common law assignment of contract

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Assignment of Contract

Jump to section, what is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Jeremiah C.

Assignment of contract in real estate.

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

Meet some of our Lawyers

Shelia A. Huggins is a 20-year North Carolina licensed attorney, focusing primarily on business, contracts, arts and entertainment, social media, and internet law. She previously served on the Board of Visitors for the North Carolina Central University School of Business and the Board of Advisors for the Alamance Community College Small Business Center. Ms. Huggins has taught Business and Entertainment Law at North Carolina Central University’s law school and lectured on topics such as business formation, partnerships, independent contractor agreements, social media law, and employment law at workshops across the state. You can learn more about me here: www.sheliahugginslaw.com www.instagram.com/mslegalista www.youtube.com/mslegalista www.facebook.com/sheliahuugginslaw

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Rhea de Aenlle is a business-savvy attorney with extensive experience in Privacy & Data Security (CIPP/US, CIPP/E), GDPR, CCPA, HIPAA, FERPA, Intellectual Property, and Commercial Contracts. She has over 25 years of legal experience as an in-house counsel, AM Law 100 firm associate, and a solo practice attorney. Rhea works with start-up and midsize technology companies.

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John has extensive leadership experience in various industries, including hospitality and event-based businesses, then co-founded a successful event bar company in 2016. As co-founder, John routinely negotiated agreements with venues, suppliers, and other external partners, swiftly reaching agreement while protecting the brand and strategic objectives of the company. He leverages his business experience to provide clients with strategic legal counsel and negotiates attractive terms.

Patent attorney with master's in electrical engineering and biglaw experience.

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Benjamin Snipes (JD/MBA/LLM) has 20 years of experience advising clients and drafting contracts in business and commercial matters.

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Ultimate Checklist for Understanding Contract Assignment Rules

• February 28, 2024
• Moton Legal Group

In contracts, understanding assignment is key. Simply put, an assignment in contract law is when one party (the assignor) transfers their rights and responsibilities under a contract to another party (the assignee). This can include anything from leasing agreements to business operations. But why is this important? It’s because it allows for flexibility in business and personal dealings, a critical component in our world.

Here’s a quick rundown: – Contract Basics: The foundational agreements between parties. – Assignment Importance: Allowing the transfer of obligations and benefits to keep up with life’s changes.

Contracts are a staple in both personal and business worlds, acting as the backbone to many transactions and agreements encountered daily. Understanding the nuances, like assignments, can empower you to navigate these waters with confidence and ease. Whether you’re a business owner in the Southeast looking to expand or an individual managing personal agreements, grasp these basics, and you’re on the right path.

Understanding Contract Assignment

Contract Assignment sounds complicated, right? But, let’s break it down into simple terms. In contracts and legal agreements, knowing about assignment can save you a lot of headaches down the road. Whether you’re a business owner, a landlord, or just someone who deals with contracts, this is for you.

Legal Definition

At its core, contract assignment is about transferring rights or obligations under a contract from one party to another. Think of it as passing a baton in a relay race. The original party (the assignor) hands off their responsibilities or benefits to someone else (the assignee). But, there’s a twist – the race keeps going with the new runner without starting over.

Contract Law

In contract law, assignment comes into play in various ways. For example, if you’re a freelancer and you’ve agreed to complete a project but suddenly find yourself overbooked, you might assign that contract to another freelancer. This way, the job gets done, and your client is happy. However, not all contracts can be freely assigned. Some require the other party’s consent, and others can’t be assigned at all, especially if they involve personal skills or confidential trust.

Property Law

When it comes to property law, assignment often surfaces in landlord-tenant relationships. Say you’re renting a shop for your business, but you decide to move. If your lease allows it, you might assign your lease to another business. This means they take over your lease, stepping into your shoes, with all the rights and obligations that come with it.

The concept might seem straightforward, but there are important legal requirements and potential pitfalls to be aware of. For instance, an assignment could be prohibited by the contract itself, or it may significantly change the original deal’s terms in a way that’s not allowed. Plus, when you’re dealing with something that requires a unique skill set, like an artist or a consultant, those services typically can’t be passed on to someone else without agreement from all parties involved.

To navigate these complexities, understanding the fundamentals of assignment in contract law and property law is crucial. It ensures that when you’re ready to pass that baton, you’re doing it in a way that’s legal, effective, and doesn’t leave you tripping up before you reach the finish line.

The goal here is to make sure everyone involved understands what’s happening and agrees to it. That way, assignments can be a useful tool to manage your contracts and property agreements, keeping things moving smoothly even when changes come up.

For more detailed exploration on this topic, consider checking the comprehensive guide on Assignment (law)). This resource dives deeper into the nuances of contract assignment, offering insights and examples that can help clarify this complex area of law.

By grasping these basics, you’re well on your way to mastering the art of contract assignment. Whether you’re dealing with leases, business deals, or any agreement in between, knowing how to effectively assign a contract can be a game-changer.

Key Differences Between Assignment and Novation

When diving into contracts, two terms that often cause confusion are assignment and novation . While both deal with transferring obligations and rights under a contract, they are fundamentally different in several key aspects. Understanding these differences is crucial for anyone involved in contract management or negotiation.

Rights Transfer

Assignment involves the transfer of benefits or rights from one party (the assignor) to another (the assignee). However, it’s important to note that only the benefits of the contract can be assigned, not the burdens. For instance, if someone has the right to receive payments under a contract, they can assign this right to someone else.

Novation , on the other hand, is more comprehensive. It involves transferring both the rights and obligations under a contract from one party to a new party. With novation, the original party is completely released from the contract, and a new contractual relationship is formed between the remaining and the new party. This is a key distinction because, in novation, all parties must agree to this new arrangement.

Obligations Transfer

Assignment doesn’t transfer the original party’s obligations under the contract. The assignor (the original party who had the rights under the contract) might still be liable if the assignee fails to fulfill the contract terms.

In contrast, novation transfers all obligations to the new party. Once a novation is complete, the new party takes over all rights and obligations, leaving the original party with no further legal liabilities or rights under the contract.

Written Agreement

While assignments can sometimes be informal or even verbal, novation almost always requires a written agreement. This is because novation affects more parties’ rights and obligations and has a more significant impact on the contractual relationship. A written agreement ensures that all parties are clear about the terms of the novation and their respective responsibilities.

In practice, the need for a written agreement in novation serves as a protection for all parties involved. It ensures that the transfer of obligations is clearly documented and legally enforceable.

For example, let’s say Alex agrees to paint Bailey’s house for $1,000. Later, Alex decides they can’t complete the job and wants Chris to take over. If Bailey agrees, they can sign a novation agreement where Chris agrees to paint the house under the same conditions. Alex is then relieved from the original contract, and Chris becomes responsible for completing the painting job.

Understanding the difference between assignment and novation is critical for anyone dealing with contracts. While both processes allow for the transfer of rights or obligations, they do so in different ways and with varying implications for all parties involved. Knowing when and how to use each can help ensure that your contractual relationships are managed effectively and legally sound.

For further in-depth information and real-life case examples on assignment in contract law, you can explore detailed resources such as Assignment (law) on Wikipedia).

Next, we’ll delve into the legal requirements for a valid assignment, touching on express prohibition, material change, future rights, and the rare skill requirement. Understanding these will further equip you to navigate the complexities of contract assignments successfully.

Legal Requirements for a Valid Assignment

When dealing with assignment in contract law , it’s crucial to understand the legal backbone that supports a valid assignment. This ensures that the assignment stands up in a court of law if disputes arise. Let’s break down the must-know legal requirements: express prohibition, material change, future rights, and rare skill requirement.

Express Prohibition

The first stop on our checklist is to look for an express prohibition against assignment in the contract. This is a clause that outright states assignments are not allowed without the other party’s consent. If such language exists and you proceed with an assignment, you could be breaching the contract. Always read the fine print or have a legal expert review the contract for you.

Material Change

Next up is the material change requirement. The law states that an assignment cannot significantly alter the duties, increase the burdens, or impair the chances of the other party receiving due performance under the contract. For instance, if the contract involves personal services tailored to the specific party, assigning it to someone else might change the expected outcome, making such an assignment invalid.

Future Rights

Another important aspect is future rights . The rule here is straightforward: you can’t assign what you don’t have. This means that a promise to assign rights you may acquire in the future is generally not enforceable at present. An effective assignment requires that the rights exist at the time of the assignment.

Rare Skill Requirement

Lastly, let’s talk about the rare skill requirement . Some contracts are so specialized that they cannot be assigned to another party without compromising the contract’s integrity. This is often the case with contracts that rely on an individual’s unique skills or trust. Think of an artist commissioned for a portrait or a lawyer hired for their specialized legal expertise. In these scenarios, assignments are not feasible as they could severely impact the contract’s intended outcome.

Understanding these legal requirements is pivotal for navigating the complexities of assignment in contract law. By ensuring compliance with these principles, you can effectively manage contract assignments, safeguarding your interests and those of the other contracting party.

For anyone looking to delve deeper into the intricacies of contract law, you can explore detailed resources such as Assignment (law) on Wikipedia).

Moving forward, we’ll explore the common types of contract assignments, from landlord-tenant agreements to business contracts and intellectual property transfers. This will give you a clearer picture of how assignments work across different legal landscapes.

Common Types of Contract Assignments

When we dive into assignment in contract law , we find it touches nearly every aspect of our business and personal lives. Let’s simplify this complex topic by looking at some of the most common types of contract assignments you might encounter.

Landlord-Tenant Agreements

Imagine you’re renting a fantastic apartment but have to move because of a new job. Instead of breaking your lease, you can assign your lease to someone else. This means the new tenant takes over your lease, including rent payments and maintenance responsibilities. However, it’s crucial that the landlord agrees to this switch. If done right, it’s a win-win for everyone involved.

Business Contracts

In the business world, contract assignments are a daily occurrence. For example, if a company agrees to provide services but then realizes it’s overbooked, it can assign the contract to another company that can fulfill the obligations. This way, the project is completed on time, and the client remains happy. It’s a common practice that ensures flexibility and efficiency in business operations.

Intellectual Property

Intellectual property (IP) assignments are fascinating and complex. If an inventor creates a new product, they can assign their patent rights to a company in exchange for a lump sum or royalties. This transfer allows the company to produce and sell the invention, while the inventor benefits financially. However, it’s critical to note that with trademarks, the goodwill associated with the mark must also be transferred to maintain its value.

Understanding these types of assignments helps clarify the vast landscape of contract law. Whether it’s a cozy apartment, a crucial business deal, or a groundbreaking invention, assignments play a pivotal role in ensuring these transitions happen smoothly.

As we navigate through the realm of contract assignments, each type has its own set of rules and best practices. The key is to ensure all parties are on the same page and that the assignment is executed properly to avoid any legal pitfalls.

Diving deeper into the subject, next, we will explore how to execute a contract assignment effectively, ensuring all legal requirements are met and the process runs as smoothly as possible.

How to Execute a Contract Assignment Effectively

Executing a contract assignment effectively is crucial to ensure that all legal requirements are met and the process runs smoothly. Here’s a straightforward guide to help you navigate this process without any hiccups.

Written Consent

First and foremost, get written consent . This might seem like a no-brainer, but it’s surprising how often this step is overlooked. If the original contract requires the consent of the other party for an assignment to be valid, make sure you have this in black and white. Not just a handshake or a verbal agreement. This ensures clarity and avoids any ambiguity or disputes down the line.

Notice of Assignment

Next up, provide a notice of assignment to all relevant parties. This is not just common courtesy; it’s often a legal requirement. It informs all parties involved about the change in the assignment of rights or obligations under the contract. Think of it as updating your address with the post office; everyone needs to know where to send the mail now.

Privity of Estate

Understanding privity of estate is key in real estate transactions and leases. It refers to the legal relationship that exists between parties under a contract. When you assign a contract, the assignee steps into your shoes, but the original terms of the contract still apply. This means the assignee needs to be aware of and comply with the original agreement’s requirements.

Secondary Liability

Lastly, let’s talk about secondary liability . Just because you’ve assigned a contract doesn’t always mean you’re off the hook. In some cases, the original party (the assignor) may still hold some liability if the assignee fails to perform under the contract. It’s essential to understand the terms of your assignment agreement and whether it includes a release from liability for the assignor.

Executing a contract assignment effectively is all about dotting the I’s and crossing the T’s . By following these steps—securing written consent, issuing a notice of assignment, understanding privity of estate, and clarifying secondary liability—you’re setting yourself up for a seamless transition.

The goal is to ensure all parties are fully informed and agreeable to the changes being made. This not only helps in maintaining good relationships but also in avoiding potential legal issues down the line.

We’ll dive into some of the frequently asked questions about contract assignment to clear any lingering doubts.

Frequently Asked Questions about Contract Assignment

When navigating contracts, questions often arise, particularly about the concepts of assignment and novation. Let’s break these down into simpler terms.

What does assignment of a contract mean?

In the realm of assignment in contract law , think of assignment as passing the baton in a relay race. It’s where one party (the assignor) transfers their rights and benefits under a contract to another party (the assignee). However, unlike a relay race, the original party might still be on the hook for obligations unless the contract says otherwise. It’s like handing off the baton but still running alongside the new runner just in case.

Is an assignment legally binding?

Absolutely, an assignment is as binding as a pinky promise in the playground – but with legal muscle behind it. Once an assignment meets the necessary legal criteria (like not significantly changing the obligor’s duties or having express consent if required), it’s set in stone. This means both the assignee and the assignor must honor this transfer of rights or face potential legal actions. It’s a serious commitment, not just a casual exchange.

What is the difference between assignment and novation?

Now, this is where it gets a bit more intricate. If assignment is passing the baton, novation is forming a new team mid-race. It involves replacing an old obligation with a new one or adding a new party to take over an old one’s duties. Crucially, novation extinguishes the old contract and requires all original and new parties to agree. It’s a clean slate – the original party walks away, and the new party steps in, no strings attached.

While both assignment and novation change the playing field of a contract, novation requires a unanimous thumbs up from everyone involved, completely freeing the original party from their obligations. On the other hand, an assignment might leave the original party watching from the sidelines, ready to jump back in if needed.

Understanding these facets of assignment in contract law is crucial, whether you’re diving into a new agreement or navigating an existing one. Knowledge is power – especially when it comes to contracts.

As we wrap up these FAQs, the legal world of contracts is vast and sometimes complex, but breaking it down into bite-sized pieces can help demystify the process and empower you in your legal undertakings.

Here’s a helpful resource for further reading on the difference between assignment and cession.

Now, let’s continue on to the conclusion to tie all these insights together.

Navigating assignment in contract law can seem like a daunting task at first glance. However, with the right information and guidance, it becomes an invaluable tool in ensuring that your rights and obligations are protected and effectively managed in any contractual relationship.

At Moton Legal Group, we understand the intricacies of contract law and are dedicated to providing you with the expertise and support you need to navigate these waters. Whether you’re dealing with a straightforward contract assignment or facing more complex legal challenges, our team is here to help. We pride ourselves on our ability to demystify legal processes and make them accessible to everyone.

The key to successfully managing any contract assignment lies in understanding your rights, the obligations involved, and the potential impacts on all parties. It’s about ensuring that the assignment is executed in a way that is legally sound and aligns with your interests.

If you’re in need of assistance with a contract review, looking to understand more about how contract assignments work, or simply seeking legal advice on your contractual rights and responsibilities, Moton Legal Group is here for you. Our team of experienced attorneys is committed to providing the clarity, insight, and support you need to navigate the complexities of contract law with confidence.

For more information on how we can assist you with your contract review and other legal needs, visit our contract review service page .

In the constantly evolving landscape of contract law, having a trusted legal partner can make all the difference. Let Moton Legal Group be your guide, ensuring that your contractual dealings are handled with the utmost care, professionalism, and expertise. Together, we can navigate the complexities of contract law and secure the best possible outcomes for your legal matters.

Thank you for joining us on this journey through the fundamentals of assignment in contract law. We hope you found this information helpful and feel more empowered to handle your contractual affairs with confidence.

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14.1 Assignment of Contract Rights

Learning objectives.

• Understand what an assignment is and how it is made.
• Recognize the effect of the assignment.
• Know when assignments are not allowed.
• Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment The passing or delivering by one person to another of the right to a contract benefit. , an obligee One to whom an obligation is owed. (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor One who owes an obligation. (the one who has a duty to perform) to a third person ( assignee One to whom the right to receive benefit of a contract is passed or delivered. ); the obligee then becomes an assignor One who agrees to allow another to receive the benefit of a contract. (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.” Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights" ). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor A person who pays money to receive another’s executory contractual benefits. is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of An assignee takes no greater rights than his assignor had. the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course (covered in detail Chapter 23 "Negotiation of Commercial Paper" ). Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor. Uniform Commercial Code, Section 9-206. While a waiver of defenses Surrender by a party of legal rights otherwise available to him or her. makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions A contract for household or domestic purposes, not commercial purposes. . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment.

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right The right or duty of a particular person to perform or receive contract duties or benefits; cannot be assigned. that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.” Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments" ). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 (see Chapter 28 "Secured Transactions and Suretyship" ), the first assignee to file will prevail.

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties Promises, express or implied, made by an assignor to the assignee about the merits of the assignment. to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

Key Takeaway

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

• If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
• Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
• Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
• Why are leases generally not assignable? Why are insurance contracts not assignable?

Assignment of Contract Rights: Everything You Need to Know

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 3 min read updated on February 01, 2023

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 

What Is an Assignment of Contract?

The party that currently holds rights and obligations in an existing contract is called the assignor and the party that is taking over that position in the contract is called the assignee. When assignment of contract takes place, the assignor usually wants to hand all of their duties over to a new individual or company, but the assignee needs to be fully aware of what they're taking on. 

Only tangible things like property and contract rights can be transferred or assigned . Most contracts allow for assignment or transfer of contract rights, but some will include a clause specifying that transfers are not permitted. 

If the contract does allow for assignments, the assignor isn't required to have the agreement of the other party in the contract but may transfer their rights whenever they want. Contract assignment does not affect the rights and responsibilities of either party involved in the contract. Just because rights are assigned or transferred doesn't mean that the duties of the contract no longer need to be carried out. 

Even after the assignor transfers their rights to another, they still remain liable if any issues arise unless otherwise noted in an agreement with the other party. 

The purpose for the assignment of contract rights is to change the contractual relationship, or privity , between two parties by replacing one party with a new party. 

How Do Contract Assignments Work?

Contract assignments are handled differently depending on certain aspects of the agreement and other factors. The language of the original contract plays a huge role because some agreements include clauses that don't allow for the assignment of contract rights or that require the consent of the other party before assignment can occur.

For example, if Susan has a contract with a local pharmacy to deliver her prescriptions each month and the pharmacy changes ownership, the new pharmacy can have Susan's contract assigned to them. As long as Susan continues to receive her medicine when she needs it, the contract continues on, but now Susan has an agreement with a new party. 

Some contracts specify that the liability of the agreement lies with the original parties, even if assignment of contract takes place. This happens when the assignor guarantees that the assignee will continue to perform  the duties required in the contract. That guarantee makes the assignor liable. 

Are Assignments Always Enforced?

Assignments of contract rights are usually enforceable, but will not be under these circumstances:

• Assignment is prohibited in the contract language, which is called an anti-assignment clause.
• Assignment of rights changes the foundational terms of the agreement.
• The assignment is illegal in some way.

If assignment of contract takes place, but the contract actually prohibits it, the assignment will automatically be voided. 

When a transfer of contract rights will somehow change the basics of the contract, assignment cannot happen. For instance, if risks are increased, value is decreased, or the ability for performance is affected, the assignment will probably not be enforced by the court. 

Basic Rights of Contract Assignments

Most contracts allow for assignments, but you'll want to double check a contract before signing if this is something you anticipate happening during the lifespan of your agreement. Contract law does impose strict rules and regulations regarding the assignment of contract rights, so it's important to be sure that any transfers of rights are fully legal before acting on them. 

Any business agreements should always outline provisions for contract assignments and be well-drafted to be sure that the agreement is effective and enforceable. 

Why Use Contract Assignments?

When an assignor hands over their contracts rights to an assignee, they are signing away their obligation to perform and putting that obligation on a new party. The other party involved in the contract should see no difference in how the agreement plays out. If performance is negatively affected by the assignment of rights, something is wrong. 

If a party in a contract can no longer perform their duties, it is better to assign their contractual rights to a party who can carry out the duties rather than breach contract. 

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• Assignment of Rights and Obligations Under a Contract
• Legal Assignment
• Assignment Contract Law
• Assignment Law
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Contract Assignments

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  What is a Contract Assignment?

