with

public utilities. But there are many transactions in which the basic
exchange terms are, to a greater or lesser degree, specifically

"agreed to."^°^ One party often "accepts" the other party's stan-
dard form for various reasons, such as an inability to bargain, an
unwillingness to bargain, lack of time to bargain, no one with whom
to bargain, a feeling that it is useless to bargain, similarity of stan-

dardized terms used by all competitors, or trust in the other party

and his form. The usual standard form, in addition to specifying
the performance exchange, deals with administration, nonperform-

ance, remedies, and disputes. Mass produced forms are used because
they spread the cost of contract making over many transactions,
save bargaining time, and control risk uniformly. Also, they are
expected to obtain maximum protection for the forms user, as in a
mortgage transaction, or to reduce liability for the user, as in a
seller's sale of goods form.

Some of the current justifications for certain standardized
provisions will not exist in the next century. Uniformity of law
relating to contracts, improvement of rules for dispute resolution,
elimination of contract as an instrument for controlling initial
risk distribution, a greater sense of moral obligation on the part

of lawyers who draft mass produced contracts—^these factors and
assertion of public law rules relegating contract to its proper do-
main will mean that contracts will concentrate on the basic ex-
change. Those who provide essential or commonly used consumer
commodities or services^ °® will be considered public utilities. At a

^'^^See Slawson, supra note 3.

^°®The modern conception of "necessaries" is expanding to cover such
items. See In re Weaver, 339 F. Supp. 961 (D. Conn. 1972) (color television
exempt) ; Rehurek v. Chrysler Credit Corp., 262 So. 2d 452 (Fla. App. 1972)
(automobile).



1973] AMERICAN CONTRACT SYSTEM 341

minimum, the state will dictate what we today consider the "boiler
plate" or the standardized items. An increasing number of com-
modities and services will be, at least intermittently, totally regu-

lated by rationing and price controls. But there will be a large

residue of bargaining permitted on basic terms, especially in trans-

actions involving commonly used consumer goods and services as

well as living space beyond basic minimum needs. The consumer
will select from different types of goods or services for which the

pricing authorities or, if the price is not controlled, the market will

set a range of prices. However, once the price is determined, the

other terms will be determined by public authorities.

Other types of commodities and services not important enough

to justify complete standardization of terms will be subjected to

some controls. For example, a limited form of public control upon

real estate broker agreements may be necessary because such agree-
ments generate an unusual amount of misunderstanding, litigation,
and, occasionally, oppression. For that reason, it will be necessary

for rules to be developed which will provide a fair risk allocation,

avoid misunderstanding and let the parties know where they stand.
This type of control will be illustrated in the following examples.

To sum up, negotiated contracts will have minimal legal con-
trols as long as they do not affect public interest. Mass produced
contracts, involving essential or commonly used consumer com-
modities and services, will be dictated by public authorities, either
totally or to the extent of major standardization of key terms.
Other mass produced contracts not falling into that category will
have legal controls designed to eliminate the worst aspects of
oppression and render the contract making system more efficient.

C, Some Illustrations

1. Negotiated Contracts

Negotiated, tailor-made contracts will be divided into impor-

tant contracts affected with a public interest and those which are
not important enough to require close governmental control. As
an illustration of the former, suppose a manufacturer makes a
twenty-year contract with a natural gas supplier under which the
latter will supply the former with natural gas. Future regulatory
agencies will totally control production and use of energy resources.
Such a contract in the next century will require prior approval by
the regulatory agency. To avoid delay such contracts will be fed
into a computer for transmission to a master computer located at
the regulatory agency. The receiving computer will be programmed
to determine whether the contract meets the standards set by the



342 INDIANA LAW REVIEW [Vol. 7:309

regulatory agency. If so, notification of approval will be trans-

mitted in a matter of minutes.

If the computer determines that the contract does not meet

agency standards, the computer will report this back to the con-

tracting parties and indicate the changes required for compliance

with agency regulations. If these changes are acceptable to the

contracting parties, the changes will be fed into the computer and
the contract approved. If the proposed changes are not acceptable

to the contracting parties, the reasons given by the contracting par-

ties will be fed into the computer for evaluation. In most situations,

an agreement will ultimately be reached by computer. In rare cases
in which this cannot be accomplished, a television conference will
be held, or, if needed, a hearing scheduled to resolve the differences.

