How-to guide: Key considerations when drafting consumer contracts (USA)

Introduction

This guide outlines key considerations for drafting consumer contracts to ensure compliance with both federal and state laws, as consumer protection regulations can vary considerably across jurisdictions. It is aimed at in-house counsel, private practice lawyers, and compliance personnel.

This guide covers:

Consider the nature of the consumer contract
Key drafting considerations
Limitations on remedies

This guide can be used in conjunction with the following How-to guides: Drafting a sale and supply of goods agreement and What makes a consumer contract invalid; Checklist: What to consider to ensure a contract is valid; and Quick views: What is a consumer contract and Best practices for executing consumer contracts.

Section 1 – Consider the nature of the consumer contract

Consumer contracts are legally binding agreements that have been entered into by individuals for their own personal non-business or family purposes. These contracts may be formed through verbal agreements, written agreements, or conduct, such as purchasing a product in a retail store.

There is no overarching US consumer contract law, and the interpretation and performance of these contracts is governed by state law – see Restatement (Second) Conflict of Laws section 188. State contracting law refers to the legal framework (ie, the body of laws and regulations) governing contracts within a specific state in the United States.

Deciding which laws in the United States apply to a consumer contract depends partly on the nature of the contract (ie, whether the contract is for the sale of goods or for the supply of services).

1.1 Contracts for the sale of goods

These contracts involve businesses selling physical products to consumers, such as electronics, groceries or clothes. Many jurisdictions have adopted the Uniform Commercial Code (UCC) to govern these contracts. The UCC provides uniform rules for contract formation, warranties, remedies, and other commercial transactions involving tangible goods, reducing legal hurdles across state lines.

The UCC rules become part of each jurisdiction’s statutory law and are enforceable like other statutory rights. Almost every state and the District of Columbia have adopted the UCC in its entirety, except Louisiana which has adopted most articles, except article 2. Additionally, every territory (except American Samoa) has adopted some articles of the UCC, and many Native American tribal governments have adopted all or some of the Code. Typically, the Code has been adopted uniformly, although there are some variations between jurisdictions.

Article 2 of the UCC deals with the sale of goods outlining rules regarding offer and acceptance, warranties, buyer and seller rights, and remedies in case of breach.

1.1.1 Mixed contracts

To determine if a mixed contract involving both goods and services falls under article 2 of the UCC, the so-called ‘predominant purpose test’ is used. This test looks at various factors, such as the contract’s language, billing practices, cost allocation, the parties’ overall objective, and the nature of the final product to decide if the contract is mainly for goods or services, thus determining if the UCC or the common law applies. If the primary focus is on the sale of goods, the UCC governs; if on provision of services, common law principles apply. Assessment will be made on a case-by-case basis. The burden of proving that the contract is primarily for the sale of goods would generally fall on the party that is asserting that the contract is for the sale of goods, and therefore governed by Article 2 of the UCC. See Lorad, LLC v Azteca Milling LP, 670 F Supp 3d 470 at 489 (N.D. Ohio 2023).

1.2 Contracts for the supply of services

These involve contracts where a business provides services to consumers like home maintenance, IT providers or personal nutrition plans. Contracts for the supply of services are governed by the common law principles which form the foundation of contract law in most states. When interpreting these contracts, courts rely on previous court decisions and established legal precedents to determine the validity and enforceability of the contracts. Common law applies to agreements involving services, real estate, employment, and other non-goods-related transactions.

For further information, see Quick View: What is a consumer contract.

Section 2 – Key drafting considerations

2.1 Pre-contract

Before reaching an agreement, consumers will typically need to have access to the contract terms.

2.1.1 UCC

A consumer contract can still be enforceable however without defining every performance detail. For instance, under the UCC, a seller and consumer can agree to a contract without setting price or delivery terms (UCC sections 2-305(1), 2-308).

In such cases, the price should be ‘reasonable at the time for delivery’ (UCC section2-305(1)), and the delivery time must also be ‘reasonable’ (UCC section 2-309(1)). Thus, consumer contract terms only need to be ‘reasonably certain’ to be enforceable. If the essential terms are too uncertain to determine if the agreement has been upheld or breached, then there is no contract.

2.1.2 Exercise caution when making statements

Under common law, a contract can be voided due to a fraudulent or significant misrepresentation by the other party, and the affected party justifiably relies on it (Restatement (Second) of Contracts section 164).

Misrepresentations may also breach state advertising or unfair competition statutes, such as California’s laws that penalize ‘untrue or misleading’ advertising and declare false advertising as unfair competition (see California Business and Professions Code sections 17500, 17200).