In a contract assignment, one of the two parties to a contract may transfer their right to the other’s performance to a third party. This is known as “contract assignment.” Generally, all rights under a contract may be assigned. A provision in the contract that states the contract may not be assigned usually refers to the delegation of the assignor’s (person who assigns) duties under that contract, not their rights under the contract. 

In modern law, the phrase “assignment of contract” usually means assignment of both rights and duties under a contract.

Who are the Various Parties Involved in a Contract Assignment?

How is a contract assignment created, when is a contract assignment prohibited, which parties are liable to each other in a contract assignment, are there issues with multiple assignments, should i hire a lawyer for contract assignments.

In a contract, there are two parties to the agreement, X and Y. The parties may agree to let X assign X’s rights to a third party . Once the third party enters the picture, each party has a special name. For instance, suppose X, a seller of bookmarks, contracts with Y, a purchaser of bookmarks. Y desires to have Y’s right to X’s performance (the sale of bookmarks on a monthly basis) to another person. 

This third person, Z, is called the assignee. X is called the obligor , and Y is called the assignor , since Y has assigned its right to X’s performance . X, the obligor, is obligated to continue to perform its duties under the agreement.

There are no “magic words” needed to create an assignment. The law simply requires that the would-be assignor have an intent to immediately and completely transfer their rights in the agreement. In addition, writing is typically not required to create an assignment. As long as X and Y both adequately understand what right is being assigned, an assignment is created. 

Words that indicate a transfer is to take place suffice, such as “I intend to transfer my rights under this agreement,” or, “I intend to give my rights to Z,” or “I intend to confer an assignment on Z.” In addition,consideration,which is a bargained-for exchange required for a contract to be valid, is not required for assignment.

In certain instances, an assignment of contract rights can be prohibited. If the contract contains a clause prohibiting assignment of “the contract,” without specifying more, the law construes this language as barring only delegation of the assignor’s duties, not their rights. If the assignment language states “assignment of contractual rights are prohibited,” the obligor may sue for damages if the assignor attempts to assign the agreement. If the contract language states that attempts to assign “will be void,” the parties can bar assignment.of rights.

Under modern contract law, the phrase “I assign the contract” is usually interpreted to mean that one is assigning rights and duties. What is an assignment of duties? An assignment of duties occurs where Y, called the obligor or delegator, promises to perform for X, the obligee. Y then delegates their duty to perform to Z, the delegate. Under the law, most duties can be delegated. 

There are exceptions to this rule. Delegation can be prohibited when:

• The duties to be performed involve personal judgment and special skill (e.g., a portrait, creation of a custom-made dress). 
• “Personal judgment” is the exercise of some kind of superior judgment when it comes to determining how, when, or where to do something. Examples of individuals who exercise personal judgment include talent scouts and financial advisors.  Special skill is the unique ability to create a good or perform a service. A delegator can be prohibited from delegating duties when it is that specific delegator’s services are sought. For example, if the services of a specific famous chef are sought, and the original agreement was entered into on the understanding that the chef was hired for their specific talent, the delegator may not delegate the services;
• The assignment fundamentally changes risks or responsibilities under the agreement;
• The assignment is over future rights associated with a future contract that does not currently exist;
• Delegation would increase the obligation of the obligee. For example, if a shoe manufacturer contracts to deliver soles to a store in the same town as the shoe factory, the other party cannot assign the delivery to a different store in another state. Doing so would impose a greater obligation on the obligee than was originally contemplated;
• The obligee had placed special trust in the delegator. For example, assume that you have hired a patent attorney, based on that attorney’s significant skill and expertise, to obtain a valuable patent. You have placed special trust in this person, hiring them instead of other patent attorneys, because of their unique expertise. In such a situation, the attorney may not delegate his duties to another attorney (delegate), since the attorney was hired because of one person’s special capabilities;
• The delegation is of a promise to repay a debt; or
• The contract itself restricts or prohibits delegation. If the contract states, “any attempt to delegate duties under this contract is void,” a delegation will not be permitted.

In a contract involving assignment of rights, the assignee may sue the obligor. This is because the assignee, once the assignee has been assigned rights, is entitled to performance under the contract. If the obligor had a defense that existed in the original contract between obligor and assignor, the obligor may assert that defense against the assignee. Examples of such defenses include the original contract was not valid because of lack of consideration, or because there was never a valid offer or acceptance).

An assignee may also sue an assignor. Generally, if an assignment is made for consideration,it is irrevocable. Assignments not made for consideration, but under which an obligor has already performed, are also irrevocable. If an assignor attempts to revoke an irrevocable assignment,the assignee may sue for “wrongful revocation.” 

In circumstances involving delegation of duties,an obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the agreement. Therefore, the obligee may sue the delegator for nonperformance by the delegate. The obligee may sue the delegate for nonperformance, but can only require the delegate to perform if there has been an assumption by the delegate. An assumption by the delegate is a promise that the delegate will perform the delegated duty, which promise is supported by consideration. 

Assignments that are not supported by consideration are revocable. If an initial assignment is revocable, a subsequent assignment can revoke it. If a first assignment is irrevocable, because consideration was present,the first assignment will usually prevail over a subsequent assignment. This means the person who can claim the assignment was first made to them will prevail over someone who claims a subsequent assignment. 

If, however, the second person paid value for the assignment, and entered into the assignment without knowing of the first assignment, the “subsequent”assignee is entitled to proceeds the first judgment against the obligor (the original party who still must perform), in the event such a judgment is issued,

If you have an issue with assignment of rights or duties under a contract, you should contact a contract lawyer  for advice. An experienced business lawyer near you can review the facts of your case, advise you of your rights, and represent you in court proceedings.

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Prior to joining LegalMatch, Daniel worked as a legal editor for a large HR Compliance firm, focusing on employer compliance in numerous areas of the law including workplace safety law, health care law, wage and hour law, and cybersecurity. Prior to that, Daniel served as a litigator for several small law firms, handling a diverse caseload that included cases in Real Estate Law (property ownership rights, residential landlord/tenant disputes, foreclosures), Employment Law (minimum wage and overtime claims, discrimination, workers’ compensation, labor-management relations), Construction Law, and Commercial Law (consumer protection law and contracts). Daniel holds a J.D. from the Emory University School of Law and a B.S. in Biological Sciences from Cornell University. He is admitted to practice law in the State of New York and before the State Bar of Georgia. Daniel is also admitted to practice before the United States Courts of Appeals for both the 2nd and 11th Circuits. You can learn more about Daniel by checking out his Linkedin profile and his personal page. Read More

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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What Is an Assignment of Contract?

Assignment of Contract Explained

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Assignment of contract allows one person to assign, or transfer, their rights, obligations, or property to another. An assignment of contract clause is often included in contracts to give either party the opportunity to transfer their part of the contract to someone else in the future. Many assignment clauses require that both parties agree to the assignment.

Learn more about assignment of contract and how it works.

What Is Assignment of Contract?

Assignment of contract means the contract and the property, rights, or obligations within it can be assigned to another party. An assignment of contract clause can typically be found in a business contract. This type of clause is common in contracts with suppliers or vendors and in intellectual property (patent, trademark , and copyright) agreements.

How Does Assignment of Contract Work?

An assignment may be made to anyone, but it is typically made to a subsidiary or a successor. A subsidiary is a business owned by another business, while a successor is the business that follows a sale, acquisition, or merger.

Let’s suppose Ken owns a lawn mowing service and he has a contract with a real estate firm to mow at each of their offices every week in the summer. The contract includes an assignment clause, so when Ken goes out of business, he assigns the contract to his sister-in-law Karrie, who also owns a lawn mowing service.

Before you try to assign something in a contract, check the contract to make sure it's allowed, and notify the other party in the contract.

Assignment usually is included in a specific clause in a contract. It typically includes transfer of both accountability and responsibility to another party, but liability usually remains with the assignor (the person doing the assigning) unless there is language to the contrary.

What Does Assignment of Contract Cover?

Generally, just about anything of value in a contract can be assigned, unless there is a specific law or public policy disallowing the assignment.

Rights and obligations of specific people can’t be assigned because special skills and abilities can’t be transferred. This is called specific performance.   For example, Billy Joel wouldn't be able to transfer or assign a contract to perform at Madison Square Garden to someone else—they wouldn't have his special abilities.

Assignments won’t stand up in court if the assignment significantly changes the terms of the contract. For example, if Karrie’s business is tree trimming, not lawn mowing, the contract can’t be assigned to her.

Assigning Intellectual Property

Intellectual property (such as copyrights, patents, and trademarks) has value, and these assets are often assigned. The U.S. Patent and Trademark Office (USPTO) says patents are personal property and that patent rights can be assigned. Trademarks, too, can be assigned. The assignment must be registered with the USPTO's Electronic Trademark Assignment System (ETAS) .  

The U.S. Copyright Office doesn't keep a database of copyright assignments, but they will record the document if you follow their procedure.

Alternatives to Assignment of Contract

There are other types of transfers that may be functional alternatives to assignment.

Licensing is an agreement whereby one party leases the rights to use a piece of property (for example, intellectual property) from another. For instance, a business that owns a patent may license another company to make products using that patent.  

Delegation permits someone else to act on your behalf. For example, Ken’s lawn service might delegate Karrie to do mowing for him without assigning the entire contract to her. Ken would still receive the payment and control the work.

Do I Need an Assignment of Contract?

Assignment of contract can be a useful clause to include in a business agreement. The most common cases of assignment of contract in a business situation are:

• Assignment of a trademark, copyright, or patent
• Assignments to a successor company in the case of the sale of the business
• Assignment in a contract with a supplier or customer
• Assignment in an employment contract or work for hire agreement

Before you sign a contract, look to see if there is an assignment clause, and get the advice of an attorney if you want to assign something in a contract.

Key Takeaways

• Assignment of contract is the ability to transfer rights, property, or obligations to another.
• Assignment of contract is a clause often found in business contracts.
• A party may assign a contract to another party if the contract permits it and no law forbids it.

Legal Information Institute. " Assignment ." Accessed Jan. 2, 2021.

Legal Information Institute. " Specific Performance ." Accessed Jan. 2, 2021.

U.S. Patent and Trademark Office. " 301 Ownership/Assignability of Patents and Applications [R-10.2019] ." Accessed Jan. 2, 2021.

Licensing International. " What is Licensing ." Accessed Jan. 2, 2021.

Assignment and Novation

What are assignment and novation clauses.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment and novation clauses

Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:

• assignment, for the transfer of benefits; and
• novation, for the transfer of rights/benefits and obligations

Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment clauses

A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.

Novation clauses

By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.

A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.

It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.

Option 1 – Assignment, novation and other dealings – consent required

A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].

Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld

(a)   [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld . 

(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:

(i)      [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];

(ii)      [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;

(iii)     the proposed assignee is a competitor of [ insert name of Party B ]; or

(iv)       [ Insert name of Party B ] is in dispute with the proposed assignee .

Click  here  for information on how to use this boilerplate clause.

A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.

Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.

A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.

The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.

The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause.  Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.

A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:

• extraneous or disassociated from the subject matter of the contract;
• materially inconsistent with any provision(s) of the contract; or
• based on collateral or improper considerations.

It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.

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The Assignment of Commercial Contracts in Legal Practice

Contracts are a prime example of intangible property. Parties to commercial contracts, like other property owners, frequently want to transfer their property to a third party. The transfer of a contract refers to the assignment of some or all of a party’s rights or the delegation of some or all of a party’s performance, or both, to a non-party to the agreement.

Some common instances in which a contracting party in a commercial context may desire to assign contractual rights, performance responsibilities, or both are as follows:

• In an asset sale, a corporation sells parts or all of its company.
• A contractor who subcontracts its work under certain projects.
• A business conglomerate that is going through an internal corporate reorganization.
• The borrower who offers its lender a security interest in its assets.
• A manufacturer who sells its receivables to a third party.

In any of these cases, the non-transferring party may object to assignment or delegation for a variety of grounds, including:

• The desire to choose the party with whom it does business.
• Concern that a different obligor or obligee may jeopardize the non-transferring party’s capacity to benefit from the contractual deal

To decide whether the transferring party (also known as the transferor) can execute the proposed transfer without gaining the non-transferring party’s approval, the transferring party must turn to relevant legislation and the plain text of the contract. If consent is necessary and not obtained, the transferring party faces the following risks:

• Violation of the contract.
• Making an ineffective and invalid transfer.

The Definitions of Assignment and Delegation

Each party to a contract is an:

• Obligee in terms of its contractual rights; and
• Obligor in terms of its contractual performance responsibilities.

Contract “assignability” is a term frequently used by contracting parties and practitioners. While they may expressly address the assignment of a party’s rights under the contract in some contexts, they frequently use the term “assignment” to refer to both:

• The delegation of duty to perform.
• The assignment of rights to obtain performance.

However, assignment and delegation are two distinct legal concepts that must be treated individually due to the fact that they might have different outcomes.

What is an Assignment?

Assignment is the transfer of some or all of an obligee’s (assignor’s) rights to receive performance under a contract, generally but not always to a non-party (assignee). A contract benefit is a right (a chose in action) that, in theory, may be delegated by the benefiting party to a non-party. For clarity purposes, this informative piece will assume that the assignee is a non-party, although the rights and responsibilities of the parties addressed apply equally to an assignee who is also a party to the agreement. When these rights are assigned, the assignor no longer has any claim to the advantages of the given rights, which are completely passed to the assignee.

Technically, a contract’s burden cannot be assigned under the law (see National Trust Co. v. Mead [i] and Irving Oil Ltd. v. Canada [ii] ). Transferring performance responsibilities under a contract requires the approval of all parties, making such a transfer a novation.

In practice, parties frequently refer to “assigning a contract” or “allowing the assignment of a contract,” which is actually an inaccurate representation of their intentions. For example, the parties may plan for some or all of the following:

• The contract’s rights or benefits may be assigned.
• The contract’s burdens or performance duties may be transferred.
• Rights and burdens may be transferred.

The Effects of Assignment

The assignor is no longer entitled to any benefits from the assigned rights, which have all been passed to the assignee; nonetheless, even if the assignor is stripped of its contractual rights, assignment does not decrease or remove the assignor’s duties to the non-assigning party. As previously stated, a contract’s burden may only be assigned to a third party with the approval of all parties. As a result, the assignor is still obligated to fulfill its contractual commitments. The non-assigning party retains the following:

• Its entitlement to get performance from the assignor; and
• Its remedies against the assignor in the event of non-performance.

The ordinary rule is that a party can only assign its benefits without the consent of the other party to the contract and will remain liable to the other party for its performance obligations (see National Trust Co. v. Mead [iii] and Rodaro v. Royal Bank [iv] ). If the assignor intends to transfer its obligations and both the non-transferring party and the potential assignee agree, the parties should enter into a novation agreement, which results in a new contract between the assignee and the old contract’s remaining (non-transferring) party. In practice, the assignee often undertakes the contract’s performance responsibilities as of the date of assignment, and the assignor gets an indemnity from the assignee in the event of a breach or failure to perform.

A clear, present, purpose to transfer the assigned rights without needing any additional action by the assignee is required for an assignment to be effective, which means that a promise to assign in the future is ineffective as an actual transfer. Otherwise, no special terminology is necessary to draft an effective assignment.

What is Delegation?

Delegation is the transfer of some or all of an obligor’s (delegating party’s) performance responsibilities (or conditions demanding performance) under a contract to a non-party (delegatee). To be effective, a delegation requires the delegatee to agree to take on the delegated performance; however, unless the non-delegating party has consented to a novation, the delegating party remains accountable for the delegated performance, whether or not it has also transferred its contractual rights.

This is distinct from an assignment of rights, in which the assignor relinquishes its contractual claims upon assignment. As a result, even if the delegating party can effectively delegate its actual performance to the delegatee (such that the delegatee’s actual performance discharges the delegating party’s duty), the delegating party cannot be relieved of its obligation to perform and liability for non-performance unless the non-delegating party agrees to a novation.

There is no precise wording necessary to create an effective delegation, just as there is not for the assignment of rights. When performance is effectively delegated, the delegatee assumes liability for the delegating party’s performance obligations (under an assumption agreement), even if the delegating party retains liability to the non-delegating party for the delegatee’s failure to adequately perform the delegated obligations in the absence of a novation. Under an assumed agreement, the delegating party may have recourse against the delegatee, which is frequently addressed through a contractual indemnity right.

If the delegating party wishes to entirely exclude itself from liability for non-performance, it must get the non-delegating party’s approval to the contract (novation). In the majority of novations, the delegating party, the delegatee, and the non-delegating party all agree on the following:

• The delegatee replaces the delegating party as a party to the contract.
• The delegating party is no longer liable for contract performance.
• The delegatee is directly and solely liable for the delegating party’s contract fulfillment.

Types of Assignment – Legal (Statutory) Assignment vs. Equitable Assignment

• Legal (Statutory) Assignment: An assignment that satisfies the provisions of the appropriate province or territory laws (for example, the Conveyancing and Law of Property Act [v] )
• Equitable Assignment: An equitable assignment may be enforced even if it does not fulfill the statutory requirements for a legal assignment.

Requirements for a Legal (Statutory) Assignment

All of Canada’s common law provinces have enacted legislation allowing the transfer of contract rights. Notably, the legislation for Ontario is the Conveyancing and Law of Property Act .

These statutory assignments are enforceable if the parties comply with the following procedures:

• The assignment is absolute.
• The assignment is in writing, signed by the assignor
• the non-assigning obligor is given express written notice.

A statutory assignment does not need consideration, and no precise words or form are necessary. They can be made as gifts and be valid.

Requirements for an Equitable Assignment

An assignment may be enforceable as an equitable assignment even if it does not fulfill the formality criteria of a statutory assignment. An equitable assignment does not necessitate the use of any specific terms or form. However, in order to comply with any provincial statutes of frauds regulations, the assignment must be in writing. The phrasing must clearly indicate that the assignee is to benefit from the rights being assigned. In contrast to a statutory assignment, consideration is required until there is a full transfer, such as a gift. It is not necessary to provide the non-assigning obligor with express written notification (except in the case of a transfer of land). However, notification is often given largely to assure that:

• The obligor ceases to pay the assignor.
• The assignee has priority over subsequent encumbrances.

Contractual Anti-Assignment & Anti-Delegation Clauses

Rather than relying on relatively uncertain legal rules, most commercial contract parties handle transferability issues in the written agreement. As a result, most commercial contracts include a negative covenant that restricts one or both parties’ rights to assign.

These clauses frequently include specific exceptions that allow one or more of the parties to assign and delegate rights and duties, often to designated non-parties such as affiliates and successors-in-interest to the transferring party’s business.

Courts frequently uphold provisions that prevent assignment because they favor the rights of parties to freely contract. However, subject to specific limitations, there is a broad assumption that contractual rights are assignable. As a result, the case law on anti-assignment provisions is a little erratic. Some courts have upheld anti-assignment clauses and declared the agreement unenforceable. Others have argued that an anti-assignment provision cannot preclude assignment.

Overall, contractual anti-assignment and anti-delegation provisions are commonly included in many types of business contracts. If not, transferability is determined by the contract’s subject matter and the nature of the rights and obligations to be transferred. It is important to stay knowledgeable the existence of such contractual terms when dealing with various commercial contracts…such as contracts for the sale of goods, personal service contracts, commercial real estate leases and various other types of contracts.

If you have any questions about your business’s contractual assignment or delegation needs, contact Cactus Law today to speak with a lawyer specializing in commercial law.

Disclaimer:

The information presented above is solely for general educational and informational purposes. It is not intended to be, and should not be taken as, legal advice. The information given above may not be applicable in all cases and may not even reflect the most recent authority after the date of its publication. As a result, please refer to all updated legislation, statutes, and amendments. Nothing in this article should be relied on or acted upon without the benefit of legal advice based on the specific facts and circumstances described, and nothing in this article should be interpreted otherwise.

About the Author:

Kanwar Gujral is entering his third year at Osgoode Hall Law School in Toronto, Ontario. He has a dedicated interest in real estate, business, and corporate law.

[i] National Trust Co. v. Mead , 1990 CarswellSask 165 (S.C.C.).

[ii] Irving Oil Ltd. v. Canada , 1984 CarswellNat 137 (Fed. C.A.).

[iii] Supra note 1.

[iv] Rodaro v. Royal Bank , 2002 CarswellOnt 1047 (Ont. C.A.).

[v] Conveyancing and Law of Property Act , R.S.O. 1990, c. C.34.

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What constitutes a valid assignment of a contract?

Published by a lexisnexis dispute resolution expert.

This Practice Note identifies what can be transferred when assigning rights under a contract and how to effect a valid assignment of a contract.

For guidance on common contract assignment scenarios, see Practice Note: Assigning contracts—common scenarios and considerations.

For guidance on the key practical and commercial considerations when assigning contracts, see Practice Note: How to assign rights under a contract.

