Traditional Standard Form Contracting Richard Warner

Features of Standard Form Contracts [1] Businesses do not expect “customers to understand or even to read the standard terms . . . [2] Employees . . . often have only a limited understanding of its terms and limited authority to vary them. [3] Customers do not . . . ordinarily understand or even read the standard terms. [4] They trust to the good faith of the party using the form [5] and to the tacit representation that like terms are being accepted regularly by others similarly situated. [6] But they understand that they are assenting to the terms not read or not understood, subject to such limitations as the law may impose. Restatement of Contracts (second) § 211

Focus For Now on (4) [4] They trust to the good faith of the party using the form. So what is trust in good faith? Trusting that the business will not violate one’s reasonable expectations about contractual terms.

Sources of Reasonable Expectations Type of transaction Reasonableness of the business practice Reasonable expectations Words of the agreement

Steven v. Fidelity and Casualty Co. Mr. Steven bought a life insurance policy before his air trip. He had to substitute a different air carrier during the trip. That carrier crashed and Steven died. The insurance company denied coverage claiming that the policy did not cover substitue carriers.

Steven’s Trip He had a round-trip ticket for this itinerary. Chicago, IL Dayton, OH Terre Haute, IN Los Angeles, CA

The Canceled Flight His ticket was for a flight from Terre Haute to Chicago on Lake Central Airlines. The flight was canceled, and he finally end up on an “air taxi” operated by Turner Aviation. It was that plane that crashed. Chicago, IL Dayton, OH Terre Haute, IN Los Angeles, CA

What Expectation? Visible on the vending machine. “Do Not Purchase More Than a Total of $62,500 Principal Sum--Nor for Travel on Other Than Scheduled Air Carriers. This Policy Covers on One-Way Trip Only Unless Round Trip Ticket Is Purchased Before Departure.” If you read this, what you expect? That the policy covered your trip on the Turner air taxi? only Lake Central Airlines? I am not sure.

Fidelity’s View What Steven happened to expect—even what he reasonably expected—is irrelevant. The language of the contract is controlling. The policy restricted coverage to injuries sustained while “traveling on a transportation ticket or pass covering the whole of said airline trip, issued to him for transportation on an aircraft operated by a scheduled air carrier.”

The Court’s View: First Point Reasonable expectations set terms. “In this type of standardized contract, sold by a vending machine, Visible on the vending machine. “Do Not Purchase More Than a Total of $62,500 Principal Sum--Nor for Travel on Other Than Scheduled Air Carriers. This Policy Covers on One-Way Trip Only Unless Round Trip Ticket Is Purchased Before Departure.” the insured may reasonably expect coverage for the whole trip which he inserted in the policy, including reasonable substituted transportation necessitated by emergency.”

The Court’s View: Second Point Were terms conflict with a customer’s reasonable expectation, the business must bring it to the customer’s attention. “If the insurer did not propose such coverage, it should have plainly and clearly brought to the attention of the purchaser such limitation of liability.”

Reasonable Expectations Three sources: the type of transaction, the reasonableness of the business practice, the words of the agreement.

The Type of Transaction “In this type of standardized contract, sold by a vending machine . . .” No opportunity to read, No duplicate, so could not consult, Relevant restrictions would not be understood.

Reasonableness of Business Practice “The risk of injury on the substitute conveyance in many cases will be no greater than the risk on the scheduled flight; in all cases it will be less than if the scheduled airline attempts to fly the scheduled flight despite bad weather or mechanical difficulty. Thus, both in the terms of occurrence and magnitude of risk, substitute emergency transportation falls well within the obligation undertaken by the insurer.”

Words of the Contract Ambiguous: “The language of the policy does not specifically exclude the expected coverage for the substituted flight. Neither the insuring clause, the definitions of a scheduled air carrier nor section 3(b) infra. negates, without ambiguity, protection for the emergency substitute flight.” What weight does the contract language get if it is not ambiguous? We address this later.

Sources of Reasonable Expectations Type of transaction Reasonableness of the business practice Reasonable expectations Words of the agreement

Puzzle What do the reasonableness of the business practice, and The words of the contract have to do with Steven’s—or any consumer’s—reasonable expectations? They are not the basis of any expectations, so how can they be what makes those expectations reasonable?