Submission of the agreement will provide data to the regulatory

agency which will be vital in making policy decisions. Such a
storage system will protect the confidentiality of information con-

tained in the approved contract.

Many provisions that are found in contracts today will not
have to be included or will not be allowed in contracts of the

future. As a result, contracts will deal principally with the basic
performance to be exchanged, excuses for nonperformance, and
contract administration.

As a further example, consider the negotiation of group in-
surance agreements in the next century. Group insurance is cur-
rently generating problems because of conflicting documents, Le,,

sales literature, individual policies, and master agreements. ^°' Such
policies will have to receive governmental approval, just as those

which deal with energy resources described earlier, even though
the master policy may have been negotiated between a large em-
ployer or a strong association and the insurance company. Such
group policies affect too many people to be left to the determination
of the contracting parties. Such agreements will not have their

terms dictated by the state, but they will be approved by the state
in the same manner as energy purchase contracts.

Consider also the evolution of the long term commercial lease
in the year 2001. Subject to time and place variations, contracts
for the lease of commercial space do not involve substantial public

interest considerations. Frequently, such a transaction will be

formalized by a mass produced contract. For example, contracts for

^°'iSee Bauer v. Insurance Co. of North America, 351 F. Supp. 873 (E.D.
Wis. 1972) (failure to notify defense rejected when insurer failed to bring
notice period provision to insured's attention)

.



1973] AMERICAN CONTRACT SYSTEM 343

the use of office space in which the supplier and user have rela-

tively equal bargaining power and utilize a tailor-made commercial

lease will not usually require public approval. However, the agree-

ment will be filed, its contents stored on computer tape, and it will

be fed to regional agencies empowered to collect this information

for planning and informational purposes. In a period of space

scarcity, greater public control might be needed. In such a case,

an approval system would be installed.

2, Mass Produced Contracts

First, let us look at contracts for commodities or services not

essential to life or commonly used by consumers. Assuming that

real estate brokers in the next century perform a role similar to

today's broker, and that private property still exists, suppose a

property owner wishes to hire a broker to find a buyer for his

property. Let us look a bit more closely at today's system in order
to predict how awareness of today's problems and the availability
of technology can rationalize the transaction. Generally, brokers

today use a mass produced form. Ordinarily such forms are drafted

by broker associations or by lawyers retained by high volume
brokers. As a rule, the property owner does not retain a lawyer to
review the broker-oriented form. Broker-owner disputes are com-

mon and often result in litigation. "° Brokers use contracts to deal
with revocation by the owner, owner sales of the listed property,
and the owner's sale of the property after the listing has expired to
a buyer introduced to the owner by the broker. The owner may not
wish to pay the broker if the broker finds him a buyer and the
deal is never consummated due to default by the prospective pur-
chaser."' Owners may also resist payment of the commission when
the broker makes a quick sale. Also, owners become unhappy when
the broker decides to concentrate his efforts on more attractive
listings. In any event, the broker transaction is one in which, due to
the frequent absence of good will bargaining, the broker looks

largely to contract (his own and the contract for the sale of the
property) as a means of protecting himself.

How will broker transactions be handled in the next century?
Suppose the owner and the broker agree on the owner's selling price

^^^See 1 A. CoRBiN, supra note 9, § 50.

'''E.g., Bernard Klibanow & Co. v. Shafer, 21 111. App. 2d 392, 276 N.E.2d
446 (1971) (real estate broker held entitled to commission notwithstanding
nonenforceability of purchase agreement)

.

I



344 INDIANA LAW REVIEW [Vol. 7:309

and the amount of commission, as well as the duration of the broker

agreement. Broker and owner will go to a convenient computer

center. They will feed into the computer the basic elements of their
deal. The computer will ask questions of each party to apprise them

of the possible pitfalls. The computers will also inquire whether

any representations have been made in the areas which have proved
troublesome in prior similar transactions.