Note also that when discussing assigning contractual rights, reference may also be made to assigning ‘ chose in action ’ in the sense that the benefit of a contract has been held to be a chose in action.

When is assignment of contracts relevant for consideration?

Contracts, or rather, rights under contracts, are frequently assigned as part of the way companies run their businesses. When advising a party in relation to a proposed or purported assignment (transfer) of a contractual right where there may be a dispute, you will need to consider:

what, when and how rights can be assigned

how an assignment can be challenged

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Related legal acts:

• Insolvency Act 1986 (1986 c 45)
• Law of Property Act 1925 (1925 c 20)
• Powers of Attorney Act 1971 (1971 c 27)

Key definition:

Chose in action definition, what does chose in action mean.

A right to something such as a payment of a debt or other contractual right that can be recovered through legal action

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Why a New Deal Must Address the Readability of U.S. Consumer Contracts

by Michael L. Rustad *

Volume 44 Issue 2

The full text of this article may be downloaded by clicking on the PDF link.

United States companies are increasingly drafting consumer contracts that are complex and unreadable, thus making it difficult for many Americans to comprehend terms of use that apply to goods and services. Many U.S. companies are creating terms of use that are, in effect, rights-foreclosure schemes. Many consumer agreements cap damages at a nominal amount, disclaim all warranties, limit remedies, and impose mandatory arbitration clauses and class action waivers. U.S. courts enforce these unfair mass-market contracts with few exceptions. My proposal for a New Deal for Consumer Contracts, as described in this Article, would impose a more exacting readability standard, enforcing agreements only if they were drafted at a reading level of the eighth grade or below in order to protect consumers against inadvertently agreeing to unfair standard contract terms such as unfair choice of law and forum clauses, limits on recovery, predispute arbitration, and disclaimers of all significant remedies. The New Deal for Consumer Contracts would invalidate unfair and deceptive consumer clauses—a reform that would synchronize U.S. consumer law with the mandatory consumer laws of the twenty-seven countries of the European Union.

Introduction

Online agreements deployed by leading U.S. companies are not only unreadable to the average American but are also significantly imbalanced to the detriment of the consumer. Microsoft’s thirty-two page standard form agreement is difficult to read with a Flesch Reading Ease (FRE) score of 58.8 written at the ninth-grade level, a full grade level beyond what the average American adult is able to grasp. 1 “The average American adult has an eighth-grade reading level.” Jonathan M. Barnes, Comment, Tailored Jury Instructions: Writing Instructions That Match a Specific Jury’s Reading Level , 87 Miss. L.J. 193, 195 (2018); What’s the Latest U.S. Literacy Rate? , Wylie Commc’ns, https://www.wyliecomm.com/​2021/​08/​whats-the-latest-u-s-literacy-rate [https://perma.cc/​5A55-PXKF] (“Medical information for the public should be written at no higher than an eighth-grade reading level, according to the American Medical Association, National Institutes of Health and Centers for Disease Control and Prevention[.]”). Microsoft’s Service Agreement asserts that consumers are bound to their onerous terms by simply creating an account or “by continuing to use the Services after being notified of a change to these Terms.” 2 Microsoft Services Agreement , Microsoft (June 15, 2022), https://www.microsoft.com/​en-us/​servicesagreement [https://perma.cc/​ZE6G-5LH5].. Microsoft’s browsewrap-type agreement predicates contract formation on merely using the service. 3 See id. ; Michael L. Rustad & Maria Vittoria Onufrio, Reconceptualizing Consumer Terms of Use for a Globalized Knowledge Economy , 14 U. Pa. J. Bus. L. 1085, 1106–07 (2012) (“A ‘browsewrap’ is an internet-related quickwrap where a consumer purportedly assents by simply browsing the website and not by clicking on an agreement through a hyperlink or radio button. A federal court described browsewrap as taking divergent forms, but its predicate is that this contracting form does not require the user to manifest assent because ‘[a] party instead gives his assent simply by using the website.’” (alteration in original) (footnote omitted) (quoting Sw. Airlines Co. v. BoardFirst, LLC, No. 06-CV-0891, 2007 WL 4823761, at *4 (N.D. Tex. Sept. 12, 2007))). “The notice that supposedly binds the consumer may be a web page, link, or a small disclaimer on a web page that gives notice that the visitor’s use of a website is conditional on his or her agreeing to restrictive terms or conditions.” Id. at 1107; see also Meyer v. Uber Techs., Inc., 868 F.3d 66, 75 (2d Cir. 2017) (stating that a browsewrap agreement “generally post[s] terms and conditions on a website via a hyperlink at the bottom of the screen”).

Microsoft asserts the unilateral right to modify its terms of use (ToU) 4 For the sake of consistency, this Article will use the term “ToU” to refer to all standard form agreements. at any time, 5 Microsoft Services Agreement , supra note 2 (“We may change these Terms at any time, and we’ll tell you when we do. Using the Services after the changes become effective means you agree to the new terms. If you don’t agree to the new terms, you must stop using the Services, close your Microsoft account and, if you are a parent or guardian, help your minor child close his or her Microsoft account.”). and their “Limitation of Liability” clause caps damages for any cause of action against them “up to an amount equal to your Services fee for the month during which the loss or breach occurred (or up to $10.00 if the Services are free).” 6 Id . Microsoft’s one-sided limitation on recoverable damages applies to all of its products and services, including its Windows program. Microsoft’s ToU eliminates nearly every type of “damages or losses, including direct, consequential, lost profits, special, indirect, incidental, or punitive.” 7 Id .

Microsoft’s standard form agreement requires consumers to submit any disputes to arbitration, and the arbitration clause prohibits them from initiating or joining class actions, also known as an anti-class action waiver. This inequitable provision is a waiver of consumers’ constitutional right to have their claim heard by a jury. 8 By its explicit terms, Microsoft’s predispute mandatory arbitration clause requires users to waive their Seventh Amendment right to a jury trial or to have their case heard by a judge: We hope we never have a dispute, but if we do, you and we agree to try for 60 days, upon receipt of a Notice of Dispute, to resolve it informally. If we can’t, you and we agree to binding individual arbitration before the American Arbitration Association (“AAA”) under the Federal Arbitration Act (“FAA”), and not to sue in court in front of a judge or jury. Instead, a neutral arbitrator will decide and the arbitrator’s decision will be final except for a limited right of review under the FAA. Id. ; see Silc v. Crossetti, 956 F. Supp. 2d 957, 958 (N.D. Ill. 2013) (“Since the Seventh Amendment right to trial by jury is incident to and predicated upon the right to a federal judicial forum, an arbitration provision waives the right to resolve a dispute through litigation in a judicial forum and implicitly and necessarily waives the parties’ right to a jury trial.”). The Illinois federal court concluded that in agreeing to arbitration, the parties “would forego a judicial forum and have the case resolved pursuant to the Commercial Arbitration Rules of the American Arbitration Association.” Id . at 960; see also Hudson v. Bah Shoney’s Corp., 263 F. Supp. 3d 661, 667 (M.D. Tenn. 2017) (concluding that a restaurant worker did not knowingly or voluntarily waive her Seventh Amendment right to a jury trial by submitting to arbitration, and therefore the agreement was unenforceable). Specifically, Microsoft users are barred from joining “[c]lass action lawsuits, class-wide arbitrations, private attorney-general actions, requests for public injunctions, and any other proceeding . . . where someone acts in a representative capacity.” 9 Microsoft Services Agreement , supra note 2. Microsoft’s arbitration and anti-class action clause is effectively a “no liability” zone. One-sided ToU where consumers waive important contractual and constitutional rights raise serious concerns of procedural and substantive unfairness. To update Oliver Wendell Holmes Jr.’s famous quote, Microsoft’s boilerplate is a “product of lawyers ‘shoveling smoke.’” 10 Oliver Wendell Holmes, Jr. Quotes , BrainyQuote, https://www.brainyquote.com/​quotes/​oliver_wendell_holmes_jr_382541 [https://perma.cc/​HQ8P-2P6Z].

Part I of this Article utilizes the FRE and Flesch-Kincaid Grade Level (FKGL) tests to calculate the readability of ToU, terms of service, and other standard form agreements of: (1) the 100 largest retailers; (2) the 100 largest digital companies; (3) the 100 largest software companies; (4) the 50 largest banks; and (5) the 33 largest credit card companies. 11 All calculations within this Part are based on the formulas and interpretations found in Eissler, infra note 30. The five subsamples were drawn from the following sources: (1) the 100 largest retailers were drawn from Top 100 Retailers 2021 List , Nat’l Retail Fed’n, https://nrf.com/​resources/​top-retailers/​top-100-retailers/​top-100-retailers-2021-list [https://perma.cc/​5LKG-7Q75] (Sept. 27, 2021) (ranked according to sales); (2) the 100 largest digital companies were drawn from Top 100 Digital Companies , Forbes, https://www.forbes.com/​top-digital-companies/​list/​#tab:rank [https://perma.cc/​NJ3E-X4VK] (2019 rankings); (3) the 100 largest software companies were drawn from The Top 100 Software Companies of 2021 , Software Rep. (July 12, 2021), https://www.thesoftwarereport.com/​the-top-100-software-companies-of-2021 [https://perma.cc/​G9ZU-U4X8]; (4) the 50 largest banks were drawn from Top 50 Banks in Americ a, ADV Ratings, https://www.advratings.com/​banking/​top-banks-in-the-us [https://perma.cc/​K6UQ-QJDG]; (5) the 33 largest credit card companies were drawn from Adam McCann, Credit Card Market Share by Issuer , WalletHub (June 10, 2022), https://wallethub.com/​edu/​cc/​market-share-by-credit-card-issuer/​25530 [https://perma.cc/​XMD8-78CQ]. Overall, consumer contracts 12 For purposes of this study, “consumer contracts” are defined as written agreements entered into primarily for personal, family, or household purposes. This is consistent with the definition of “consumer” in the key pieces of the European Union’s consumer protection legislation: “a consumer is an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft or profession.” Consumer Contracts: Is It a Consumer Contract? , Prac. L. Com., https://uk.practicallaw.thomsonreuters.com/w-022-4729 (last visited Nov. 27, 2022). are drafted at a college level—six grade levels (or greater) higher than the average American adult’s reading level. American consumers have a duty to read the contracts they sign, but the largest U.S. companies have no equivalent duty to make their ToU understandable.

Part II compares the readability of rights-foreclosure clauses—such as arbitration/anti-class action clauses, warranty disclaimers, and liability limitations (caps on damages)—with the consumer contract as a whole. The most noteworthy finding is that leading U.S. companies draft foreclosure clauses to be even more incomprehensible than the ToU as a whole. Not only are many ToU clauses unreadable by the average American, but they also “cannibalize” consumer remedies by deploying these types of rights-foreclosure clauses.

Part III proposes a New Deal for Consumer Contracts to address the incomprehensibility and unfairness of U.S. consumer contracts. These reforms would require U.S. companies to draft consumer contracts at the eighth-grade level or below to ensure that they are readable irrespective of the device used (desktop, mobile, etc.). The substantive part of the New Deal for Consumer Contracts would invalidate unfair and deceptive rights-foreclosure clauses, such as caps on damages, predispute mandatory arbitration clauses, and warranty disclaimers, that strip consumers of any meaningful remedy. These reforms would standardize U.S. consumer law with that of the European Union (EU), thus minimizing the risk that U.S. companies will be subject to multi-million-dollar penalties by EU regulators.

I. U.S. Consumer Contracts Are Unreadable

A. the duty to read.

The duty to read doctrine is “an important building block of U.S. contract law.” 13 Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable , 60 B.C. L. Rev. 2255, 2257 (2019); see also Michael L. Rustad & Thomas H. Koenig, Wolves of the World Wide Web: Reforming Social Networks’ Contracting Practices , 49 Wake Forest L. Rev. 1431, 1451 (2014) (“The duty to read is a long-standing principle in Anglo-American contract law . . . . ”). Consumers have a duty to read contracts as contracting parties and are presumed to have read the contract before agreeing to its terms. Accordingly, “in the absence of fraud, overreaching or excusable neglect, . . . one who signs an instrument may not avoid the impact of its terms on the ground that he failed to read the instrument before signing it.” 14 Roldan v. Callahan & Blaine, 161 Cal. Rptr. 3d 493, 497 (Ct. App. 2013) (quoting Stewart v. Preston Pipeline Inc., 36 Cal. Rptr. 3d 901, 920–21 (Ct. App. 2005)). Important legal implications arise when a consumer fails to read the terms of a contract: the consumer will generally still be bound by the contract, and this failure is typically not a sufficient ground to either void the contract or “trigger a contractual mistake necessary for contract reformation.” 15 Benoliel & Becher, supra note 13, at 2260.

Despite this duty to read, “very few consumers actually read or review standard-form boilerplate” 16 Rustad & Koenig, supra note 13, at 1456. See generally Sara R. Benson, Social Media Researchers and Terms of Service: Are We Complying with the Law? , 47 AIPLA Q.J. 191 (2019) (highlighting common issues with social media ToU). ToU, which are drafted by the nation’s most prominent companies, are indecipherable to the average American adult. More than 99% of the terms and conditions of five hundred popular American websites go beyond the reading level of the average American adult. 17 See Dustin Patar, Most Online ‘Terms of Service’ Are Incomprehensible to Adults, Study Finds , VICE (Feb. 12, 2019, 2:51 PM), https://www.vice.com/​en/​article/​xwbg7j/​online-contract-terms-of-service-are-incomprehensible-to-adults-study-finds [https://perma.cc/​L5G8-L9QD]; Debra Cassens Weiss, 99% of Website Sign-Up Contracts Are Unreadable, Study Finds , ABA J. (Feb. 21, 2019, 9:24 AM), https://www.abajournal.com/​news/​article/​the-vast-majority-of-website-user-agreements-fall-below-readability-recommendations-study-finds [https://perma.cc/​LF76-GHZA]; see also Benoliel & Becher, supra note 13, at 2257–58. Incomprehensible standard form contracts thus cast doubt on whether a consumer who cannot comprehend the terms is even capable of manifesting assent. 18 See In re Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 1058, 1064 (D. Nev. 2012). The court held that the ToU was too inconspicuous to “conclude that Plaintiffs ever viewed, let alone manifested [their] assent to, the Terms of Use.” Id . When courts enforce contracts that cannot be understood by most American adults, consumers waive constitutional and substantive contract rights without an intelligent understanding of the one-sided clauses drafted by powerful U.S. companies. There cannot truly be a manifestation of assent to terms and agreements, which are—for all intents and purposes—indecipherable. The widespread problem of unreadability is a consumer protection issue, but it is also a question of unethical corporate behavior, which is addressed by the procedural and substantive reforms proposed in this Article.

B. No Duty of Readability

Notwithstanding that consumers are bound by the agreements they sign, even those they cannot fully understand, 19 John D. Calamari, Duty to Read—A Changing Concept , 43 Fordham L. Rev. 341, 341 (1974) (“Every lawyer learned early in the course on contracts that a party may be bound by an instrument which he has not read.”). there is no concurrent duty for companies to make consumer contracts readable. 20 Patar, s upra note 17; Benoliel & Becher, supra note 13, at 2258; Weiss, supra note 17. “Readability” is a measure of how easily a text can be read and understood. 21 What Is Readability and How Does It Work? , Text Inspector (Nov. 16, 2020), https://textinspector.com/​what-is-readability-and-how-does-it-work [https://perma.cc/​2547-JYV7]. Readability “is a study of the complexity of the concepts of the language that takes into consideration the syntax, the structure and the complexity of the vocabulary.” Seltzer v. Foley, 502 F. Supp. 600, 606 (S.D.N.Y. 1980). Significant to this analysis are elements that determine the reader’s “optimal” reading speed and abilities to both understand and find it interesting. 22 Veronica J. Finkelstein & Jack Foley, The Importance of Readability , N.J. Law. Mag., Oct. 2021, at 10.

The chief factors that go into readability are “sentence length, sentence structure, and the average syllables per word” 23 Jennifer Calonia, What Is Readability? , grammarly blog (Sept. 2, 2020), https://www.grammarly.com/​blog/​readability [https://perma.cc/​T4KM-MW87]. —all of which, when combined, determine the reader’s likelihood of understanding the text. 24 See id . High readability increases the likelihood that the consumer will understand the terms of the contracts they sign. 25 Id . Thus, when a contract has low readability, the reasonable consumer often does not know to what they are agreeing. 26 See Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone Read the Fine Print? Consumer Attention to Standard-Form Contracts , 43 J. Legal Stud. 1, 1–2 (2014); David Lazarus, Want to Read a Tech Company’s User Agreements? Got 90 Minutes to Spare? , L.A. Times (Aug. 24, 2021, 6:00 AM), https://www.latimes.com/​business/​story/​2021-08-24/​column-consumer-contracts [https://perma.cc/​RB9B-ZNLJ]; see also Caroline Cakebread, You’re Not Alone, No One Reads Terms of Service Agreements , Bus. Insider (Nov. 15, 2017, 7:30 AM), https://www.businessinsider.com/​deloitte-study-91-percent-agree-terms-of-service-without-reading-2017-11 [https://perma.cc/​693Q-YJPA] (discussing a Deloitte study which found that 91% of consumers blindly accept terms and conditions); Jessica Guynn, What You Need to Know Before Clicking ‘I Agree’ on That Terms of Service Agreement or Privacy Policy , USA Today (Jan. 29, 2020, 2:21 PM), https://www.usatoday.com/​story/​tech/​2020/​01/​28/​not-reading-the-small-print-is-privacy-policy-fail/​4565274002 [https://perma.cc/​7N23-K49E]. “Just as bed bugs hide in cracks and crevices of mattresses and box springs, sneakwrap documents, masquerading in the clothing of contracts, purport to bind consumers to oppressive and unfair terms.” 27 Rustad & Onufrio, supra note 3, at 1086. U.S. companies are systematically depriving users of any meaningful remedy when they eliminate every conceivable category of damages, disclaim all warranties, and require the user to submit to arbitration, waiving their right to join class actions.

This Article underscores the importance of restoring the balance between a consumer’s duty to read a consumer contract prior to signing and the readability of such contracts. Further, this Article proposes a solution to the gap between the consumer’s duty to read and the provider’s duty to draft readable contracts. Specifically, imposing a minimum readability standard of grade eight and invalidating one-sided clauses designed to eliminate all important rights would harmonize U.S. consumer law with that of the EU.

1. Leading Readability Tests

This Section of the Article analyzes the readability of consumer contracts for the largest U.S. companies using the Flesch-Kincaid standard measures of readability. The Flesch-Kincaid readability tests have two parts: the FRE and the FKGL. 28 NL 10605.105 What Is the Flesch-Kincaid Readability Test? , Soc. Sec. Admin.: Program Operations Manual Sys. (POMS) (Sept. 28, 2015) [hereinafter NL 10605.105 ], https://secure.ssa.gov/​poms.nsf/​lnx/​0910605105 [https://perma.cc/​X4W7-8MVR]; see Norman Otto Stockmeyer, Using Microsoft Word’s Readability Program , Mich. Bar J., Jan. 2009, at 46, 46 (“Word’s Flesch Reading Ease score is based on a formula developed in 1949 by Rudolf Flesch. It is computed using the average number of syllables per word and words per sentence.”).

a. Flesch Reading Ease

The FRE test, developed by Rudolf Flesch sixty-five years ago, is the most widely employed test for readability. 29 See Deras v. Roberts, 788 P.2d 987, 993 n.7 (Or. 1990) (“For all measures, the Secretary of State by rule shall designate a test of readability and adopt a standard of minimum readability for a ballot title. The ballot title shall comply with the standard to the fullest extent practicable consistent with the requirements of impartiality, conciseness and accuracy.” (quoting Or. Rev. Stat. Ann. § 250.039 (repealed 1995))). See generally Rudolf Flesch, The Art of Readable Writing (1949) (describing the FRE score methodology). The FRE score is defined by “the average number of words in a sentence” and “the average number of syllables in a word.” 30 Flesch Reading Ease and the Flesch Kincaid Grade Level , Readable [hereinafter FRE & FKGL ], https://readable.com/​readability/​flesch-reading-ease-flesch-kincaid-grade-level [https://perma.cc/​95Y5-WMAX]; see also MJ Eissler, How to Use the Flesch and Flesch-Kincaid Tests to Improve Blog Readability , okwrite, https://okwrite.co/​blog/​2021/​05/​19/​how-to-use-the-flesch-and-flesch-kincaid-tests-to-improve-blog-readability [https://perma.cc/​CVU5-43BW] (“The [FRE] Test focuses on long sentences and long (polysyllabic) words.”); id. (“The formula for the test is: 206.835 – 1.015 x (words/sentences) – 84.6 x (syllables/words).”). See generally Flesch, supra note 29; NL 10605.105 , supra note 28. FRE scores range from 0 to 100 with the following interpretations:

Table One: Interpretation of the FRE 31 Eissler, supra note 30 .