The Second Restatement of Contracts identifies several situations in which silence may be held to constitute misrepresentation. Such situations include when a party knows that disclosing a fact would be necessary to prevent a previous statement from being misleading; when disclosure would correct the other party’s mistake regarding a basic assumption of the contract, and non-disclosure would result in a failure to act in good faith; when disclosure would correct a misunderstanding about a document that forms part of the agreement; or when there is a relationship of trust justifying the need for disclosure (see Harley-Davidson Motor Co v Powersports, Inc, 319 F.3d 973, 991 (7th Cir. 2003), quoting Restatement (Second) of Contracts section 161).

Contractual terms that exclude or limit liability for misrepresentation are valid unless they are deemed unreasonable. States define unreasonableness differently, often distinguishing between innocent and intentional misrepresentations. Parties frequently exclude liability for innocent misrepresentations by including a ‘merger clause’ in their contracts, asserting that the contract is the complete expression of the agreement.

For additional information, see How-to guide: What makes a consumer contract invalid.

2.2 Key elements in consumer contracts

2.2.1 The basics

Consumer contracts follow the same basic rules as any other contract, including the principles of contract formation, which involve offer, acceptance, consideration and mutual assent.

2.2.2 Incorporation of terms

In a consumer contract, ’incorporation’ refers to the process of including additional terms and conditions from another document, such as standard terms and conditions, into the main contract by reference – essentially making those terms legally part of the agreement between the consumer and the company, provided the consumer is adequately notified and has a reasonable opportunity to review them. This promotes clarity of the rights and liabilities to all parties and is cost-effective as it avoids the company setting out every detail in the main contract where it can be dealt with by way of cross-reference. Notice and acceptance of these terms is of particular importance when dealing with consumers given the additional protections they are afforded at law.

For incorporation to be valid, the consumer must be clearly informed about the existence of the additional terms and have a reasonable chance to read and understand them before agreeing to the contract (notice and acceptance).

Three methods of incorporation have been recognized by the courts:

click-wrap agreements – which are online contracts where the consumer must click a box to signify acceptance of terms and conditions before proceeding;
hyperlinks – which provide a clear link to the full terms and conditions within the contract; and
signature – which, in some cases, requires the consumer to sign a document that incorporates the additional terms.

2.2.3 Specific presentation requirements

Use plain language – the drafter needs to use plain language and be clear about essential terms such as payment or termination provisions. The contract needs to support consumer understanding by using plain English to avoid ambiguities. If there are specific usage instructions or technical requirements, ensure that descriptions are set out to ensure consumers understand what they are agreeing to. This reduces the likelihood of misunderstanding between the parties and disputes.
Presentation requirements – consumer contracts include specific presentation requirements for certain terms, as well as mandatory terms that must be included under certain circumstances.
When drafting a consumer requirement, it is important above all else that the written agreement presented to and executed by, the consumer be clear and understandable. Even if specific language is not required or is not required to be presented in a particular manner, clarity will always benefit both parties. It is especially beneficial to the drafter of a consumer contract, as any ambiguities in the contract are typically construed against the drafter.
Accuracy – the second most important principle is accuracy. The writing should be a correct statement of the terms and conditions of the agreement.
Form and presentation – this extends beyond just the words on the page; it encompasses the physical and structural factors that influence a consumer’s ability to understand the agreement. These factors include clear, straightforward language free from confusing jargon, and presenting the information in an easily readable format.
Guide the reader – a well-structured contract uses headings, bullet points, and has a logical flow that will guide the reader through the terms and conditions. Key information, such as cancellation policies or automatic renewal clauses, should be displayed prominently, not hidden in the fine print. The written contract should be a roadmap for the consumer, making it easy for them to navigate the agreement and understand their rights and obligations.
Inform and empower – the goal of the drafter should be to empower consumers by giving them clarity and transparency, and enabling them to make informed decisions. Courts recognize the importance of making a fair presentation of contractual terms, and contracts with misleading or obscured terms may be deemed unenforceable. Ultimately, a consumer-friendly contract benefits both parties by fostering trust and minimizing the risk of disputes.
Consider the parties – there are two parties to a consumer contract: the consumer and the business. The consumer is an individual who is purchasing a good or service, or receiving digital content. The business is the entity that is selling the good or service or providing the digital content.

2.3 Contract formation

At common law, forming a contract requires two essential elements: assent and consideration. Assent typically takes the form of an offer and acceptance, and it must be ‘sufficiently definite to assure that the parties are truly in agreement with respect to all material terms’ (Express Indus & Terminal Corp v New York State Department of Transportation 715 N E 2d 1050, 1053 (N.Y. 1999)). However, not all terms need to be fixed with absolute certainty. In determining assent, courts examine the objective manifestations of agreement between the parties.