If all the matters are resolved, the computer will print out

the contract containing the basic exchange elements and including

specialized provisions designed to control foreseeable points of

controversy. The computer will also print out the name of an offi-
cial with whom a dissatisfied party can consult. That official will
be given authority to resolve disputes informally between the par-

ties, subject to an appeal to an informal tribunal. This tribunal will

consist of representatives of the public, homeowners, and brokers.

In essence, there will be industry arbitration.

The computer will be able to print out terms for varying types
of deals. For example, the parties could make a transaction under
which the broker could receive maximum protection—something on
the order of broker contracts today—but he would receive a lower
commission. At the other extreme, the computer could print out a
contract under which the broker assumed considerable risks in ex-
change for a higher commission. As an illustration of the latter, the
broker could receive a higher commission only if the deal went
through. The number of variations could not be infinite, but there
would have to be sufficient flexibility for a workable system. The
state's interest in such a transaction will not be sufficient to require

that a government agency program the computer. Instead, the state
will appoint a committee composed of private citizens representing
different interests to ensure a broad spectrum of public inputs into

the programming process.^ ^^ Alternatively, local persons desiring
to improve the system might set up such a program themselves,
with or without state financial support.

Such a system could also use video tape techniques to make
a record of the person who appears before the computer for iden-
tification purposes and also to provide a record of what transpired
before the computer. In essence, such a system would be a high
technology version of the best aspects of the European notary
system.

Another transaction which will have to be rationalized is goods
distribution. Today, the process is in a state of chaos. Buyers and

112See Note, Standard Form Contracts, 16 Mod. L. Rev. 318 (1953).



1973] AMERICAN CONTRACT SYSTEM 345

sellers refuse to sign any form other than the ones prepared by
their own lawyers. Such forms typically are one sided. The buyer
attempts maximum protection while the seller tends to limit his
exposure to almost zero. Businessmen, at least at the outset, rarely

look to the standard terms, and their lawyers only utilize them
when all other avenues for settling the dispute vanish. Today's
businessmen and their lawyers who recognize the irrationality and
chaotic nature of the system sometimes draft industry-wide agree-

ments or master agreements between buyer and seller designed to
cover many similar transactions for a fixed period of time. Hov/-
ever, such industry or master agreements are difficult and costly
to formulate. The irrational nonmatching forms system is used be-
cause the alternatives do not look any better and old habits die
slowly.

By the twenty-first century, businessmen and their lawyers
will decide that it is not worth the effort to draft such forms. Goods
ordering will be done through computers. The state will encourage,
and perhaps compel, groups of buyers and sellers to negotiate and
conclude standardized rules for such transactions. Again, many of
the clauses presently used will not be necessary or perhaps may not
be valid in the next century. But there will still be a need for rules
to govern the relationship between the parties. And these rules are
likely to go beyond the basic performance exchange to encompass
orderly administration, remedies, and allocation of certain risks.
These provisions will come out of a computer center when the buyer
and seller feed into the computer the elements of their transaction.
The computer will be programmed by representatives of buyers and
sellers aided by public interest groups with a stake in commercial
policies.

As to transactions involving essential or commonly used con-
sumer commodities and services, suppose a twenty-first century
consumer purchases an appliance like a television set. Here again,
many of the provisions which appear on today's standardized mass
produced contracts for consumer durables will not be necessary or
permitted. Policy makers will be primarily concerned with the pro-
duction of a document informing buyer and seller of their respec-
tive rights under the agreement and providing an equitable method
of orchestrating the performances to be exchanged. The buyer will
go to an appliance distribution center and choose the item he wishes
to purchase. The price of the appliance will either be set by the
seller (perhaps subject to some bargaining), or set by the state.
Once item and price are determined, he will go to a small computer
in the distribution center. The computer will ask questions designed
to determine whether the buyer knows what he is getting and



346 INDIANA LAW REVIEW [Vol. 7:309

what he is promising to do. Also, the computer will be programmed
to print out warranties''^ and credit terms and inform the pur-

chaser to whom he should bring his complaints. Public authorities
will program such transactions. Video tape will record the com-
puter interview. All of the data relating to the transactions will be

fed into a data bank which will be used for economic planning
purposes.