FRE test results can also be expressed “in terms of the grade level a hypothetical reader should have achieved before the selected passage would be readable.” 32 Ian Gallacher, “When Numbers Get Serious”: A Study of Plain English Usage in Briefs Filed Before the New York Court of Appeals , 46 Suffolk U. L. Rev. 451, 458 (2013); see John Garger, Determine Readability Using the Flesch Reading Ease , John Garger (Jan. 29, 2020), https://www.johngarger.com/​blog/​determine-readability-using-the-flesch-reading-ease [https://perma.cc/​YD8N-UHVY]. The FKGL test translates the FRE score into a grade level as follows: The formula takes average sentence length and multiplies it by 0.39, and average number of syllables and multiplies it by 11.8. These products are summed, and the result is reduced by 15.59. Therefore, the formula is: 0.39 (total words/total sentences) + 11.8 (total syllables/total words) – 15.59[.] A score of about 65 correlates with the 8th to 9th grade level, and a score of about 55 indicates a 10th to 12th grade level. Scores between 0 and 30 represent college graduate readability. Id . For example, “[s]coring between 70 to 80 is equivalent to school grade level 8,” 33 FRE & FKGL , supra note 30. while “[s]cores from 60 to 70 are plain English, readable by the average reader.” 34 Garger, supra note 32.

b. Flesch-Kincaid Grade Level

The FKGL determines a U.S. grade school level for a specific document, with grades ranging from kindergarten through twelfth grade. The FKGL formula includes “(1) the average sentence length (ASL), which is the number of words divided by the number of sentences, and (2) the average number of syllables per word (ASW), which is the number of syllables divided by the number of words.” 35 Amanda Reid, Readability, Accessibility, and Clarity: An Analysis of DMCA Repeat Infringer Policies , 61 Jurimetrics J. 405, 415 (2021). As noted above, the FKGL formula is: “0.39 (total words/total sentences) + 11.8 (total syllables/total words) – 15.59.” Garger, supra note 32. The test also considers active voice when computing the corresponding grade level. 36 Greg Johnson, Assessing the Legal Writing Style of Brett Kavanaugh , Vt. Bar J., Fall 2018, at 30, 32. The resulting grade level represents the minimum number of years of educational attainment necessary in order to read and comprehend a particular text. 37 See Automatic Readability Checker , Readability Formulas, https://readabilityformulas.com/​freetests/​six-readability-formulas.php [https://perma.cc/​Y2CU-SBQ8]; Thomas H. Koenig & Michael L. Rustad, Digital Scarlet Letters: Social Media Stigmatization of the Poor and What Can Be Done , 93 Neb. L. Rev. 592, 616 n.131 (2015) (noting that Rudolf Flesch and John P. Kincaid cocreated the FRE test). “For example, a score of 4.3 indicates a Grade 4 readability level, while a score higher than 12 indicates college-level readability.” 38 Eissler, supra note 30.

The FRE test can also be translated into a grade level equivalent, as illustrated below:

Table Two: Interpretation of the FKGL 39 See Georgia Fenwick, Flesch Reading Ease: Everything You Need to Know , writing studio (Oct. 25, 2020), https://writingstudio.com/​blog/​flesch-reading-ease/​#:~:text=The%​20Flesch%20Reading%20Ease%20Score%20is%20a%20great,assigns%20each%20score%20bracket%20with%20a%20corresponding%20grade [https://perma.cc/​W588-EJ2M] .

Critics maintain that the FRE score is difficult to interpret, lacks context and “real-world meaning,” 40 Id . and “negatively correlates with other readability formulas.” 41 Sameer Badarudeen & Sanjeev Sabharwal, Assessing Readability of Patient Education Materials: Current Role in Orthopaedics , 468 Clinical Orthopaedics & Related Rsch. 2572, 2575 tbl.1 (2010). To bridge this gap, the FKGL puts the FRE score into context by assigning “each score bracket with a corresponding grade.” 42 Fenwick, supra note 39.

As noted in Table Three below, a number of states require a minimum FRE or FKGL score to ensure the readability of documents, including consumer disclosures, so that the general public can understand them. 43 See, e.g. , Fla. Stat. Ann. § 627.4145 (West 2003) (requiring that insurance policies be written with a minimum FRE score of 45). Life insurance is required to “clearly and conspicuously” include disclosures written at “a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test.” S. Journal, 113th Sess. (S.C. 1999). The FKGL test “is a reformulation of the Flesch Reading Ease Score test that expresses its result in terms of the grade level a hypothetical reader should have achieved before the selected passage would be readable.” 44 Gallacher, supra note 32, at 458. This assesses the consumer contracts’ readability scores by using both measures.

Table Three: Minimum Readability Requirements in State Statutes 45 Louis J. Sirico, Jr., Readability Studies: How Technocentrism Can Compromise Research and Legal Determinations , 26 Quinnipiac L. Rev. 147, 148 n.7 (2007) (reporting state minimum readability requirements) .

C. The Average U.S. Adult Has Poor Reading Skills

The standard FRE score must be sixty or above to ensure that the text will be understood by the average American adult, who reads at the eighth-grade level. 46 Barnes, supra note 1, at 195. Moreover, the National Center for Education Statistics estimated that 21% to 23% of American adults have “demonstrated skills in the lowest level of prose, document, and quantitative proficiencies.” 47 Irwin S. Kirsch, Ann Jungeblut, Lynn Jenkins & Andrew Kolstad, Adult Literacy in America: A First Look at the Findings of the National Adult Literacy Survey xvi (3d ed. 2002). Notably, the Pew Research Center determined that 71% of Facebook users had a high school education or less, too low to grasp the website’s ToU. 48 Maeve Duggan & Aaron Smith, Demographics of Key Social Networking Platforms , Pew Rsch. Ctr. (Dec. 30, 2013), http://www.pewinternet.org/​2013/​12/​30/​demographics-of-key-social-networking-platforms [http://perma.unl.edu/​6L8L-NXNH].

A study by the National Assessment of Educational Progress evidenced that between 2017 and 2019, literacy rates dwindled across the states. 49 Jenn Smith, Experts and Educators Share Ways to Help Struggling Readers , Seattle Times, Nov. 15, 2021, at A10. Although the recommended FKGL score is Grade 8, 50 The Flesch Kincaid Grade Level has the [sic] some of [the] following levels: 0, 2, 4, 6, 8, 10, 12, 14, 16, and 18. The higher you score, the more difficult the text is to read. As a general guide, it is a smart idea to aim for a Flesch Kincaid reading level of 8. This is because the average reader will have reading skills equivalent to 8th graders. Flesch Kincaid Grade Level Readability , TextCompare (emphasis omitted), https://www.textcompare.org/​readability/​flesch-kincaid-grade-level#:~:text=It%20is%​20actually% 20a%20modified%20formula%20of%20another,1940s%20and%20modified%20it%​20for%20the%20US%20Navy [https://perma.cc/​YU3A-ZYAD]. 45 million Americans were functionally illiterate and unable to read above a fifth-grade level in 2017, meaning that many Americans cannot comprehend widely deployed consumer contracts. 51 Illiteracy by the Numbers , Literacy Project, https://literacyproj.org [https://perma.cc/​D37W-86UM] (“50% of adults cannot read a book written at an eighth-grade level[.]”); see also Cynthia R. Farina, Mary J. Newhart, Claire Cardie & Dan Cosley, Rulemaking 2.0 , 65 U. Miami L. Rev. 395, 438 (2011) (“[T]he recommended readability level for . . . text written for broad public consumption is no higher than 8.0 on the Flesch-Kincaid scale . . . .”).         When comparing reading test scores among economically developed countries, the United States still scores below countries in both Europe and Asia. 52 Louis Serino, What International Test Scores Reveal About American Education , Brookings (Apr. 7, 2017), https://www.brookings.edu/​blog/​brown-center-chalkboard/​2017/​04/​07/​what-international-test-scores-reveal-about-american-education [https://perma.cc/​FK79-VVKR]. The mean U.S. reading skill, calculated on a 500 point scale, was 270—3 points below the international average. 53 US Adults Score Below Average on Worldwide Test , Fla. Times-Union (Oct. 8, 2013, 7:53 AM), https://www.jacksonville.com/​story/​news/​education/​2013/​10/​08/​us-adults-score-below-average-worldwide-test/​15813751007 [https://perma.cc/​U4ZL-GXE2]. Data from the Program for the International Assessment of Adult Competencies concluded that “[n]ot only did Americans score poorly compared to many international competitors, the findings reinforced just how large the gap is between the nation’s high- and low-skilled workers.” 54 Id . In contrasting reading comprehension skills between the United States and other developed countries, 55 See Karantzi Ismini, European Texts and Readability , Inst. of Rsch. & Training on Eur. Affs. (Oct. 14, 2016), http://www.irtea.gr/​?p=2661&lang=en [https://perma.cc​/L7QS-K3VQ]; Barbara K. Kondilis, Ismene J. Kiriaze, Anastasia P. Athanasoulia & Matthew E. Falagas, Mapping Health Literacy Research in the European Union: A Bibliometric Analysis , PLoS ONE, June 2008, at 1; see also Lau Tak Pang, Chinese Readability Analysis and Its Applications on the Internet, at i–ii (Oct. 2006) (MPhil thesis, The Chinese University of Hong Kong) (CORE).. it is important to consider why adult readers in the United States fare worse than adult readers in the EU countries. 56 See Michael T. Nietzel, Low Literacy Levels Among U.S. Adults Could Be Costing the Economy $2.2 Trillion a Year , Forbes (Sept. 9, 2020, 7:14 AM), www.forbes.com/​sites/​michaeltnietzel/​2020/​09/​09/​low-literacy-levels-among-us-adults-could-be-costing-the-economy-22-trillion-a-year/​?sh=913d1934c904 [https://perma.cc/​UU6M-BL9Y]; What’s the Latest U.S. Literacy Rate? , supra note 1; see also Jill Barshay et al., America’s Reading Problem: Scores Were Dropping Even Before the Pandemic , Hechinger Rep. (Nov. 10, 2021), https://hechingerreport.org/​americas-reading-problem-scores-were-dropping-even-before-the-pandemic [https://perma.cc/​BX2B-834X]; International Comparisons of Achievement , Nat’l Ctr. for Educ. Stat., https://nces.ed.gov/​fastfacts/​display.asp?id=1 [https://perma.cc/​TNZ3-8M66] (“The United States scored lower than 12 education systems: Moscow City (Russian Federation), the Russian Federation, Singapore, Hong Kong (China), Ireland, Finland, Poland, Northern Ireland (United Kingdom), Norway, Chinese Taipei (China), England (United Kingdom), and Latvia.”); s ee also Drew DeSilver, U.S. Students’ Academic Achievement Still Lags That of Their Peers in Many Other Countries , Pew Rsch. Ctr. (Feb. 15, 2017), https://www.pewresearch.org/​fact-tank/​2017/​02/​15/​u-s-students-internationally-math-science [https://perma.cc/​HT34-E6EC] (reporting that average reading skills of U.S. fifteen-year-olds taking the Program for International Student Assessment ranked twenty-fourth below many European countries including Finland, Ireland, Latvia, Norway, Germany, Poland, Slovenia, Netherlands, Denmark, Sweden, Belgium, France, United Kingdom, and Portugal).. One contributing factor may be that educational policies in Europe “stress the importance of promoting a literate environment in the home.” 57 Luisa Araújo & Patricia Costa, Home Book Reading and Reading Achievement in EU Countries: The Progress in International Reading Literacy Study 2011 (PIRLS) , 21 Educ. Rsch. & Evaluation 422, 422–23, 425 (2015) (concluding from a study that examined “the association between frequency of book reading before the start of compulsory education and the reading achievement of 4th-grade students whose parents have high and low education levels in 22 European countries”).. For example, the High Level Group of Experts on Literacy emphasizes that the home and school environments must “reinforce each other in order to boost high literacy levels.” 58 Id. at 423. The reading assessment data in this Section confirms that many adults in the United States lack the reading skills to understand basic legal documents such as a website’s ToU, and comparative reading assessment studies confirm that the United States lags behind the reading skills of many other countries, including those in the EU.

D. Past Studies of Readability

1. Readability of Consumer Software License Agreements

A New York University (NYU) research team assessed what changed between 2003 and 2010 in the terms of 264 mass-market consumer software license agreements. 59 See Florencia Marotta-Wurgler & Robert Taylor, Set in Stone? Change and Innovation in Consumer Standard-Form Contracts , 88 N.Y.U. L. Rev. 240, 243 (2013) (“We use a sample of EULAs from 264 mass-market software firms between 2003 and 2010 to track changes to thirty-two common contractual terms. Our methodology measures the relative buyer-friendliness of each term relative to the default rules of Article 2 of the Uniform Commercial Code (U.C.C.) to examine how the pro-seller bias of EULAs changes over time. Since buyers need to become informed about terms to ‘shop’ around effectively, we measure changes in contract length and readability. We begin exploring the firm, product, and market characteristics that are associated with contract changes. Finally, we record relevant court decisions around the sample period to evaluate whether the sample contracts are sensitive to changes in the enforceability of terms.”).. The researchers documented differences in end user license agreements (EULA) over the seven-year period during which they studied, finding that “[t]hirty-nine percent of the sample firms made material changes to their contracts during the seven-year period, despite the fact that the product being licensed was held as constant as possible.” 60 Id . at 243–44 (“[A] material change occurs when a EULA changes at least one of the thirty-two terms that we track.”).

The researchers also discovered that contracts, on average, are no easier to read, despite getting longer. 61 Id. at 244. Further, the average license agreement is as difficult to read as a scientific publication, which is far beyond what could be grasped by the average American adult. 62 Id. at 253 (“EULAs are comparable to articles in scientific journals, which typically have Flesch-Kincaid scores of around thirty. Thus, Panel C indicates that contracts are not only getting longer but also remain difficult to read.” (footnote omitted)). In most instances, the changes made the terms “more pro-seller relative to the original contract.” 63 Id . at 244 (“Most of these changes are driven by firms opting out of U.C.C. Article 2 default rules in favor of relatively more pro-seller terms.”). However, the NYU study found that consumer software agreements passed the readability test mandated for insurance contracts by a wide margin. 64 Id . at 253–54.

In another study, researchers calculated the readability of diverse consumer contracts 65 Benoliel & Becher, supra note 13, at 2256. “The results of this study indicate that consumer sign-in wrap contracts are generally unreadable.” Id. at 2277. The research findings illustrate consumer contracts within social media and how the average U.S. adult has at least two forms of social media where a contract has been created. Id. at 2284. and found that approximately 99% of website sign-in-wrap contracts are indecipherable. 66 Id. at 2278–79. Based on these findings, the researchers proposed solutions likely to improve readability among certain consumer contracts. 67 Id. at 2286–87 (demonstrating policy solutions within firms); see also Michael Terasaki, Do End User License Agreements Bind Normal People? , 41 W. St. U. L. Rev. 467, 488 (2014)..

2. Readability of Internet-Related Health Information

Disclosures about medical procedures given to patients and their families must be drafted to increase accessibility and allow for equitable long-term health outcomes. As such, physicians, universities, hospitals, and medical societies must ensure that they produce readable content.

A team of medical researchers conducted three studies evaluating the accessibility, content, and readability of publicly available health information posted on the Internet. 68 Gretchen K. Berland et al., Health Information on the Internet: Accessibility, Quality, and Readability in English and Spanish , 285 JAMA 2612, 2612 (2001). The researchers found that less than 25% of search results on the first pages led to relevant content, with 20% in English and 12% in Spanish. 69 Id. . Of these, “[a]ll English and 86% of Spanish Web sites required high school level or greater reading ability.” 70 Id . While the information was generally accurate, researchers concluded that “[c]overage of key information on English- and Spanish-language Web sites is poor and inconsistent.” 71 Id . In sum, the studies concluded that comprehending Web-based health information requires high reading levels. 72 Id . ; see Tiffany M. Walsh & Teresa A. Volsko, Readability Assessment of Internet-Based Consumer Health Information , 53 Respiratory Care 1310, 1310, 1315 (2008); Nilay Boztas et al., Readability of Internet-Sourced Patient Education Material Related to “Labour Analgesia” , Med., 2017, at 1.

Another public health team studied the readability of online COVID-19 information and determined whether scores differed across various English-speaking countries. 73 Amy P. Worrall et al., Readability of Online COVID-19 Health Information: A Comparison Between Four English Speaking Countries , BMC Pub. Health, 2020, at 1, 1. The researchers concluded:

There were poor levels of readability webpages reviewed, with only 17.2% of webpages at a universally readable level. There was a significant difference in readability between the different webpages based on their information source ( p  < 0.01). Public Health organisations and Government organisations provided the most readable COVID-19 material, while digital media sources were significantly less readable. There were no significant differences in readability between regions. 74 Id. ; see Rosemary Gottlieb & Janet L. Rogers, Readability of Health Sites on the Internet , 7 Int’l Elec. J. Health Educ. 38, 38 (2004) (“Results of the study indicate that health educators need to be aware of the reading levels of the health information they are placing on the Internet. If the level of health information material is above the comprehension level of the general public, many individuals will be at a disadvantage in comprehending health information required to make personal health decisions.”); see also Anuoluwapo Oloidi, Sabina Onyinye Nduaguba & Kehinde Obamiro, Assessment of Quality and Readability of Internet-Based Health Information Related to Commonly Prescribed Angiotensin Receptor Blockers , Pan Afr. Med. J., Mar. 11, 2020, at 1 (showing online content to be of moderate difficulty and suboptimal readability).

In the context of major orthopedic websites, “most of the patient education materials . . . are written at a reading level that may be too advanced for comprehension by a substantial proportion of the population.” 75 Badarudeen & Sabharwal, supra note 41, at 2572. The Stanford University researchers conducted a study by employing the following searches:

“Google searches of the terms ‘Cleft Palate Surgery’ and ‘Palatoplasty’ were performed. Additionally, searches of only ‘Cleft Palate Surgery’ were run from several internet protocol addresses globally. . . . Search results for ‘Cleft Palate Surgery’ were easier to read and comprehend compared to search results for ‘Palatoplasty.’ Mean Flesch-Kincaid Grade Level scores were 7.0 and 10.11, respectively (P = .0018). Mean Flesch-Kincaid Reading Ease scores were 61.29 and 40.71, respectively (P = .0003). Mean Gunning Fog Index scores were 8.370 and 10.34, respectively (P = .0458). Mean [Simple Measure of Gobbledygook (SMOG)] Index scores were 6.84 and 8.47, respectively (P = .0260). Mean Coleman-Liau Index scores were 12.95 and 15.33, respectively (P = .0281). . . .” 76 Findings from Stanford University in Cleft Lip and Palate Reported (Readability of Online Patient Information Relating to Cleft Palate Surgery) Mouth Diseases and Conditions—Cleft Lip and Palate , Health & Med. Daily, Nov. 11, 2021, 2021 WLNR 36965876 (quoting research from Stanford University).

The researchers concluded that the top search results for “Cleft Palate Surgery” had an average readability of a seventh-grade reading level, which “compares favorably to other health care readability analyses.” 77 Id. (quoting research from Stanford University).

In another study, the Tel Aviv Sourasky Medical Center performed an online search using terms related to sudden sensorineural hearing loss (SSNHL). 78 Tel Aviv Sourasky Medical Center Reports Findings in Sensorineural Hearing Loss (Evaluation of the Quality of Online Information on Sudden Sensorineural Hearing Loss) , Educ. Daily Rep., Nov. 29, 2021, 2021 WLNR 38980547. Two independent physicians performed a content analysis of the readability of patient education materials using a sample of the ten most frequently consulted patient education websites. 79 Id . They defined “quality” according to the FRE and FKGL, and defined “understandability” and “actionability” according to the Patient Education Materials Assessment Tool and Clinical Practice Guideline (CPG) adherence. 80 Id .

The researchers found that “[t]he average FRE score was ‘fairly difficult’ (mean 57.28, median 55.55, range 46.4–71.8) and the average FKGL score was ‘standard’ (mean 9th grade, median 9th grade, range 5th–10th grade).” 81 Id. (quoting research from Tel Aviv Sourasky Medical Center). “Internet resources for patient education on SSNHL vary in quality and are generally understandable to the average layman.” 82 Id. (quoting research from Tel Aviv Sourasky Medical Center). Thus, even though patient education sites were relatively accessible, the researchers concluded that it would be desirable to have “more comprehensive and easier-to-read information to improve patients’ medical knowledge about their condition.” 83 Id . (quoting research from Tel Aviv Sourasky Medical Center).

