A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities
Debra Pogrund Stark
The John Marshall Law School
Jessica M. Choplin
February 9, 2009
NYU Journal of Law & Business, Spring 2009
Are consumers "foolish" or "negligent" when they trust what salespersons falsely tell them rather than read all of the terms of the contracts they sign? Should consumers be barred from bringing a fraud action on the ground that they have not "reasonably relied" upon such false statements or deceptive conduct when the form contract they sign states that they have not so relied? Currently seven states' courts have interpreted their consumer fraud statutes to require "reasonable reliance," and three-quarters of the states' courts impose this requirement for a common law action for fraud. Some courts have also ruled that the presence of a "no reliance" type clause bars a consumer from being able to raise the alleged false statement or deceptive conduct.
The attached article, "A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities," provides an interdisciplinary analysis of this important aspect of consumer fraud law. The article proposes law reforms based upon the results of our fraud simulation study, reading contracts survey, and an analysis of the cognitive and social psychological reasons why consumers trust what salespersons tell them rather than read all of the contract terms.
In our survey of consumers, we found that on average 67% of the consumers reported that they failed to read all of the terms of the contracts they signed among the six different categories of consumer transactions surveyed (agreements relating to computer software, rolling contracts, car rentals, apartment leases, home purchase and home loans). As detailed in the article, the primary reasons why consumers rely upon what the salesperson tells them and fail to carefully read and understand all of the terms of the contracts they sign are due to cognitive barriers such as: (i) visual and comprehension challenges based upon the manner in which many form contracts are drafted, (ii) analytic deficiencies based upon schema deficits, (iii) positive confirmation biases, (iv) inability to imagine possible negative outcomes (i.e. the availability heuristic), (v) default assumptions, and (v) sunk cost effects. The article also explores some of the social psychological reasons why consumers fail to read the contracts they sign including: (i) misplaced trust in the defrauders due to a variety of factors which creates a strong motivation to trust which is exacerbated when the consumer is of a lower socio-economic status, (ii) social norms not to read contracts in certain contexts and a concomitant social value to trust, and (iii) a perceived (and often real) inability to negotiate the terms of the contract.
In light of these cognitive and social psychological barriers to reading and understanding all of the terms of the form contracts that consumers sign, we contend that courts are enforcing a contractual myth and creating a license to deceive when they enforce no reliance type clauses in contracts when in fact many consumers do in fact rely upon such statements in making the decision to purchase the product or service. Ninety percent of the public we surveyed reported that they expect that the terms of the contracts they sign will be consistent with the salesperson's statements and eighty percent reported that if there is an inconsistency they think the company should honor the statements made by the salespeople when the consumer has not read the terms of the agreement.
While promoting certainty of contractual obligations is a legitimate goal, and the enforceability of "no reliance" type clauses through the reasonable reliance requirement is sensible under certain conditions in transactions between sophisticated companies, this article contends that based upon our empirical data it is not sound policy to make it a bar to a consumer bringing a common law fraud action or a statutory fraud action (the consumer would of course still have the burden to prove that the parol false statement or deceptive conduct took place).
This article comprehensively addresses an important aspect of consumer fraud among the fifty states and provides very important data relative to the issue of consumer protection in general and consumer fraud in particular.
Number of Pages in PDF File: 89
Keywords: consumer protection, consumer fraud, reasonable reliance, fraud simulation study, reading contracts survey, cognitive science, judgment and decision making
JEL Classification: K12, K13, M3
Date posted: February 11, 2009 ; Last revised: February 25, 2009