The American Law Institute’s launch of a project it is calling Restatement of the Law Third, Consumer Contracts could have major consequences for providers of consumer financial services and other companies that contract with consumers. The project’s premise is that because ALI’s existing Restatement Second of Contracts generally takes a “one-size-fits-all” approach that does not distinguish between commercial and consumer contracts, it is inadequate, and a separate restatement of rules applicable to consumer contracts is needed.

The first meeting of the project’s advisers was held on November 30, 2012, at New York University’s School of Law. Attendees included Ballard Spahr attorney Alan S. Kaplinsky, one of only two attorneys named advisers who represent industry.

The advisers consist primarily of academics and judges. While two advisers come from the business side, neither of their companies contract with consumers. (Having been made aware of this issue at the meeting, ALI has indicated it is receptive to getting broader participation from financial services companies and other companies that contract with consumers.)

Particularly noteworthy is that one of the project’s two reporters is Professor Oren Bar-Gill. Together with former law professor and now U.S. Senator-Elect Elizabeth Warren, Professor Bar-Gill authored the University of Pennsylvania Law Review article that provided the blueprint for the Consumer Financial Protection Bureau. (157 U. PA L. Rev. 1 (2008))  Other advisers include Meredith Fuchs, CFPB General Counsel, Julie Brill, Federal Trade Commission Commissioner, and David Vladeck, head of the FTC’s Bureau of Consumer Protection.

An outline distributed at the meeting describes the project’s proposed scope and organization. Although the outline states that the project’s purpose is not to reform consumer contract law, much of it suggests the new restatement could significantly change how the legal system treats consumer contracts. For example, the project plans to:

  • Examine the law on when a consumer is bound to a contract and “provide a clear conceptual framework that adapts the offer/acceptance model to the passive negotiations environment.”
  • Clarify how the “material breach” doctrine applies to a consumer’s right to cancel a contract.
  • Formulate “the principles for punitive treatment of some types of willful breaches of consumer contracts.”
  • “[U]nify the framework” for developing rules mandating pro-consumer terms and banning terms.
  • Clarify the contours of the unconscionability doctrine, including how it applies in the area of arbitration. (The outline states that “[o]ne goal will be to translate research on consumer decisionmaking, and on the limits of consumer understanding, into specific guidelines for courts.”)
  • “Distill the common principles that ought to guide” courts in applying the FTC Act and state laws prohibiting “unfair or deceptive” acts or practices and the Dodd-Frank prohibition on “unfair, deceptive or abusive” acts or practices.