3. Study of Readability of Social Media Terms of Use

The most comprehensive previous readability study examined the readability of 329 social media consumer contracts. 84 See Rustad & Koenig, supra note 13, at 1435. The study found that the average FRE score of these consumer agreements was 47.8, making them more challenging for the average U.S. adult to comprehend. 85 Id. at 1460 tbl.3. The social media researchers determined that:

The largest number of social media TOUs were drafted at a Flesch Readability Ease level classified as “difficult” (scores of thirty to thirty-nine) (N=148). Thirty-nine percent of the TOUs had readability scores between fifty and fifty-nine, which means they were “fairly difficult” to understand (N=125). Five percent of the TOUs were rated as “very confusing,” with scores between zero and twenty-nine (N=18)—scores that are particularly problematic. 86 Id . at 1462 (footnotes omitted).

The social network agreement study concluded that rights-foreclosure clauses in ToU are drafted onerously, at a reading level substantially higher than the average consumer can comprehend. When analyzing the “Big Five” most popular social media sites, none of the ToU achieved the standard reading level score of 60 and were thus drafted above the average reader’s comprehension. 87 Koenig & Rustad, supra note 37, at 625. In light of that conclusion, the social media study proposed a consumer contract “blacklist” of unenforceable terms and a “graylist” of presumptively unfair clauses. 88 Rustad & Koenig, supra note 13, at 1436 (noting that this proposal would “address the structural imbalance between social media sites currently empowered to dictate rights without remedies”).

4. Consumer Financial Protection Bureau Arbitration Clauses

Providers of consumer financial products and services often include predispute mandatory arbitration clauses in their contracts. 89 Consumer Fin. Prot. Bureau, Arbitration Study Preliminary Results: Section 1028(a) Study Results to Date 4 (2013) [hereinafter Preliminary Results], https://files.consumerfinance.gov/​f/​201312_cfpb_arbitration-study-preliminary-results.pdf [https://perma.cc/​7E5G-SCJV] (conducted pursuant to section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010); see Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 11-203, § 1028, 124 Stat. 1376, 2003 (2010) (codified at 12 U.S.C. § 5518). Congress mandates that the Consumer Financial Protection Bureau (CFPB) assess such clauses and provide a report to Congress. 90 Preliminary Results, supra note 89, at 4; Consumer Fin. Prot. Bureau, Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a) 2 (2015) [hereinafter Report to Congress], https://files.consumerfinance.gov/​f/​201503_cfpb_arbitration-study-report-to-congress-2015.pdf [https://perma.cc/​VHB5-A2HX]. The CFPB noted that ToU in consumer financial products and services, which include credit cards, checking accounts, and payday loans, are ubiquitous. 91 See Preliminary Results, supra note 89, at 4.

The CFPB determined that when compared to the rest of the credit card contract, arbitration clauses were more complicated and written at a higher grade level in almost every case. 92 Id. at 28. “The mean Flesch readability score for credit card arbitration clauses . . . was 34.5 and the median was 33.7,” while the mean score for the remainder of the contract was 52.2 and the median was 51.6. 93 Id. at 28–29 (footnote omitted). In terms of the FKGL, credit card arbitration clauses had a mean grade level of 14.2 and a median of 14.7, while the remainder of the contract had a mean of 10.8 and a median of 11. 94 Id. at 29 (“Of the 66 contracts studied, only in three cases was the Flesch-Kincaid grade level lower for the arbitration clause than for the remainder of the contract.”). The CFPB found that the arbitration clauses were more difficult to read than the agreement as a whole. Moreover, the arbitration clauses were drafted at such a high reading level that only college graduates could understand the terms. 95 See id. at 28–29 (reporting findings of credit card agreements with arbitration clauses); id. (“By comparison, the mean Flesch readability score for the remainder of the contract ( i.e. , excluding the arbitration clause) was 52.2 and the median was 51.6. The readability score for the remainder of the credit card contract exceeded the readability score for the arbitration clause in every case . ” (footnote omitted)); see also Marieke van der Rakt, The Flesch Reading Ease Score: Why and How to Use It , Yoast (May 20, 2019), https://yoast.com/​flesch-reading-ease-score [https://perma.cc/​FM7Y-VM9K] (interpreting the FRE score).

Predispute mandatory arbitration clauses are controversial, as observed by the CFPB:

Some commenters take the view that pre-dispute arbitration clauses contained in standard-form contracts are unfair to consumers. Critics generally focus on three areas. First, they attack arbitration as a dispute resolution process. They contend that it reduces or eliminates procedural protections—such as a right of appeal or access to discovery—that are generally available in court. There are also claims that arbitration may be biased against consumers, and that it may not be as fast or cheap as its proponents’ claim. . . . [C]ritics [also] argue that arbitration clauses may immunize companies from a range of private civil liabilities, such as by reducing the availability of discovery or by eliminating class proceedings. According to this argument, arbitration clauses may undermine deterrence and leave widespread wrongdoing against consumers unaddressed. Finally, critics assert that arbitration, which is almost always conducted in private, undermines benefits inherent in the public nature of the court system, such as transparency and the development of clear precedents. 96 Preliminary Results, supra note 89, at 7–8 (footnotes omitted); see Omri Ben-Shahar, CFPB Gets Ready to Prohibit Arbitration Agreements—And It Wouldn’t Help Consumers , Forbes (May 5, 2016, 5:31 PM), https://www.forbes.com/​sites/​omribenshahar/​2016/​05/​05/​cfpb-gets-ready-to-prohibit-arbitration-agreements-it-would-not-help-consumers/​?sh=3f06bd8c64b2 [https://perma.cc/​TMQ4-D5BR].

On the other hand, advocates of predispute mandatory arbitration clauses argue that consumer arbitration is cost-effective and more efficient than litigation. Specifically, they contend that arbitration “minimizes the disruption and loss of good will that often results from litigation and . . . reduces litigation costs.” 97 Preliminary Results, supra note 89, at 8 (quoting Am. Bankers Ass’n, Consumer Bankers Ass’n & Fin. Servs. Roundtable, Comments on Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements (Docket No. CFPB-2012-0017) 2 (June 22, 2012), https://www.consumerfinancemonitor.com/​wp-content/​uploads/​sites/​14/​2012/​06/​CFPB-Comment-Letter-62212.pdf [https://perma.cc/​H8EB-9AY2]) (“Arbitration proponents also claim that these cost savings inure to the benefit of consumers through lower prices and/or expanded access. . . . [W]hile proponents of arbitration clauses may acknowledge the potential impact on class proceedings, many take the view that such proceedings typically are meritless, inefficient, and provide little or no benefit to consumers. They contend that the reduced cost of arbitration together with various provisions of arbitration clauses (including the availability of small claims court as well as contingent minimum awards in arbitration) provide ample opportunity for consumers to obtain redress for asserted wrongs that involve relatively small amounts of money.” (footnotes omitted)).

The CFPB found that arbitration clauses were not only lengthy but also complex. 98 Id. at 28. In comparing large and small issuers, the CFPB also found that:

[A]rbitration clauses from larger issuers tended to be longer (averaging 1,329.5 words) than ones from smaller issuers (averaging 1,067.3 words), but that arbitration clauses from larger issuers tended to score better on the readability metrics than ones from smaller issuers. Thus, the Flesch-Kincaid grade level was 14.7 for arbitration clauses from large issuers as compared to 15.7 for arbitration clauses from small issuers, and one of the three largest credit card issuers used the clause with the best readability score. 99 [2018] Fed. Banking L. Rep. (CCH) ¶ 153-656 (footnote omitted).

The CFPB researchers also concluded that the median readability of the ToU for the financial services market (excluding the arbitration clause) was approximately 52, 100 Preliminary Results, supra note 89, at 28–29. which indicates that they are fairly difficult to read. 101 See Garger, supra note 32 (“A score of 100 represents the easiest to read text, and a score of 0 represents the most difficult to read text. Scores from 60 to 70 are plain English, readable by the average reader.”). The CFPB’s report on the quality of the consumer credit card market stated that providers have increasingly deployed arbitration clauses in credit card agreements over the last five years. 102 Jonathan B. Engel & Rich Zukowsky, Readability and Deferred Interest Remain Concerns in CFPB’s Biennial CARD ACT Report , Davis Wright Tremaine LLP (Oct. 21, 2021), https://www.dwt.com/​blogs/​financial-services-law-advisor/​2021/​10/​cfpb–card-act-report-2021 [https://perma.cc/​AS9K-RF2X]. “With regards to readability, the CFPB found that the ‘median Flesch-Kincaid grade level of 12.4 in the 2020 data indicates fewer than half of all agreements should be readable by a high school graduate. This has steadily increased from a value of 12.0 in 2016.’” 103 Id. (quoting Bureau of Consumer Fin. Prot., The Consumer Credit Card Market 123 (2021), https://files.consumerfinance.gov/​f/​documents/​cfpb_consumer-credit-card-market-report_2021.pdf [https://perma.cc/​2X25-ETZA]). Given that arbitration clauses foreclose the right to a jury trial, it is important that the average American adult find them to be understandable.

5. Readability of Franchise Disclosure Documents

The Federal Franchise Rule governs the franchise industry and requires franchisors to provide potential franchisees with franchise disclosure documents (FDDs). The Rule further requires that each FDD “contain twenty-three prescribed informational items about the franchise.” 104 Uri Benoliel & Xu (Vivian) Zheng, Are Disclosures Readable? An Empirical Test , 70 Ala. L. Rev. 237, 245 (2018). A 2018 study of 523 FDDs determined that the textual quality of such documents is often poor. 105 Id. at 239–40. The study drew upon a list of 988 franchisors from a dataset using a 2017 edition of Entrepreneur . 106 Id . at 246. All FDDs in the study were found to be unreadable by more than six grade levels beyond what is needed for the average American adult to comprehend the text. 107 Id. at 253; Russ Garland, Franchise Disclosure Documents Can Be Baffling , Wall St. J. (Apr. 30, 2018, 10:03 PM), https://www.wsj.com/​amp/​articles/​franchise-disclosure-documents-can-be-baffling-1525140180 [https://perma.cc/​J42V-K5Z7]; cf. Rochelle Spandorf, Reading the FDD: The Argument Against Simplification , Franchising.com (May 4, 2021), https://www.franchising.com/​articles/​reading_the_fdd_the_argument_against_simplification.​html?ref=newsletter [https://perma.cc/​8LLP-UAR5] (acknowledging the readability problem but explaining that “[p]roper due diligence of a complex investment is not something that can or should be abbreviated, condensed, or hastened”).

6. Readability of DMCA Repeat Infringer Policies

The Digital Millennium Copyright Act (DMCA) “amended U.S. copyright law to address important parts of the relationship between copyright and the internet.” 108 The Digital Millennium Copyright Act , Copyright.gov, https://www.copyright.gov/​dmca [https://perma.cc/​YDB8-4A9Z]; see 17 U.S.C. §§ 1201–1332. Title II of the DMCA limits service providers’ liability for copyright infringement for: (1) transitory digital network communications; (2) system caching; (3) information residing on systems or networks at the direction of users; and (4) information location tools. 109 17 U.S.C. § 512(a)–(d) (limiting Internet service provider liability for material found online). Internet service providers, including websites, are immunized from secondary copyright infringement claims if they designate an agent to receive notices of copyright infringement. 110 See id. § 512(a) (providing a safe harbor for Internet service providers).

Chapter 12 of the DMCA generally prohibits the circumvention of copyright protection systems. Section 1201 of the DMCA prohibits the manufacture of devices or tools that circumvent copyright protection devices. 111 See id. § 1201(a) (prohibiting the distribution of devices that provide a means for infringing upon works protected under the U.S. Copyright Act). Section 1201(b) prohibits the manufacture of circumvention devices, which bypass technical measures controlling access to copyrighted works. 112 See id . § 1201(b) (stating that the use of circumvention devices will incur liability). A 2021 study of the DMCA included a sample of thirteen broadband providers that constitute eighty percent of the consumer market. 113 Reid, supra note 35, at 411–12. The principal investigator stated the DMCA study’s objectives as follows:

This study sought to identify the readability, accessibility, and clarity of ISP [(internet service provider)] policies on repeat infringers—policies by which each ISP “informs subscribers.” . . . [C]omplying with the DMCA is optional; however, no ISP in this study wholly opted out of the safe harbor schema. All ISPs within the sample had some policy language relevant to the DMCA. . . . [T]he location of the repeat infringer policy varied among the posted legal documents, as did the policy details and amount of specificity. However, the readability analysis reflects that these policies were uniformly written for a sophisticated and educated audience. 114 Id . at 414.

The service providers’ DMCA policies were drafted many grade levels beyond the reading level of the typical American reader:

For these ISP policies, the median grade level is a college graduate, and the readability score is “very difficult.” The median FKGL is 16.1, ranging from 10.5 to 26.4. On the U.S. education grade level, the average policy requires at least four years of post-high school education. The median [FRE score] is 24.35, ranging from 0 to 52.8. No policy met the standard plain English reading level of 60. . . . The scores above indicate the copyright and repeat infringer provisions were written at a level suitable for subscribers with tertiary education. Therefore, nonlawyer readers would find these policies very challenging to understand. This raises the question whether average subscribers are indeed the intended audience for these policies. One wonders whether these unreadable policies satisfy the DMCA condition to inform subscribers. 115 Id . at 419–20 (footnotes omitted).

E. Why Readability Matters

Readability has not been given enough attention in prior literature, notwithstanding that it is “a distinct and important dimension of disclosure quality.” 116 Steven F. Cahan, Seokjoo Chang, Wei Z. Siqueira & Kinsun Tam, The Roles of XBRL and Processed XBRL in 10-K Readability , 49 J. Bus. Fin. & Acct. 33, 33 (2021). This Section of the Article demonstrates the importance of readability for consumer disclosures, which is important to most Americans, given that readability enables consumers to understand the full terms to which they are, or are not, agreeing. Unreadable consumer contracts can lead consumers to agree to one-sided clauses in browsewrap or other mass-market agreements. For example, arbitrators in consumer cases only have authority if users have agreed to submit to arbitration. 117 As noted by the Court of Appeals of Ohio: [A]rbitration is a matter of contract and, despite the strong policy in its favor, a party cannot be compelled to arbitrate any dispute that he has not agreed to submit to arbitration. This axiom “recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed to submit such grievances to arbitration.” Peabody Landscape Constr., Inc. v. Welty Bldg. Co., No. 2022 CA 00023, 2022 WL 5240506, at *4 (Ohio Ct. App. Oct. 6, 2022) (citation omitted) (quoting Grady v. Winchester Place Nursing & Rehab. Ctr., No. 08 CA 59, 2009 WL 2217733 (Ohio Ct. App. July 20, 2009)). “While arbitration is encouraged as a form of dispute resolution, the policy favoring arbitration does not trump the constitutional right to seek redress in court.” 118 Id . As such, the unreadability of consumer contracts casts doubt on whether users have agreed to submit to arbitration, class action waivers, disclaimers of warranties, and limitations on damages to a nominal amount.

1. Social Media Rights-Foreclosure Schemes

Social networking websites deploy some of “the most widely used standard form contract[s] in world history with potentially billions of users.” 119 Rustad & Onufrio, supra note 3, at 1086. Hundreds of social networking sites, including Facebook, utilize ToU to condition “access to digital data and information-based platforms.” 120 Id . As of the second quarter of 2022, Facebook was the most widely used social media site worldwide, with approximately “2.93 billion monthly active users.” 121 S. Dixon, Facebook: Quarterly Number of MAU (Monthly Active Users) Worldwide 2008–2022 , Statista (Aug. 22, 2022), https://www.statista.com/​statistics/​264810/​number-of-monthly-active-facebook-users-worldwide [https://perma.cc/​H93G-YCYP]. “Around seven-in-ten U.S. adults (69%) say they ever use Facebook, according to an early 2021 phone survey. There has been no statistically significant change in the share of adults who use the platform since 2016.” John Gramlich, 10 Facts About Americans and Facebook , Pew Rsch. Ctr. (June 1, 2021), https://www.pewresearch.org/​fact-tank/​2021/​06/​01/​facts-about-americans-and-facebook [https://perma.cc/​DL8L-STUL].

Facebook requires all users to agree to its Terms of Service (ToS) as a condition of use. 122 See Terms of Service , Facebook, https://www.facebook.com/​legal/​terms [https://perma.cc/​C35T-QXFW] (July 26, 2022). Facebook’s ToS reveals that the social media giant claims the right to use the personal information of its users without payment or other compensation. 123 See id. “Facebook can use any of your stuff for any reason they want without paying you, for advertising in particular.” Facebook Terms of Service (Statement of Rights and Responsibilities) , tl;drLegal, https://tldrlegal.com/​license/​facebook-terms-of-service-(statement-of-rights-and-responsibilities) [https://perma.cc/​3EP5-8SB7]. As such, social network sites like Facebook are, in effect, schemes to foreclose the rights of their users:

The empirical reality is that few social networking site users would be aware that they waive their implied warranty of merchantability, surrender their right to file suit in a court of law, and agree to submit to arbitration in a distant forum by the mere act of cracking open shrinkwrap, clicking on an icon labeled “I agree” or merely accessing a website. In the past fifteen years, a large number of academics have called for radical reform of standard form TOUs. 124 Rustad & Onufrio, supra note 3, at 1142–43.

2. Consumer Disclosures on Financial Statements

Precontractual disclosure gives the consumer information about the costs and benefits of products or services used by American consumers. 125 Benoliel & Zheng, supra note 104, at 238–39. “Disclosure laws cover a wide range of products and services such as franchises, securities, employee-benefit plans, electronic fund transfers, product warranties, health plans, and consumer credits.” 126 Id. at 239. Mandatory disclosures in financial statements, such as 10-K statements, must be readable for potential investors to make informed decisions about whether to invest in a given company.

An accounting industry study “identifie[d] financial statement readability as a distinct and important dimension of disclosure quality that has been overlooked in the prior literature.” 127 Cahan, Chang, Siqueira & Tam, supra note 116, at 33. The study found that many potential investors rely on the company’s disclosures in regard to risk, thus highlighting the importance of readability:

[The] interim report on critical audit matter (CAM) disclosures finds that investors are using CAMs to better understand the work of the auditor and company disclosures. Furthermore, as part of the report, a survey of investors finds that most respondents were likely to use CAMs to identify risks associated with a given company. However, the survey results indicate that just 55% of respondents viewed the CAMs as easy to understand. 128 Edward Lynch, Making Critical Audit Matters More Readable , J. Acct. (Oct. 1, 2021), https://www.journalofaccountancy.com/​issues/​2021/​oct/​make-critical-audit-matters-more-readable.html [https://perma.cc​/KCF5-FPAK]..

3. Unreadable Jury Instructions

The integrity of the jury system depends upon the readability of the jury instructions, especially considering that the average reading level of an American adult is the eighth grade. 129 The average American adult has an eighth-grade reading level. Approximately thirty-two million American adults cannot read, and twenty-one percent of American adults are considered illiterate, that is, having below a fifth-grade reading level. Low literacy in the United States causes problems in jury trials because pattern instructions, on average, are written at a twelfth-grade reading level. Barnes, supra note 1, at 195 (footnotes omitted). However, “jury instructions are too difficult [to understand] and are thus unintelligible” to many jurors, given their poor wording and arcane meaning 130 Bettina E. Brownstein, It’s Time to Make Jury Instructions Understandable , Ark. Law., Fall 2002, at 24, 24. :

Imagine you are a layperson with an eighth-grade reading level. You are a juror in a capital murder sentencing, and life or death hinges on your determination of fact and application of the law. The judge reads the instructions, and then sends you and the other jurors to deliberate. Your decision depends on your understanding of how to apply aggravating and mitigating factors according to this sentencing instruction . . . . 131 Barnes, supra note 129, at 194–95 (footnote omitted).

A juror’s inability to understand jury instructions in, for example, a capital murder case has life or death consequences. This Part of the Article has given examples of why readability matters in consumer contracts where Americans inadvertently waive constitutional rights and substantive consumer protections. The U.S. Supreme Court has long established the requirement of an intelligent waiver of constitutional rights. 132 “A waiver is ordinarily an intentional relinquishment or abandonment of a known right or privilege. The determination of whether there has been an intelligent waiver of the right to counsel must depend, in each case, upon the particular facts and circumstances surrounding that case . . . .” Johnson v. Zerbst, 304 U.S. 458, 464 (1938). The next Part will demonstrate that the largest American companies draft their consumer agreements many grade levels above the reading level of most U.S. consumers, so many users are not intelligently, or at all, aware that they are waiving important constitutional rights.

