Learning about Contract Law and Credit cards

When I was in law school, the class that disturbed me the most was contract law. That's right. I was unfased by the "hairy hand," the dead parent's leg, and other horribles of torts class. Criminal law was rather quaint, really. You got tested on whether you could recall that the medieval definition of burglary was the breaking and entering of a dwelling house at night. If the law school exam omitted the breaking (door was open) or it was a garage, or it was twilight, it wasn't burglary. For me, there was no "paper chase" or 1L moment from any of that.

Contract law was what messed with my worldview, demonstrating how fundamentally rotten people can be. The bones of contract law are doctrines, both ancient and modern, that are pure common law overlaid with twentieth century nonsense about plain language and market custom. The meat of it is relationships gone horribly, horribly wrong. Brothers, long-time partners, family members, people screwing one another over for small sums of money. I like to say that a useful way to think about negotiation is the difference between selling a car to a friend and selling one to a stranger. When selling a car to a friend, both parties are - or should be - fundamentally interested in the deal that is fairest. When selling one to a stranger, we can and do take some, but one hopes limited, advantage of one another's ignorance, gullibility, or desperation. (Peacemaking, btw, must be like selling a car to a friend; it fails when the haggling approach is used). One of my favorite cases in contract law was an old Campbell's soup chestnut. Campbell's used to have contracts to pay farmers a lump sum for all the carrots they grew on X acres. You know, something like "You got fifteen nice acres of carrots there, Farmer Ted, I'll buy seven." This way, farmers knew in advance what they would get even if the harvest failed, and Campbell's could negotiate a deal that, building in the risk, would amortize across farms to a lower average carrot cost. Either that or they were all lazy. Anyhow, farmers, they later discovered, would transplant carrots to the other side of their property shortly before harvest time to deprive Campbell's of a small (say 5%) of what it should have made, at enormous effort that could not possibly have been worthwhile. Clauses had to be later added about not moving vegetables. Then there's the uncle who promised the nephew $1000 if he graduated college, reassured him repeatedly of this, then welched. (Uncle wins). There's a saying that "hard cases make bad law." This is truest in contract alw.

I mention this because this libertarian/jungle version of contract law we learned in law school and continue to pump over the airwaves is no longer accurate, although it is dominant in the minds of those who speak of "freedom of contract." In your lifetime, unless you are a businessman/woman you will probably get to negotiate no more than a handful of contracts in your life, of all the thousands you will sign. Almost every contract we sign is presented on a take-it-or-leave-it basis by very powerful corporations. Old-fashioned contract law does have some acknowledgement of the power relationships that produce these one-sided deals, but limited.

This is what the current credit card regulation controversy is all about. "Freedom of contract" cry the banks. If people don't like these terms, they can go elsewhere. Of course, you can't negotiate the terms. You can't say, "Yes, I'll take this, but I want a .5% lower interest rate and to be governed by Indiana law, not Delaware law, and I want voluntary arbitration, not mandatory." In fact, the market simply doesn't provide any possibility for negotiating or choosing between alternatives for 99% of the terms in any of these contracts. They are pretty much all standardized. You may get to choose a better rate, but you can't choose to avoid things like the right to change the rate at any time. All those terms are fixed across the industry. This is why it makes sense for the government to simply step in and regulate the terms. We have to live in the real world, not a legal make-believe world where we pretend that signing up for telephone service or a credit card is about the "meeting of the minds" between two somewhat equal parties. You can choose to forego credit cards, as you can choose to forego television, telephones, automobiles, or underwear. Calling such regulation socialism is just silly.