Federalizing Contract Law

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Lewis & Clark Law Review


Contract law is generally understood as state common law, supplemented by the Second Restatement of Contracts and Article 2 of the Uniform Commercial Code. It is regarded as an expression of personal liberty, anchored in the bargain and consideration model of the 19th century or classical period. However, for some time now, non-bargained or adhesion contracts have been the norm, and increasingly, the adjudication of legal rights and contractual remedies is controlled by privately determined arbitration rules. The widespread adoption of arbitral adjudication by businesses has been enthusiastically endorsed by the Supreme Court as consonant with the Federal Arbitration Act (“FAA”). However, Court precedents have concluded that only bilateral or individualized arbitration promotes the goals of the FAA, while class arbitration is destructive. Businesses and the Court have theorized that bilateral arbitration is an efficient process that reduces the transaction costs of all parties thereby permitting firms to reduce prices, create jobs, and innovate or improve products. But empirical research tells a different story. This Article discusses the constitutional contours of crafting common law for the FAA and its impact on state and federal laws. It shows that federal common law rules crafted for the FAA can operate to deny consumers and workers the neoclassical contractual guarantee of a minimum adequate remedy and rob the federal and state governments of billions of dollars in tax revenue. From FAA precedents the Article distills new rules of contract formation, interpretation, and enforcement and shows how these new rules undermine neoclassical limits on private control of legal remedies. The Article shows that federal contract law now gives firms the ability to contractually control not only legitimate commercial risks but also whether they can be held accountable for breach. Using empirical data and arbitral precedents, the Article demonstrates how federal contract law endorses arbitration terms that facilitate market failure by making legal rights and remedies an illusion. Arbitration contracts also help firms avoid their state and federal tax obligations by making it unpalatable for workers to pursue wage claims. By giving firms the liberty to impose impermissible terms without any penalty, the federal rules undermine the legal promise of a minimum adequate remedy and incentivizes non-compliance with regulations in the public interest. The Article concludes that the federal contract rules do not provide sufficient incentive for contractual or regulatory compliance, and this justifies the historical preference for public law control of legal remedies.

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