II. Empirical Study of the Readability of Top U.S. Companies’ Consumer Contracts

In 2011, the U.S. Supreme Court legitimized the practice of imposing mandatory arbitration clauses and class action waivers in AT&T Mobility LLC v. Concepcion . 133 563 U.S. 333 (2011). The Court “described [these] provision[s] as reflecting both a ‘liberal federal policy favoring arbitration,’ and the ‘fundamental principle that arbitration is a matter of contract.’” 134 Id . at 339 (first quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983); and then quoting Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67 (2010)). Consumer arbitration is a forum wherein providers have significant advantages:

Imagine a profoundly unfair legal world in which businesses redirect consumer lawsuits away from state and federal courts into secret tribunals, in which a privately hired judge decides cases without precedents and with only limited grounds for an appeal. Under secretive forced arbitration, the social media service determines the arbitral provider and selects the rules that govern disputes with consumers. Visualize further . . . legally binding terms of use (TOU) “agreements” that are seldom, if ever, read. Even if they are read, the TOU are composed of unnecessarily complex terminology, which is drafted at the comprehension level of a typical college graduate. In this dystopian legal world, users are required to waive their constitutional right to a jury trial, the right of liberal discovery, and the right of appeal by agreeing to “take-it-or-leave it” terms of use. 135 Thomas H. Koenig & Michael L. Rustad, Fundamentally Unfair: An Empirical Analysis of Social Media Arbitration Clauses , 65 Case W. Rsrv. L. Rev. 341, 343–44 (2014) (footnotes omitted)..

This Part of the Article covers the largest empirical study of the legal world regarding unreadable and unfair consumer contracts. 136 All calculations within this Part are based on the formula found in Garger, supra note 32. Using the FRE and FKGL tests, this study measured the readability of the ToU for (1) the 100 largest U.S. retailers; (2) the 100 largest U.S. digital companies; (3) the 100 largest U.S. software companies; (4) the 50 largest U.S. banks; and (5) the 33 largest credit card companies. 137 See supra note 11 and accompanying text. “A reading level is the level of education the average person needs to be at to understand your content. These are calculated by a number of algorithms, the most widely used being the Flesch Kincaid Reading Level.” Laura Kelly, What Is the Average Person’s Reading Level? , Readable: Readability News (Aug. 21, 2020), https://readable.com/‌blog/‌what-is-the-average-persons-reading-level [https://perma.cc/‌M7X8-B644]. Both tests also assessed the readability of consumer contracts employed by the largest U.S. companies.

A. Readability of Largest Retailers’ Terms of Use

Overall, the ToU for the top 100 largest U.S. retailers were drafted at an average FKGL of 14.3 (college level) and an average FRE score of 38 (difficult). Seventy-eight of the 100 largest retailers’ arbitration clauses were drafted at a readability level requiring nearly three years of college (Grade 14.7). The FRE score for the sixty-one arbitration clauses was 34, only slightly more difficult than the ToU (some college).

In contrast, the liability limitation clauses (i.e., caps on damages) were drafted at an average FKGL of 21 (equivalent to a Ph.D.) and an average FRE score of 17 (equivalent to a college graduate degree). Warranty disclaimers for the top 100 retailers were drafted at an average FKGL of 18 (equivalent to a Master’s degree). 138 See Deborah Ziff Soriano, How Long Does It Take to Get a Master’s Degree? , U.S. News & World Rep. (Mar. 13, 2019, 12:26 PM), https://www.usnews.com/​education/​best-graduate-schools/​articles/​2019-03-13/​how-long-does-it-take-to-get-a-masters-degree (last visited Nov. 27, 2022) (“The classic master’s degree model of ‘going to graduate school,’ where someone stops working and focuses on being a full-time student, often takes about two years.” (quoting Sean Gallagher, Exec. Dir., Ctr. for the Future of Higher Educ. & Talent Strategy, Ne. Univ.)).

Table Four below reveals the readability of the top ten U.S. retailers as ranked by 2020 sales. The ToU are drafted to be either fairly difficult or difficult to read with a range of grade level requirements between grade ten to college and beyond. Eight out of the top ten retailers drafted their standard form agreements so only a consumer with a college education could understand them.

Table Four: Readability of Top Ten Retailers’ Terms of Use 139 Top 100 Retailers 2021 List , supra note 11 .

Eight out of the ten leading retailers drafted their standard form agreements at a level only understood by consumers with a college education. None of these retailers drafted their ToU to be understood by the average American adult, who reads at an eighth-grade level. Only those with a college degree or beyond were able to decipher Walgreens Boots Alliance, Target, CVS, and Lowe’s Companies’ ToU, nine grade levels higher than what the average American adult can comprehend. Overall, the ten largest retailers missed the readability mark by a wide margin. 150 See infra Table 7.

B. Readability of Top Digital Companies’ Consumer Contracts

The readability scores of ToU for companies listed on Forbes ’ list of the top 100 digital companies reveals that their terms are written at a college level. 151 Top 100 Digital Companies , supra note 11. The FRE score for these companies was 38.3, which is classified as difficult to read. When applying the FKGL formula, these companies’ terms were written at a Grade 14 level (some college), six grade levels above the average reading level of U.S. adults. 152 See FRE & FKGL , supra note 30 (“The Flesch Kincaid Grade Level is a widely used readability formula which assesses the approximate reading grade level of a text. It was developed by the US Navy who worked with the Flesch Reading Ease. Previously, the Flesch Reading Ease score had to be converted via a table to translate to the reading grade level. The amended version was developed in the 1970s to make it easier to use. The Navy utilised it for their technical manuals used in training.”); Top 100 Digital Companies , supra note 11.

The contracts for the ten largest digital companies demonstrated a wide range in readability: Apple (Grade 17.2), Microsoft (Grade 8.7), Samsung Electronics (Grade 12.2), Alphabet-Google (Grade 15.9), AT&T (Grade 12.1), Amazon (Grade 9.5), Verizon (Grade 18.5), China Mobile (Grade 12.5), Walt Disney (Grade 16.5), and Facebook (Grade 12.7). 153 The complete list of the top 100 digital companies includes: Apple, Microsoft, Samsung Electronics, Alphabet-Google, AT&T, Amazon, Verizon, China Mobile, Walt Disney, Facebook, Alibaba, Intel, Softbank, IBM, Tencent Holdings, Nippon Telegraph & Telephone Corp. (NTT), Cisco Systems, Oracle, Deutsche Telekom, Taiwan Semiconductor, KDDI, SAP, Telefónica, América Móvil, Hon Hai Precision, Dell Technologies, Orange, China Telecom, SK Hynix, Accenture, Broadcom, Micron Technology, Qualcomm, PayPal, China Unicom, HP, Bell (BCE), Tata Consultancy Services, Automatic Data Processing (ADP), BT Group, Mitsubishi Electric, Canon, Booking Holdings, Saudi Telecom Co., JD.com, Texas Instruments, Netflix, Phillips, Etisalat, Baidu, ASML Holding, Salesforce, Applied Materials, Recruit Holdings, Singtel, Adobe, Xiaomi, Telstra, Vmware, TE Connectivity, SK Holdings, Murata Manufacturing, Cognizant, NVIDIA, eBay, Telenor, Vodafone, SK Telecom, Vivendi, Naspers, Infosys, China Tower Corp., Swisscom, Corning, Fidelity National Information, Rogers Communications, Nintendo, Kyocera, NXP Semiconductors, DISH Network, Rakuten, Altice Europe, TELUS, Capgemini, Activision Blizzard, Analog Devices, Lam Research, DXC Technology, Legend Holdings, Lenovo Group, NetEase, Tokyo Electron, Keyence, Telkom Indonesia, Nokia, Fortive, Ericsson, Fiserv, Fujitsu, and Hewlett Packard Enterprise. Top 100 Digital Companies , supra note 11. Microsoft was the only top digital company with ToU comprehensible to the average American adult. Accordingly, as with the largest retailers, the top ten retailers drafted their consumer contracts to be incomprehensible to most U.S. consumers.

C. Readability of Software Licenses

The readability of the ToU for the 100 largest software companies reveals a comparable pattern of poor readability to that of the 100 largest retailers and the 100 largest digital companies. 154 Id . The top ten software companies drafted their terms so that they were understandable by readers with a wide range of education, from Grade 9 to beyond a college level. The reading level necessary to understand these companies’ terms was a year and a half of college (Grade 13.5), five and a half years beyond the reading level of the average American adult.

The 100 largest software companies also drafted their consumer contracts to require a minimum reading level of two or more years of college education (Grade 14). Thus, software license agreements were drafted six grade levels beyond what the average U.S. adult would comprehend. The average FRE score was 38.3, which is difficult to read, requiring a college education. The plain English standard is 60 to 70, demonstrating that the readability of software licenses surpasses the readability benchmark for average U.S. adults by a wide margin. 155 What Is Flesch Reading Ease Score? , Character Calculator, https://charactercalculator.com/flesch-reading-ease/‌#:~:text=The%20Flesch%20reading%‌20ease%20score%20indicates%20the%20understandability,the%20content%20is%20easy%20to%20read%20and%20understand [https://perma.cc/‌JP4A-WZHU] (stating that FRE scores of 60 to 70 are the plain English standard and require an eighth- or ninth-grade education, whereas FRE scores of 30 to 50 require a college education); see also Garger, supra note 32..

The ease with which a reader can understand a software license or ToU is vital to American consumers who are asked to waive important rights. However, the software industry substantially misses the readability mark.

D. Readability of Largest Banks’ Customer Agreements

The average FRE score of the fifty largest U.S. banks’ agreements was 41.9, revealing that these agreements are easier to read than that of the top 100 retailers, digital companies, and software license agreements. 156 The FKGL and FRE scores for the top U.S. banks and financial institutions included scores for the following: JPMorgan Chase, Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs, Morgan Stanley, Charles Schwab, U.S. Bancorp, Truist Financial Corp., PNC Financial Services, TD Group US Holding, Bank of New York Mellon, Capital One Financial Corp., State Street Corp., HSBC North America, Citizens Financial Group, SVB Financial Group, UBS Americas Holding, Fifth Third Bancorp, United Services Automobile Assoc., American Express Co., M&T Bank Corp., First Republic Bank, BMO Financial Corp., KeyCorp, Ally Financial, Huntington Bancshares, Barclays US LLC, Santander Holdings USA, RBC US Group Holding, Regions Financial Corp., Ameriprise Financial, Northern Trust Corp., MUFG Americas Holdings, BNP Paribas USA, DB USA Corp., Signature Bank, Discover Financial Services, First Citizens Bancshares, Synchrony Financial, Credit Suisse Holdings (USA), Zions Bancorporation N.A., Comerica Inc., Raymond James Financial Inc., First Horizon Corp., Popular, Inc., Webster Financial Corp., Western Alliance Bancorp, CIBC Bancorp USA, and New York Community Bancorp. Top 50 Banks in America , supra note 11.. On average, these banks drafted their consumer contracts at a Grade 16.3 level, eight grade levels above the average U.S. adult’s reading level. 157 See What’s the Latest U.S. Literacy Rate? , supra note 1.

E. Largest Credit Card Providers’ Agreements

The nine largest credit card companies in the sample represented over two-thirds, or 72.3%, of the industry: Chase (16.6%), Citigroup (11.6%), American Express (11.3%), Bank of America (10.7%), Capital One (10.5%), Discover (7.6%), Wells Fargo (4.3%), U.S. Bank (4.1%), and Barclay’s (2.6%). 158 Lyle Daly, The 5 Most Popular Credit Card Companies , ascent (Sept. 16, 2021), https://www.fool.com/​the-ascent/​credit-cards/​articles/​5-most-popular-credit-card-companies [https://perma.cc/‌CCZ9-ZZWE]. These companies’ credit card agreements were more comprehensible than every other sample, except banking agreements. On average, they were drafted at a tenth-grade level (Grade 10.4), which is identical to the average reading level of the thirty-three largest credit card companies described in Table Five below.

F. Summary of Readability of the Largest U.S. Companies’ Terms of Use

Table Five below presents the FRE and FKGL scores for the 100 largest retailers, the 100 largest digital companies, the 100 largest software companies, the 50 largest banks, and the 33 largest credit card companies. The National Retail Federation (NRF)’s list of the 100 largest retailers ranks the industry’s largest companies according to sales, with Walmart at the top and Amazon in second place. 159 Sandy Smith, 2021 Top 100 Retailers , NRF (July 6, 2021), https://nrf.com/​blog/​2021-top-100-retailers [https://perma.cc/​Y6ZE-QY66] (“The Top 100 roster is based on sales rankings for 2020. While pandemic-related lockdowns negatively impacted some retailers, others were able to benefit: Grocers like Publix, Aldi and H-E-B all moved up in the rankings, as did The Home Depot and Target. Those taking a hit included retailers like TJX Companies and Macy’s.”). Walmart had $543.17 billion in 2020 worldwide retail sales, followed by Amazon with $263.16 billion. 160 Top 100 Retailers 2021 List , supra note 11. The 100 largest retailers had a mean income of $3 billion in 2020 retail sales. 161 See id . The ToU for the 100 largest digital companies were written at a Grade 14 level. Thus, readers of these retailers’ contracts would need to have a minimum of fourteen years of education. 162 See FRE & FKGL , supra note 30.

Table Five: Summary of Readability of Large Providers Terms of Use

The readability samples summarized in Table Five above represent the most extensive empirical investigation of the readability of ToU conducted to date. The major finding that the FRE scores demonstrate is that terms are difficult to read. Banks had the best readability score of 43, followed by credit card companies with 42. The readability of the ToU for the 100 largest digital retailers and the 100 largest retailers was 38. The terms for software companies were the most difficult to read, with an FRE score of 37.

The FRE scores for all of these groups were within five points of each other in the “difficult to read” category. Given that the desired FRE score ranges from 60 to 69, it is clear that these large companies drafted documents to be indecipherable for many American adults. 172 “Scores between 90.0 and 100.0 are considered easily understandable by an average 5th grader. Scores between 60.0 and 70.0 are considered easily understood by 8th and 9th graders. Scores between 0.0 and 30.0 are considered easily understood by college graduates.” The Flesch Reading Ease Readability Formula , Readability Formulas, https://readabilityformulas.com/​flesch-reading-ease-readability-formula.php [https://perma.cc/​FHA4-BPDH]. Similarly, the average FKGL for these providers’ agreements was Grade 14, a full six grade levels beyond what average U.S. adults are able to comprehend.

Next, consumer agreements for the fifty largest banks were drafted at an average Grade 13 level, five grade levels above what the average American adult can comprehend. The ten largest credit card providers accounted for 82% of the market share. 173 Rodriguez, supra note 170. Consumer contracts in all five samples failed the standard readability test by a wide margin.

So far, Part II has demonstrated that the largest U.S. companies systematically draft their consumer contracts to be incomprehensible to the average user, yet consumers are presumed to have read and understood the terms. If mass-market ToU are not drafted in easy-to-read language, consumers will have no meaningful opportunity to understand the rights they are waiving—including their constitutional right to a jury trial, as well as their contractual right to a minimum adequate remedy—before entering into contracts with America’s largest companies.

G. Readability of Rights-Foreclosure Clauses

The readability of rights-foreclosure clauses—notably, the liability limitation clauses and arbitration anti-class action clauses for the 100 largest retailers, the 100 largest digital companies, the 100 largest software companies, the 50 largest banks, and the 33 largest credit card companies—are even more incomprehensible than the consumer agreements as a whole. The ToU agreements utilized by these entities are “boilerplate rights deletion schemes” “masquerad[ing] in the clothing of contract.” 174 Michael L. Rustad, Wenzhuo Liu & Thomas H. Koenig, Destined to Collide? Social Media Contracts in the U.S. and China , 37 U. Pa. J. Int’l L. 647, 708 & n.300 (2015) (quoting Margaret Jane Radin, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law 39–40, 204 (2013) (explaining how boilerplate rights deletion schemes cancel or withdraw rights, including warranties or remedies under Article 2 of the Uniform Commercial Code)).

1. Types of Rights-Foreclosure Clauses

The largest American companies have created a “‘coercive contracting environment’ because of aggressive terms disclaiming warranties and limiting liability.” 175 Id. (quoting Radin, supra note 174, at 39–40, 204). Increasingly, these companies are imposing upon customers predispute arbitration clauses, coupled with anti-class action clauses. These one-sided clauses, which “have the effect of depriving users of a meaningful right to redress,” often include “unbalanced features, such as pro-provider choice-of-forum and choice-of-law clauses” that “shield the provider by imposing warranty limitations, anti-class action waivers, and hard caps on total recovery that make pursuing arbitration cost prohibitive.” 176 Rustad & Koenig, supra note 13, at 1435. This Section of the Article demonstrates that rights-foreclosure clauses are drafted to be even more unreadable than consumer contracts as a whole.

2. Caps on Damages Clauses

Table Six: Caps on Damages Clauses

Table Six above summarizes the readability of caps on damages provisions deployed by the largest U.S. companies. Eighty-four percent of the 100 largest U.S. retailers imposed caps on damages by limiting liability. Nine of the ten largest retailers cap damages at a nominal amount, or zero dollars as in Walmart’s consumer contract below. “Walmart, the multinational retail corporation that operates hypermarkets, discount department stores and grocery stores, remains the largest retailer in the world, posting record annual revenue of US$559 billion, a rise of US$35 billion [from] 2019.” 183 Ian Horswill, Record-Breaking Walmart Remains World’s Biggest Retailer , CEO Mag. (Feb. 19, 2021, 12:08 PM), https://www.theceomagazine.com/​business/​finance/​walmart [https://perma.cc/‌TW4R-QHYM]. Walmart drafted its liability limitation clause at a Grade 27 level and caps damages at zero, disclaiming every conceivable theory of liability:

YOU ACKNOWLEDGE AND AGREE THAT, TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, WALMART ENTITIES WILL NOT BE LIABLE TO YOU OR TO ANY OTHER PERSON UNDER ANY CIRCUMSTANCES OR UNDER ANY LEGAL OR EQUITABLE THEORY, WHETHER IN TORT, CONTRACT, STRICT LIABILITY, OR OTHERWISE, FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL LOSSES OR DAMAGES OF ANY NATURE EVEN IF AN AUTHORIZED REPRESENTATIVE OF A WALMART ENTITY HAS BEEN ADVISED OF OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES. TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, THIS DISCLAIMER APPLIES TO, BUT IS NOT LIMITED TO, ANY DAMAGES OR INJURY ARISING FROM ANY FAILURE OF PERFORMANCE, ERROR, OMISSION, INTERRUPTION, DELETION, DEFECTS, DELAY IN OPERATION OR TRANSMISSION, LOST PROFITS, LOSS OF GOODWILL, LOSS OF DATA, WORK STOPPAGE, ACCURACY OF RESULTS, COMPUTER FAILURE OR MALFUNCTION, COMPUTER VIRUSES, FILE CORRUPTION, COMMUNICATION FAILURE, NETWORK OR SYSTEM OUTAGE, THEFT, DESTRUCTION, UNAUTHORIZED ACCESS TO, ALTERATION OF, LOSS OF USE OF ANY RECORD OR DATA, AND ANY OTHER TANGIBLE OR INTANGIBLE LOSS. SUBJECT TO THE FOREGOING, TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, NO WALMART ENTITY WILL BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE FEES PAID BY YOU IN CONNECTION WITH YOUR USE OF THE WALMART SITES DURING THE SIX (6) MONTH PERIOD PRECEDING THE DATE ON WHICH THE CLAIM AROSE. YOU SPECIFICALLY ACKNOWLEDGE AND AGREE THAT, TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, NO WALMART ENTITY WILL BE LIABLE FOR ANY DEFAMATORY, OFFENSIVE, OR ILLEGAL CONDUCT OF ANY SELLER (INCLUDING ANY MARKETPLACE RETAILER), SHOPPER, OR OTHER USER OF THE WALMART SITES. 184 Walmart.com Terms of Use , supra note 140.

CVS’s liability limitation clause, written at a Grade 21 level, caps damages at $25 or the fees paid:

ANY LIABILITY ON THE PART OF THE CVS PARTIES, IN THE AGGREGATE, SHALL NOT EXCEED THE FEES PAID BY YOU SOLELY FOR THE RIGHT TO USE THE PARTICULAR INFORMATION OR SERVICE PROVIDED BY CVS HEREUNDER OR $25, WHICHEVER IS GREATER. 185 CVSHealth.com: Notice of Terms of Use , supra note 147.

Costco Wholesale, the fourth largest U.S. retailer as of 2021, drafted its liability limitation clause at a Grade 28 level and caps aggregate liability at $100. 186 Terms and Conditions of Use , supra note 144. Importantly, Walgreens Boots Alliance’s liability limitation clause, which caps damages at $0, was an indecipherable clause, drafted at a Grade 29 level. 187 Terms of Use , supra note 145. Moreover, the liability limitation clauses of the ten largest U.S. retailers were drafted at an average grade level of 21—thirteen grade levels above the reading level of the average American adult and seven grade levels above the ToU as a whole. As such, the vast majority of Americans will not be able to understand Walgreens’ rights-foreclosure clauses.