Life insurance, at least in our economy, is an essential con-
sumer service. At present, the insurance policy is a long, unreadable
document primarily designed to control the scope of the insurer's
risk with the result that the insured rarely knows what he is buy-
ing with his premiums. It is the classic illustration of what is
becoming common in mass produced contracts; the standardized
form is only looked to after the problem arises.

Here compulsory contracts will be produced by the state. The
person desiring to purchase a policy will go to a computer-equipped

insurance procurement center to obtain information and acquire
some basic understanding of the insurance agreements available.
Just as in the real estate broker transaction, there will be need

for flexibility with regard to such factors as coverage, exclusions,

and premiums. However, those terms which are important to the
insured will have to be brought to his attention. Obviously, he

should know the basic risk protected against, but in addition, he
should know what he should do if a loss occurs and the public
official he should contact if his claim is not being properly pro-

cessed. All these items will appear processed in his computer print-
out. To avoid communication problems and misunderstandings,
a video tape of all conversations will be made and stored, in
addition to the computer communication data.

Another essential consumer commodity is living space. '^'^ To-
day, the market determines whether the tenant will have any sig-
nificant power over the amount of rent or the duration of the lease,
let alone other terms. Even if he does have some bargaining
position, he is not likely to alter the standardized form.

^ ^ ^Israel recently created, by administrative regulation, a mandatory tele-
vision warranty clause. See Comment, Standardized Terms of Guarantee for
T.V. Sets, 7 Israel L. Rev. 147-48 (1972).

^ ^
'^American legal thought has begun, in many respects, to classify housing

as a public utility. See Robinson v. Diamond Housing Corp., 463 F.2d 853, 871

(D.C. Cir. 1972) ; Chicago Housing Authority v. Harris, 49 111. 2d 274, 275

N.E.2d 353 (1971) ; Boston Housing Authority v. Hemingway, 293 N.E.2d 831

(Mass. 1972).



1973] AMERICAN CONTRACT SYSTEM 347

In the next century, individual space users will have their leases

made by computers either located at the office of a public or private
space supplier or at a nearby computer center. Rent will, depending

upon the economic situation and particular locality, be controlled

by the state or governed by the market. The user and the supplier's
agent will feed into the computer the items to which they have
agreed and the computer will ask questions to ensure that both
parties, principally the user, fully comprehend the basic terms of
their bargain. After these are established, the computer will print

out the basic deal and information relating to an informal dispute
resolution process. Also, the computer will print out standardized

terms of approved space use programmed by public, or, in the case
of higher rentals, quasi-public agencies which will include repre-
sentatives of users and suppliers. The transaction will be recorded
on video tape and stored.

Where users form an association, an agreement will be made
by the association and the space supplier which will be similar to
our present collective bargaining labor agreements. The state will
either require good faith bargaining or establish procedures for

compulsory arbitration. Also, such an agreement will have to be
submitted and reviewed by a public agency through a computer
process similar to the system for approval of group insurance

agreements previously described.

VI. Conclusion

At best, the current contract system is cumbersome and in-
efficient. At worst, it is oppressive and overreaching. While con-
tract as a social and legal institution is durable and indispensable,

institutional and social changes coupled with recognition of the

deficiencies of the present system will generate drastic changes in

the next century.

First, some things such as judicial administration and most
loss distribution will be beyond the power of contract, except in
truly bargain transactions. Secondly, contracts will be shorter and

more comprehensible with emphasis upon communicating the basic
exchange of performance. Only in negotiated contracts will contract

be allowed to go further, and even here there will be limits. Thirdly,

legal controls will be pervasive, but of varying types, from record-
ing and approving contracts, to the dictation of minor or, in the

case of some transactions, all the terms of the agreement. Finally,
technology will develop techniques for recording events, promoting

communication, developing transactional flexibility, operating pub-

lic controls efficiently, and storing and retrieving data needed for

social and economic planning.