Turning to the ten largest digital companies, the readability of their ToU were as follows: Apple (Grade 17), Microsoft (Grade 9), Samsung Electronics (Grade 12), Alphabet-Google (Grade 16), AT&T (Grade 12), Amazon (Grade 10), Verizon (Grade 19), China Mobile (Grade 13), Walt Disney (Grade 17), and Facebook (Grade 13). Moreover, the average grade level for these companies’ terms was 14, and like the 100 largest retailers, they drafted their liability limitation clauses to be even more incomprehensible than the ToU as a whole.

Next, the 100 largest retailers drafted their liability limitation clauses with an average FRE score of only 34, missing the 70 mark by 36 points. The average grade level for these retailers’ clauses was 20, twelve grade levels higher than what can be understood by the average U.S. adult. Additionally, the 100 largest digital companies drafted their liability limitation clauses at an average grade level of 20 (equivalent to a Ph.D. or other professional degree) with an average FRE score of 21 (very confusing).

The 100 largest software companies drafted their consumer contracts at an average grade level of 14. As with the online retailers and digital companies, their liability limitation clauses were drafted to be indecipherable at an average grade level of 20. The fifty largest banks had the greatest discrepancy between the readability of their ToU and liability limitation clauses—a difference of nine grade levels. 188 Credit card companies do not incorporate liability limitation clauses into their agreements and thus are not included in this analysis. Their liability limitation clauses were drafted at a level understood only by someone with a Ph.D. or other professional degree, far beyond the reading level of the average American adult.

The objective reality is that few Americans have any prospect of understanding rights-foreclosure clauses, given that they are drafted to be indecipherable. When ordinary Americans have no reasonable opportunity to understand consumer contracts because they are unreadable, they will forfeit important consumer rights as well as constitutional protections. American businesses should have a nondisclaimable duty to make legally binding agreements understandable. If Americans have a duty to read these agreements, companies should have a duty to make them readable.

3. Predispute Mandatory Arbitration Clauses

A predispute mandatory arbitration clause is a clause in which a provider requires users to agree to waive their right to a jury or court trial. Instead, users are forced to submit to an arbitration proceeding where the courts’ usual rules of evidence, discovery, and procedural protections are not followed. A growing number of ToU include predispute mandatory arbitration clauses requiring hearings to be conducted in the provider’s home forum and shifting the cost of air travel, hotels, and other expenses onto the consumer. 189 See Rustad & Koenig, supra note 13, at 1435, 1492–93; Michael L. Rustad, Richard Buckingham, Diane D’Angelo & Katherine Durlacher, An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements , 34 U. Ark. Little Rock L. Rev. 643, 644 (2012) (“Over the past few years, a quiet revolution has begun as many social networking sites (SNSs) impose predispute mandatory arbitration on consumers. Senator Patrick Leahy (D. Vt.) stated, ‘Mandatory arbitration makes a farce of the right to a jury trial and the due process guaranteed to all Americans.’” (quoting Arbitration: Is It Fair When Forced?: Hearing Before the S. Comm. on the Judiciary , 112th Cong. 112 (2011) (statement of Sen. Patrick Leahy, Chairman, S. Comm. on the Judiciary))). Under these imbalanced clauses, predispute mandatory arbitration creates a liability-free zone for an increasing number of U.S. companies:

“[A]rbitration clauses deprive consumers of certain legal protections available in court, and may serve to quash a dispute rather than provide an alternative way to resolve it.” Forced arbitration . . . disadvantages consumers by creating a repeat player bias, capping award size, allowing evidence to be concealed, employing clandestine proceedings, suppressing claims and prohibiting an appellate court review to reverse or modify an arbitrator’s erroneous decision. 190 Koenig & Rustad, supra note 135, at 350 (footnote omitted) (quoting Richard Cordray, Prepared Remarks at the Field Hearing on Arbitration (Dec. 12, 2013), https://www.consumerfinance.gov/‌about-us/newsroom/‌prepared-remarks-of-director-richard-cordray-at-the-field-hearing-on-arbitration [https://perma.cc/‌6XD6-EBVA]).

The CFPB has compared court actions to class actions, which “establish effective procedures for redress of injuries for those whose economic position would not allow individual lawsuits. . . . [Thus], they improve access to the courts” 191 Darling v. Champion Home Builders Co., 638 P.2d 1249, 1252 (Wash. 1982) (citing 7 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1754, at 543 (1972)). :

[T]he federal court system and most state court systems provide for a class action process in which, in defined circumstances, one or more plaintiffs may file suit on behalf of similarly-situated individuals. If such an action is certified by the court as meeting the criteria for a class action and plaintiffs prevail or secure a settlement, all members of the class—for example, customers of a company who have been adversely affected by a particular practice—may be eligible to obtain relief without initiating their own lawsuits. Conversely, if the defendant prevails in a certified class action, all members of the class may be bound by the decision and thereby precluded from initiating their own lawsuits with respect to the claims at issue in the class case. 192 O. Tom Thomas, Bank Compliance Guide ¶ 102-375 (2015), 2015 WL 12736587..

The U.S. Supreme Court has held that the Federal Arbitration Act does not permit a court to strike down anti-class action clauses, even if the possible recovery has been capped below the minimum costs of pursuing the dispute. 193 Am. Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013). “[C]ourts must place arbitration agreements on an equal footing with other contracts.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). And thus “courts must ‘rigorously enforce’ arbitration agreements according to their terms.” Am. Express Co. , 570 U.S. at 233 (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985)). After the Court’s decision, many large companies now incorporate predispute mandatory arbitration clauses coupled with class action waivers in their consumer contracts.

For example, Walmart predicates its users’ agreement to arbitrate on using or accessing its site and couples this arbitration clause with an anti-class action clause:

Using or accessing the Walmart Sites constitutes your acceptance of this Arbitration provision. Please read it carefully as it provides that you and Walmart will waive any right to file a lawsuit in court or participate in a class action for matters within the terms of the Arbitration provision. EXCEPT FOR DISPUTES THAT QUALIFY FOR SMALL CLAIMS COURT, ALL DISPUTES ARISING OUT OF OR RELATED TO THESE TERMS OF USE OR ANY ASPECT OF THE RELATIONSHIP BETWEEN YOU AND WALMART, WHETHER BASED IN CONTRACT, TORT, STATUTE, FRAUD, MISREPRESENTATION, OR ANY OTHER LEGAL THEORY, WILL BE RESOLVED THROUGH FINAL AND BINDING ARBITRATION BEFORE A NEUTRAL ARBITRATOR INSTEAD OF IN A COURT BY A JUDGE OR JURY, AND YOU AGREE THAT WALMART AND YOU ARE EACH WAIVING THE RIGHT TO SUE IN COURT AND TO HAVE A TRIAL BY A JURY. YOU AGREE THAT ANY ARBITRATION WILL TAKE PLACE ON AN INDIVIDUAL BASIS; CLASS ARBITRATIONS AND CLASS ACTIONS ARE NOT PERMITTED AND YOU ARE AGREEING TO GIVE UP THE ABILITY TO PARTICIPATE IN A CLASS ACTION. The arbitration will be administered by Judicial Arbitration Mediation Services, Inc. (“JAMS”) pursuant to the JAMS Streamlined Arbitration Rules & Procedures effective July 1, 2014 (the “JAMS Rules”) and as modified by this agreement to arbitrate. The JAMS Rules, including instructions for bringing arbitration, are available on the JAMS website at http://www.jamsadr.com/rules-streamlined-arbitration. The Minimum Standards are available at http://www.jamsadr.com/consumer-arbitration. 194 Walmart.com Terms of Use , supra note 140.

The arbitration clauses of some of the largest U.S. companies frequently specified commercial rules of arbitration rather than consumer rules, even though most disputes will be with consumers. None of the nine digital companies choosing the American Arbitration Association (AAA) specified that the consumer rules apply. Digital providers also chose the following arbitral providers: JAMS; the Hong Kong International Arbitration Centre; International Arbitration Rules of the Korean Commercial Arbitration Board; and the Arbitration Act; 1991 (Ontario). The AAA recognizes a dual-track system for arbitration depending upon whether it is business-to-business, where the Commercial Dispute Resolution Procedures apply, or business-to-consumer, where Supplementary Procedures for Consumer-Related Disputes are followed. 195 Thomas L. Gravelle & Mary A. Bedikian, Supplementary Procedures for Consumer-Related Disputes , at app. 62C.XI:N, in 8B Mich. Pleading & Prac. (2d ed. 2022).

The AAA rules state that “[i]f there is a difference between the Commercial Dispute Resolution Procedures and the Supplementary Procedures, the Supplementary Procedures will be used.” 196 Id . Under the AAA’s commercial arbitration rules, the minimum fees under the Standard Fee Schedule for any case having three or more arbitrators are $4,400 for the Initial Filing Fee and $3,850 for the Final Fee; and under the Flexible Fee Schedule, the minimum fees are $2,200 for the Initial Filing Fee, $3,300 for the Proceed Fee, and $3,850 for the Final Fee. 197 Commercial Arbitration Rules and Mediation Procedures: Administrative Fee Schedules , Am. Arb. Ass’n 2 (May 1, 2018), https://www.adr.org/‌sites/‌default/‌files/‌Commercial_‌Arbitration_‌Fee_‌Schedule_‌1.pdf [https://perma.cc/‌TGG9-WDGB]. Further, the commercial fees “do not cover the cost of hearing rooms, which are available on a rental basis” and are shared by the parties. 198 Id . JAMS also states that it will not administer consumer arbitration unless its minimum standards of fairness are adopted. 199 JAMS, JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness 3 (2009), http://www.jamsadr.com/‌files/‌Uploads/‌Documents/‌JAMS-Rules/‌JAMS_Consumer_Min_Stds-2009.pdf [https://perma.cc/‌2ALB-MPU3].

Given the common use of binding predispute mandatory arbitration clauses, Table Seven below provides a summary of the readability of such clauses for the 100 largest retailers, the 100 largest digital companies, the 100 largest software companies, the fifty largest banks, and the thirty-three largest credit card companies.

Table Seven: Readability of Predispute Mandatory Arbitration Clauses

Table Seven above reveals that predispute mandatory arbitration clauses were drafted at a reading level slightly higher than the ToU as a whole, and the FRE scores for both arbitration clauses and the ToU as a whole indicate that they are difficult to read. Further, arbitration clauses, as well as the mass-market licenses, were drafted six grade levels beyond what the average American adult can understand.

The Pew Research Internet Project found that 71% of Facebook users had a high school education or less, 200 Duggan & Smith, supra note 48. which is too low to comprehend the websites’ ToU. Not only are arbitration clauses unreadable, but they also foreclose the possibility of any meaningful remedy, given that the vast majority of the largest U.S. companies cap damages at a nominal amount that is significantly lower than the consumer’s cost of filing, which is $200 under the AAA 201 Am. Arb. Ass’n, Consumer-Related Disputes: Supplementary Procedures 12 (2014), https://www.adr.org/​sites/​default/​files/Consumer-Related%​20Disputes%​20​Supplementary​%​20Procedures%​20Sep%​2015%​2C%​202005.pdf [https://perma.cc/‌MTN5-9AET]. and $250 under JAMS. 202 JAMS, supra note 199, at 3. This is, in effect, a no-liability zone because consumers will not file claims where the cost of arbitration exceeds the potential recovery.

4. Readability of Warranty Disclaimer Clauses

U.S. companies typically disclaim all implied warranties. Specifically, licensors disclaim implied warranties including the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. “To disclaim or modify the implied warranty [of merchantability], language must mention ‘merchantability’ or ‘quality’ or use words of similar import and, if in a record, must be conspicuous.” 203 Unif. Comput. Info. Transactions Act § 406(b)(1)(A) (Unif. L. Comm’n 2002) (describing methodology for disclaiming warranties under the Uniform Computer Information Transactions Act). In addition, written disclaimers must be conspicuous to be effective. 204 U.C.C. § 1-201(b)(10) (Am. L. Inst. & Unif. L. Comm’n 2021). As with Article 2 of the Uniform Commercial Code (UCC), “disclaimers will be effective if the licensor demands that the software be tested and the licensee fails to do testing in a timely manner.” 205 Michael L. Rustad, Software Licensing: Principles and Practical Strategies 222 (2010).

The largest U.S. companies eliminate all warranties with far-reaching disclaimers. For example, Walmart’s warranty disclaimer clause states:

THE WALMART SITES, AND ALL CONTENT, MATERIALS, PRODUCTS, SERVICES, FUNCTIONALITY, AND OTHER ITEMS INCLUDED ON OR OTHERWISE MADE AVAILABLE TO YOU THROUGH THE WALMART SITES, AND/OR WALMART STORE LOCATIONS, ARE PROVIDED BY WALMART ON AN “AS IS” AND “AS AVAILABLE” BASIS. NO WALMART ENTITY MAKES ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, AS TO THE OPERATION OF THE WALMART SITES OR THE CONTENT, MATERIALS, PRODUCTS, SERVICES, FUNCTIONALITY, OR OTHER ITEMS INCLUDED ON OR OTHERWISE MADE AVAILABLE TO YOU. TO THE FULLEST EXTENT PERMISSIBLE BY APPLICABLE LAW, THE WALMART ENTITIES DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUT LIMITING THE FOREGOING, THE WALMART ENTITIES DISCLAIM ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, FOR ANY MERCHANDISE OFFERED. YOU ACKNOWLEDGE THAT, TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, YOUR USE OF THE WALMART SITES IS AT YOUR SOLE RISK. THIS SECTION 17 DOES NOT LIMIT THE TERMS OF ANY PRODUCT WARRANTY OFFERED BY THE MANUFACTURER OF AN ITEM THAT IS SOLD BY WALMART TO YOU. THIS DISCLAIMER CONSTITUTES AN ESSENTIAL PART OF THESE TERMS OF USE. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, YOU ASSUME FULL RESPONSIBILITY FOR YOUR USE OF THE WALMART SITES AND AGREE THAT ANY INFORMATION YOU SEND OR RECEIVE DURING YOUR USE OF THE WALMART SITES MAY NOT BE SECURE AND MAY BE INTERCEPTED OR OTHERWISE ACCESSED BY UNAUTHORIZED PARTIES. YOU AGREE THAT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, NO WALMART ENTITY IS RESPONSIBLE FOR ANY LOSS OR DAMAGE TO YOUR PROPERTY OR DATA THAT RESULTS FROM ANY MATERIALS YOU ACCESS OR DOWNLOAD FROM THE WALMART SITES. SOME STATES DO NOT ALLOW LIMITATIONS ON HOW LONG AN IMPLIED WARRANTY LASTS, SO THE FOREGOING LIMITATIONS MAY NOT APPLY TO YOU. 206 Walmart.com Terms of Use , supra note 140.

Table Eight: Readability of Warranty Disclaimer Clauses

Table Eight above reveals that the vast majority of the largest retailers, digital companies, software companies, and banks disclaim all implied warranties in their ToU. Credit card companies typically do not include a warranty disclaimer clause, as they do not usually make warranties. Such clauses, like the liability limitation clauses, are drafted at a reading level that is two to seven grade levels above the consumer contract as a whole. The overall pattern is that while consumer contracts are unreadable, rights-foreclosure clauses are indecipherable .

As noted above, the largest U.S. companies are increasingly imposing predispute mandatory arbitration clauses, coupled with anti-class action clauses. U.S. consumers often “acquiesce to mandatory arbitration clauses, ‘anti-class action waivers, damage caps, shortened statutes of limitations, “loser pays” rules, and choice-of-forum clauses that are buried thousands of words deep in poorly indexed boilerplate.’” 207 Thomas H. Koenig, The Need to Reform Abusive Contracts for Internet Connected Toys , 52 Suffolk U. L. Rev. 187, 187–88 (2019) (quoting Koenig & Rustad, supra note 190, at 344).

These rights-foreclosure clauses are not only unreadable, but they also leave consumers with theoretical contractual rights and no meaningful remedies. These clauses are one-sided in depriving consumers of their rights but preserving the rights of the provider. An example of an asymmetrical provision is one that compels consumers to submit all claims against them to predispute mandatory arbitration but reserves the company’s rights for its own court action to protect its intellectual property. American consumer law is predicated upon the untested assumption that informed consumers will make superior choices in the marketplace if providers offer them an opportunity to review terms and conditions prior to manifesting assent. 208 “Courts generally will enforce contract terms as written. As the Texas Supreme Court recently pointed out, ‘we do not protect parties “from the consequences of their own oversights and failures in nonobservance of obligations assumed.”’” Sharon M. Beausoleil, Contract Review—An Opportunity to Avoid Those Gotcha Moments , Nat’l. L. Rev. (Sept. 14, 2022) (quoting James Constr. Grp., LLC v. Westlake Chem. Corp., 650 S.W.3d 392, 403–04 (Tex. 2022)), https://www.natlawreview.com/​article/​contract-review-opportunity-to-avoid-those-gotcha-moments [https://perma.cc/​D87S-EQF7]. However, there can be a “meeting of the minds” even if the users do not have the reading skills to understand the contract or the clauses.

Rights foreclosure, which is derived through unreadable consumer contracts, is actually tort reform in disguise. Contract law cannibalizing tort rights is an example of the legal system becoming susceptible to the “boiling frog effect—the notion that a frog immersed in gradually heating water will fail to notice the creeping [temperature], even as it’s literally being boiled alive.” 209 Peter Dockrill, Human Beings Are Susceptible to ‘Boiling Frog’ Phenomenon, Climate Scientists Warn , ScienceAlert (Mar. 4, 2019), https://www.sciencealert.com/​human-beings-are-susceptible-to-boiling-frog-phenomenon-climate-scientists-warn [https://perma.cc/​PV9T-QF7D]. The next Part of this Article contends that rights that are foreclosed through one-sided contract clauses are unenforceable in the twenty-seven countries of the EU.

Additionally, Part III proposes mandatory consumer provisions that invalidate predispute mandatory arbitration clauses, class action waivers, and complete disclaimers of warranty and liability. This proposed New Deal for Consumer Contracts would align U.S. law with our most important trading partner—the EU—and would give U.S. consumers the same strong mandatory rights enjoyed by EU citizens.

III. A Proposed New Deal for Consumer Contracts

This Part of the Article contends that rights that are foreclosed in the United States through one-sided contract clauses would be unenforceable in the twenty-seven countries of the EU. As such, this Part proposes reforms in U.S. ToU, summarized as the “New Deal for Consumer Contracts.” The substantive part of this proposal would align U.S. consumer contract law with the EU provisions on unfair and deceptive contracts. These provisions are contained in the EU’s Unfair Contract Terms Directive (UCTD), which protects consumers from one-sided terms by imposing a standard of readability that requires contract terms to be drafted in “plain and intelligible language.” 210 The UCTD is summarized as follows: The Unfair Contract Terms Directive applies to business-to-consumer transactions. The UCTD protects consumers against the use by traders of standard (not individually negotiated) contract terms which, contrary to the requirement of good faith, create a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. Unfair terms are not binding on the consumer. In addition, the Directive requires written contract terms to be drafted in plain and intelligible language. Contract terms whose meaning is unclear must be interpreted as favourably as possible for the consumer, and contract terms which are not transparent and do not allow consumers to understand their rights and obligations under the contract may be considered as unfair. The UCTD applies to both online and offline environments, and to all products, including digital content. It contains an indicative and non-exhaustive list of standard terms that may be considered as unfair. Civic Consulting, Eur. Comm’n, Study for the Fitness Check of EU Consumer and Marketing Law: Final Report Part 1—Main Report 17 (2017), https://ec.europa.eu/​newsroom/​just/​items/​59332 [https://perma.cc/​G7B7-ARQE] (discussing the UCTD (93/13/EE)).

The European Economic Area (EEA), created in 1994, “combines the countries of the European Union (EU) and member countries of the European Free Trade Association (EFTA) to facilitate participation in the European Market trade and movement without having to apply to be one of the EU member countries.” 211 Terri Mapes, Countries in the European Economic Area , ThoughtCo. (Apr. 1, 2020), https://www.thoughtco.com/‌countries-that-are-eea-countries-1626682 [https://perma.cc/​U8D6-VP6A]. The EEA countries include Iceland, Liechtenstein, and Norway, and their membership allows them to be part of the EU’s single market. 212 Id .

“The [UCTD] (93/13/EEC) protects consumers against unfair standard contract terms imposed by traders. It applies to all kinds of contracts on the purchase of goods and services, for instance online or off-line-purchases of consumer goods, gym subscriptions or contracts on financial services, such as loans.” 213 Unfair Contract Terms Directive , Eur. Comm’n, https://ec.europa.eu/​info/​law/​law-topic/​consumer-protection-law/​consumer-contract-law/​unfair-contract-terms-directive_en [https://perma.cc/‌2EAL-XSRV]. The European Commission’s 2019 amendments were enacted to improve enforcement and modernize the UCTD. 214 Id . To aid in interpreting and applying the UCTD, the EU Commission adopted a Guidance Notice, stating:

The main purpose of the Guidance Notice is to present the rich case law of the Court of Justice of the European Union on this Directive in a structured manner in order to facilitate effective application of the Directive in the EU and EEA Member States. It is addressed, in the first place, to legal practitioners and other actors involved in the defence of consumer rights. However, it may be beneficial also to businesses and consumer organisations and all those who are involved in the application of the rules on unfair contract terms. 215 Id .

The European Commission’s 2018 “‘New Deal for Consumers’ initiative aimed at strengthening enforcement of EU consumer law in light of a growing risk of EU-wide infringements and at modernizing EU consumer protection rules in view of market developments.” 216 Review of EU Consumer Law , Eur. Comm’n, https://ec.europa.eu/‌info/‌law/‌law-topic/‌consumer-protection-law/‌review-eu-consumer-law_en [https://perma.cc/​R7MD-SGKU]. See generally Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: A New Deal for Consumers , COM (2018) 183 final (Apr. 11, 2018) [hereinafter A New Deal for Consumers ], https://eur-lex.europa.eu/‌legal-content/‌EN/‌TXT/‌HTML/‌?​uri=CELEX:52018DC0183&from=EN [https://perma.cc/‌KF6S-SRYR].

The substantive provisions of the EU’s New Deal for Consumers will invalidate unfair and deceptive standard contract terms such as caps on damages, predispute arbitration, and the disclaimers of all meaningful warranties. Further, it will punish and deter companies from deploying unfair and deceptive contract terms by imposing penalties modeled on the 2019 Amendments to the UCTD. 217 Council Directive 2019/2161, arts. 8(b), 13, 2019 O.J. (L 328) 7 (EU).. The following Sections will explain the impact of these New Deal reforms on addressing indecipherable and unfair consumer contracts with the intention of harmonizing U.S. consumer law with the EU’s mandatory consumer provisions.

A. Imposing a Minimum Readability Rule

As Parts I and II documented, neither courts nor statutes require that consumer contracts be readable. Thus, while consumers have a legal duty to read contracts, companies have no equivalent duty to make their ToU readable. The United States’ laissez faire approach to consumer contracts stands in sharp contrast to European consumer law, which protects consumers from one-sided contract terms. The twenty-seven countries of the EU require consumer contracts to be drafted in “plain [and] intelligible language” and state that “ambiguities are to be interpreted in favour of consumers.” 218 Unfair Contract Terms Directive , supra note 213. Specifically, Article 5 of the UCTD states:

In the case of contracts where all or certain terms offered to the consumer are in writing, these terms must always be drafted in plain, intelligible language. Where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail. This rule on interpretation shall not apply in the context of the procedures laid down in Article 7 (2). 219 Council Directive 93/13, art. 5, 1993 O.J. (L 95) 29 (EC).

Article 6 of the UCTD makes unreadable and other unfair contract terms unenforceable:

Member States shall lay down that unfair terms used in a contract concluded with a consumer by a seller or supplier shall, as provided for under their national law, not be binding on the consumer and that the contract shall continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair terms.

Member States shall take the necessary measures to ensure that the consumer does not lose the protection granted by this Directive by virtue of the choice of the law of a non-Member country as the law applicable to the contract if the latter has a close connection with the territory of the Member States. 220 Id. art. 6.

Like the UCTD, this Article’s proposed procedural reform is to require that U.S. providers draft consumer contracts in “plain, intelligible language.” However, one of the problems of adopting the UCTD standard is that the European Commission does not operationalize the “plain, intelligible language” readability standard by imposing a minimum reading level. Therefore, the proposed New Deal for Consumer Contracts highlights the importance of imposing specific readability standards to avoid disputes over whether text is “plain and intelligible.”

The proposed New Deal for Consumer Contracts would deploy the FRE and the FKGL tests to assess whether specific consumer contracts are readable as opposed to the vague “plain, intelligible language” standard. 221 See Stockmeyer, supra note 28, at 46. See generally NL 10605.105 , supra note 28.. Recall that the FRE scores text from 0 to 100, with 60 being the minimum for plain English. 222 Stockmeyer, supra note 28, at 46. Texts with scores between 0 and 40 are very difficult to read, while texts with scores of 80 and above are very easy to read. 223 Id . The FKGL test is a “formula for computing a text’s reading grade level.” 224 Id . The FKGL readability formula analyzes and rates text based on a U.S. grade school educational level. The proposed New Deal for Consumer Contracts would require consumer agreements to be drafted with an FRE score of at least 60 and an eighth-grade level or below; otherwise, they would be unenforceable. This would be determined by subjecting a given consumer contract or clause to analysis using the FRE and FKGL formulas. 225 See NL 10605.105 , supra note 28.

Under these proposed reforms, if consumer contracts do not meet these objective standards of readability, they would be unenforceable. The result of this reform would be to operationalize the EU’s well-established “plain, intelligible language” standard using the best available measures of readability. U.S. companies would assess whether their consumer contracts comply—i.e., whether they are written at an eighth-grade level or below—before placing them on websites or otherwise introducing them to the consumer marketplace.

Another advantage of imposing a specific readability level is that U.S. companies would have, what is in effect, a readability safe harbor that protects them in the United States and Europe. Increasingly, U.S. companies are subject to European Commission enforcement. In 2021, for example, the Digital Marketing Act, “proposed by EU antitrust chief Margrethe Vestager last year, aim[ed] to curb the powers of Alphabet unit Google, Facebook, Apple and Amazon.” 226     European Commission Would Police Big Tech Under New Rules Agreed by EU Members , euronews.next (Sept. 11, 2021), https://www.euronews.com/​next/​2021/​11/​09/​european-commission-would-police-big-tech-under-new-rules-agreed-by-eu-members [https://perma.cc/​6NQN-E5JB]. The plain language requirements of the New Deal for Consumer Contracts would give most U.S. users a reasonable opportunity to comprehend consumer agreements. Writing consumer contracts in easy-to-read language would bring common sense to the common law, as American adults have the right to understand what rights they are foreclosing when reading ToU and other consumer contracts.

B. Invalidating Unfair and Deceptive Consumer Contract Terms

1. Invalidating Caps on Damages

Apple, a two-trillion-dollar company, 227 Ben Popken, Apple Is Now Worth $2 Trillion, Making It the Most Valuable Company in the World , NBC News (Aug. 19, 2020, 11:03 AM), https://www.nbcnews.com/​business/​business-news/​apple-now-worth-2-trillion-making-it-most-valuable-company-n1237287 [https://perma.cc/​4BU8-TUJ3]. states, “in no event will Apple be liable to you for any indirect, consequential, exemplary, incidental or punitive damages, including lost profits, even if Apple has been advised of the possibility of such damages.” 228 Apple Website Terms of Use: Legal Information & Notices , Apple, https://www.apple.com/​legal/​internet-services/​terms/​site.html [https://perma.cc/​R4PT-3KLX]. Apple also caps its total damages, stating:

[I]n no event [shall Apple’s liability] exceed the greater of (1) the total of any subscription or similar fees with respect to any service or feature of or on the Site paid in the six months prior to the date of the initial claim made against Apple (but not including the purchase price for any Apple hardware or software products or any AppleCare or similar support program), or (2) US$100.00. 229 Id .

Amazon, another trillion-dollar company, goes even further, capping damages at zero:

AMAZON WILL NOT BE LIABLE FOR ANY DAMAGES OF ANY KIND ARISING FROM THE USE OF ANY AMAZON SERVICE, OR FROM ANY INFORMATION, CONTENT, MATERIALS, PRODUCTS (INCLUDING SOFTWARE) OR OTHER SERVICES INCLUDED ON OR OTHERWISE MADE AVAILABLE TO YOU THROUGH ANY AMAZON SERVICE, INCLUDING, BUT NOT LIMITED TO DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, AND CONSEQUENTIAL DAMAGES, UNLESS OTHERWISE SPECIFIED IN WRITING. 230 Conditions of Use , Amazon (Sept. 14, 2022) , https://www.amazon.com/​gp/​help/​customer/​display.html/​?nodeId=GLSBYFE9MGKKQXXM (last visited Oct. 8, 2022) (disclaimer of warranties and liability limitation clauses).

The largest U.S. companies impose limitations on liability that make it impractical for any consumer to file a claim against them. Amazon, for example, requires its users to waive their right to a jury trial and litigate in Amazon’s choice of forum in the State of Washington. 231 Id. (disputes clause). The New Deal for Consumer Contracts would prohibit caps on damages, thus aligning U.S. consumer law with EU law. 232 See Council Directive 93/13, annex, 1993 O.J. (L 95) 29 (EC).. The Annex to the UCTD specifically addresses limitations on legal liability of sellers or suppliers as follows:

(a) excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier; (b) inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him[.] 233 Id. at subdiv. 1(a)–(b)..

As revealed in Part II, many leading U.S. companies cap damages at a nominal amount of $100 or less. Many of these companies also impose a predispute minimum arbitration clause. Moreover, consumer arbitrations of either the AAA or JAMS require consumers to pay $200 in order to arbitrate their claims. 234 Am. Arb. Ass’n, supra note 201, at 12 (imposing a $200 fee for consumer arbitrations). Thus, under this proposed reform, consumers would not file arbitration claims where the total potential recovery is fifty percent of the cost to file an arbitration claim.

2. Prohibiting Predispute Arbitration & Class Action Waivers

Many leading U.S. companies, including Google, the world’s largest search engine, require U.S. users to submit to binding arbitration. 235 Google Arbitration Agreement—Devices, Related Accessories, and Related Subscription Services , Google, https://support.google.com/​store/​answer/​9427031?hl=en [https://perma.cc/​2PZS-QGCH]. Many of these arbitration clauses require the consumer to share the cost of hiring the arbitrator and other expenses in addition to the consumer remitting a filing fee.

Arbitration clauses, commonly used in U.S. consumer contracts, are unreadable, substantively unfair, and deceptively presented. Thus, the New Deal for Consumer Contracts would invalidate binding arbitration clauses in all consumer contracts, further aligning U.S. consumer law with the UCTD’s invalidation of predispute mandatory arbitration clauses that exclude or hinder:

the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract. 236 Council Directive 93/13, annex, at subdiv. 1(q), 1993 O.J. (L 95) 29 (EC).

However, this reform would not prevent consumers from agreeing to arbitration after a dispute arises. Post-dispute arbitration agreements are significantly fairer than predispute arbitration in consumer contracts. Predispute arbitration agreements are seldom read or understood, whereas in post-dispute arbitration, consumers submit their claim to arbitration knowingly understanding the comparative advantages and disadvantages of arbitration versus a jury or court trial. The New Deal for Consumer Contracts would permit post-dispute arbitration agreements so long as the agreements are drafted at an eighth-grade level or lower. In addition, the consumer would have to agree to post-dispute arbitration in a signed online or paper-and-pen writing, voluntarily, and without coercion.

The New Deal for Consumer Contracts would also prohibit class action waivers, which prevent consumers from filing claims against U.S. companies where the dollar amount is small:

Class action waivers have the practical effect of denying justice to [a] large number of consumers by divesting them of the right to pursue relief under state consumer law. Class actions are, in effect, the keys to the courtroom since they enable consumers to curtail unfair and deceptive trade practices. Without class actions, vendors of goods and services may avoid judicial process and continue unfair practices with impunity. Immunity breeds irresponsibility in the information-age economy where an increasing number of companies are divesting consumers of any remedy by including class action waivers in their terms of service. 237 Rustad & Onufrio, supra note 3, at 1174.

Predispute arbitration clauses and their running partner, class action waiver clauses, systematically foreclose consumers’ rights to a minimum adequate remedy—a problem that the New Deal for Consumer Contracts would eliminate.

3. Invalidating Consumer Warranty Disclaimers

Part II revealed that top U.S. companies are routinely and systematically disclaiming all warranties, including a minimal merchantability standard, which claims that goods or services are fair, average, or fit for their ordinary purpose.

Invalidating caps on damages, predispute mandatory arbitration clauses, and consumer warranty disclaimers is an important first step in aligning U.S. consumer law with that of the EU. There is no deterring trillion-dollar companies when their total liability is capped at a nominal amount and they can shunt the case to a private arbitral forum, where they have all the advantages.

In 2019, the European Commission amended the UCTD to address penalties and dispute resolutions for unfair contract clauses. 238 Council Directive 2019/2161, art. 4, 2019 O.J. (L 328) 7 (EU). These amendments, which took effect on May 28, 2022, introduced “an obligation for Member States to provide for effective penalties in case of infringements.” 239 Unfair Contract Terms Directive , supra note 213..

Article 24 of these amendments requires Member States to enforce the UCTD with penalties that punish and deter:

Member States shall lay down the rules on penalties applicable to infringements of national provisions adopted pursuant to this Directive and shall take all measures necessary to ensure that they are implemented. The penalties provided for shall be effective, proportionate and dissuasive.

Member States shall ensure that the following non-exhaustive and indicative criteria are taken into account for the imposition of penalties, where appropriate:

(a) the nature, gravity, scale and duration of the infringement; (b) any action taken by the trader to mitigate or remedy the damage suffered by consumers; (c) any previous infringements by the trader; (d) the financial benefits gained or losses avoided by the trader due to the infringement, if the relevant data are available; (e) penalties imposed on the trader for the same infringement in other Member States in cross-border cases where information about such penalties is available through the mechanism established by Regulation (EU) 2017/2394 of the European Parliament and of the Council; (f) any other aggravating or mitigating factors applicable to the circumstances of the case.

Member States shall ensure that when penalties are to be imposed in accordance with Article 21 of Regulation (EU) 2017/2394, they include the possibility either to impose fines through administrative procedures or to initiate legal proceedings for the imposition of fines, or both, the maximum amount of such fines being at least 4 % of the trader’s annual turnover in the Member State or Member States concerned.

For cases where a fine is to be imposed in accordance with paragraph 3, but information on the trader’s annual turnover is not available, Member States shall introduce the possibility to impose fines, the maximum amount of which shall be at least EUR 2 million. 240 Council Directive 2019/2161, art. 4, 2019 O.J. (L 328) 7 (EU) (footnote omitted).

As with the U.S. remedy of punitive damages, Article 24 of the UCTD amendments will require EU penalties to be calibrated to the wealth of the defendant and the gravity of the offense. 241 “For widespread infringements that affect consumers in several EU Member States, the available maximum fine will be 4% of the trader’s annual turnover in each respective Member State. Member States are free to introduce higher maximum fines.” Press Release, Eur. Comm’n, A New Deal for Consumers: Commission Strengthens EU Consumer Rights and Enforcement (Apr. 11, 2018)..

The New Deal for Consumer Contracts would protect consumers against unfair standard contract terms. 242 As previously stated, this initiative was “aimed at strengthening [the] enforcement of EU consumer law in light of a growing risk of EU-wide infringements and at modernizing EU consumer protection rules in view of market developments.” Review of EU Consumer Law , supra note 216. See generally A New Deal for Consumers , supra note 216. These rules would apply to all kinds of contracts for the purchase of goods and services, both online and offline. Moreover, they would not only ensure that U.S. contracts are readable, but they would also eliminate strategic use of rights-foreclosure clauses that leave consumers with theoretical rights divested of a minimum adequate remedy.

The duty to read is a fundamental principle of U.S. contract law, but merely making consumer contracts and foreclosure clauses readable is not enough. At present, U.S. contract law, which permits companies to limit all remedies and warranties, thus stripping consumers of any meaningful remedy, is out of step with Europe. The doctrine of freedom of contract in consumer transactions clashes with the UCTD and other mandatory consumer laws. Thus, the procedural justice prong of the New Deal for Consumer Contracts would impose a nondisclaimable duty to draft readable consumer contracts, ensuring that the average American adult is able to understand them. Additionally, the second prong of the New Deal for Consumer Contracts would blacklist caps on damages, predispute mandatory arbitration clauses, and warranty disclaimers. The net effect of these reforms would be to bring common sense to the common law by bringing U.S. consumer law into alignment with the twenty-seven countries of the EU.

* Thomas F. Lambert Jr. Professor of Law at Suffolk University Law School, Co-Director of Suffolk’s Intellectual Property Law Concentration, and the 2011 chair of the American Association of Law Schools Torts & Compensation Systems Section. I am grateful for the support of the Robert L. Habush Endowment for this Article. I would also like to thank Sue Steinman of the Association of Justice for her continued support, and Seth Markley and Chryss J. Knowles for their editorial suggestions. I have additional appreciation for the editorial and research assistance of Hunter A. Becker, Ivette Cuenod Lorenzo, Layth H. Hert, and Elizabeth P. West, my Suffolk University Law School students. Elizabeth P. West assembled the lists of the five samples in Excel sheets that were converted to SPSS files for statistical analysis. Finally, I greatly appreciate the continued support from Suffolk University Law School Dean Andrew Perlman and Associate Dean Pat Shin.

The Future of the Commercial Contract in Scholarship and Law Reform pp 51–71 Cite as

The Nexus of Contracts Theory and Intra-Corporate Dispute Arbitration

• Joseph Lee 3  
• First Online: 03 November 2018

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Arbitration has been a forum for the resolution of intra-corporate disputes (ICDs) or enforcement of corporate norms and rights in many advanced economies. The author argues that a company’s constitution should be the basis for regulating intra-corporate dispute arbitration and discusses how the nexus of contracts theory can provide some foundation. The ICD arbitration clause should be drafted to define which disputes are covered and who is bound by the clause and it should provide arbitrators with specific powers, especially in the areas of evidence and interim remedies. The author examines the UK Companies Act 2006 and common law cases and suggests a legal paradigm for an ICD arbitration. ICD arbitration in China, Russia and Vietnam are also discussed in order to show different approaches to such a contract-based paradigm. ICD arbitration can become a method for international joint ventures, and the nexus of contracts theory can facilitate the advancement of this legal basis.

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Lee, J. (2018). The Nexus of Contracts Theory and Intra-Corporate Dispute Arbitration. In: Heidemann, M., Lee, J. (eds) The Future of the Commercial Contract in Scholarship and Law Reform. Springer, Cham. https://doi.org/10.1007/978-3-319-95969-6_3

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14.1: Assignment of Contract Rights

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• Page ID 19021

LEARNING OBJECTIVES

• Understand what an assignment is and how it is made.
• Recognize the effect of the assignment.
• Know when assignments are not allowed.
• Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment , an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person ( assignee ); the obligee then becomes an assignor (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.”Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights" ). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course. Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor.Uniform Commercial Code, Section 9-206. While a waiver of defenses makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment.

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.”Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments" ). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 (see Chapter 22 "Secured Transactions and Suretyship" ), the first assignee to file will prevail.

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

KEY TAKEAWAY

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

• If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
• Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
• Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
• Why are leases generally not assignable? Why are insurance contracts not assignable?

Journal of Advanced Research in Law and Economics

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Νοn-Classical Paradigms in Contract Law in the American, European and Russian Legal Doctrines

• A. E. KIRPICHEV Russian State University of Justice, Russia
• R. V. SHAGIEVA Russian Presidential Academy of National Economy and Public Administration, Russia
• S. V. NIKOLYUKIN Russian State University of Justice, Russia
• N. E. BORISOVA Moscow City Pedagogical University, Russia
• V. V. RALKO Russian Academy of Advocacy and Notaries, Russia

Thematic justification: In many regions of the world, scholars have renewed a discussion on the nature and properties of contracts as a legal phenomenon, leading to the emergence of so-called ‘non-classical theories of contract’: contract as a promise, relational contract, contract as a network etc.

This article’s aim is to compare non-classical approaches to contract and check the possibility of creating a modern holistic theory of contract. This article’s methodology is based on the functional method, the use of which provides a comparative perspective, meaning that each of the explored approaches to the theory of contract should be studied in the context of its causes and problems it solves.

The article systematizes problems solved by non-classical theories of contracts and concludes that the development of a new theory means the appearance of a new solution, not only for the problem for which it was designed but also for some others from the list. No theory solves all the problems of contract law. Numerous theories of the 20th and 21st centuries have shown the directions, in which it is necessary to carry out research and to seek approaches whose combinations and mutual critical evaluations will allow the formation of a met theory of contract law, the further development of which can lead to a dominant paradigm shift in response to the emergence of an integrative legal theory of contract viewed in a holistic manner as a multifaceted phenomenon.

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PLG 205 Assignment 14 1 Contract Problem