Consideration involves a promise, performance, or forbearance provided by a contract counterparty in exchange for their own promises. In typical consumer contracts, consideration is present because the consumer receives a good or service, and in exchange, the seller receives payment.

The UCC emphasizes assent without focusing on the traditional element of consideration. Under the UCC, a contract for the sale of goods may be established in any manner that demonstrates agreement, including conduct by both parties that acknowledges the existence of a contract (UCC section 2-204).

For online contracts, it is generally sufficient for the consumer to tick a box confirming acceptance of terms accessible via a link, provided the consumer has reasonable notice of the terms, a reasonable opportunity to review them, and a straightforward method to accept or decline the terms (Serrano v Cablevision Sys Corp, 863 F Supp 2d 157, 164 (E.D.N.Y. 2012)).

2.4 Disclosure requirements

Consumer protection laws and regulations often require specific disclosures to be made to ensure customers are fully informed about the terms they are agreeing to. They could be in relation to costs, fees, or could set out potential risks associated with a particular product or service.

2.4.1 Clear and conspicuous

Where disclosures are required, the laws or regulations require that those disclosures in a contract (eg, Regulation Z, codified as 12 CFR Part 1026, interpreting the Truth in Lending Act) be ‘clear and conspicuous.’ The exact disclosures that must be made vary according to the subject matter of the contract.

Under the UCC, a term is ‘conspicuous’ if it is written, displayed, or presented in such a way ‘that a reasonable person against which it is to operate ought to have noticed it.’ Whether or not a term is ‘conspicuous’ or not is a decision for the court.

Conspicuous terms include the following:

a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; or
language in the body of a contract in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

See UCC section 1-201.

‘Conspicuous’ thus is a comparison with the remainder of the text. Putting the entire text of the agreement in large or bold-faced type will not make a particular term ‘conspicuous.’

2.4.2 Mandatory disclosures

There are mandatory disclosures required in consumer contracts in the United States, depending on the type of contract:

The Truth in Lending Act (TILA), which covers consumer borrowing, states that lenders must provide standardized information to consumer borrowers about the terms and costs of loans and credit. This information includes annual percentage rate (APR), loan term, loan cost, borrower rights, number of payments, monthly payment, late fees, and prepayment penalties (see 12 CFR pt 1026).
The Electronic Fund Transfer (EFT) Act, which concerns transfers of money online and Regulation E which interprets and implements that Act, requires initial disclosures when a consumer contracts for services or before the first electronic transaction.
Some states have mandatory disclosure policies for contracts for the sale and installation of solar energy systems, including Arizona, California, Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Mexico, New York, North Carolina, Oregon, Utah, and Washington.
The Real Estate Settlement Procedures Act of 1975 requires disclosures in relation to federally guaranteed mortgage transactions.
The Home Mortgage Disclosure Act of 1975 requires financial institutions to disclose information about their mortgage lending.
The Consumer Leasing Act of 1976 regulates personal property leases that exceed four months in duration and that are made to consumers for personal, family, or household purposes.
The Truth in Savings Act of 1991 allows credit union members and potential members to make informed decisions about their accounts.

Disclosures must be clear and conspicuous, meaning they are in a form that is reasonably understandable and readily noticeable to the consumer. Disclosure requirements do not necessarily regulate the terms of an agreement but require that the terms are accurately disclosed to the consumer.

2.5 Warranties

A warranty is ‘a promise, assurance, or statement made by the warrantor regarding the existence or accuracy of specific facts or the condition, quality, quantity, or nature of a good or property.’

Warranties may be either express or implied, but a seller is not required to provide a buyer with a warranty. Federal and state laws regulate warranties in consumer contracts in the United States.

2.5.1 Implied warranties

Laws in every state – including consumer protection laws and, in most jurisdictions, section 2-302 of the UCC – create implied warranties into consumer contracts, which are built-in protections assumed at law that are not set out explicitly. These warranties provide the minimum level of assurance about the goods and services being purchased.

Two key warranties implied legally by the UCC are particularly relevant in consumer transactions involving the sale of goods:

The first of these implied warranties is the ‘warranty of merchantability,’ which essentially guarantees that the product is fit for its ordinary, intended use. This means the goods should meet reasonable expectations of quality and performance, be properly packaged and labeled and conform to any promises made on the packaging. Think of it as a promise that the product will function as a reasonable person would expect it to. For a full list of requirements, see UCC section 2-314.
The second implied warranty is the ‘warranty of fitness for a particular purpose’ which applies when a buyer relies on the seller’s expertise to recommend a product for a specific need. For instance, if you tell a salesperson you need a waterproof jacket for a hiking trip and they recommend a specific model, there is an implied warranty that the jacket will indeed be waterproof. This warranty hinges on the seller’s knowledge of the intended use and the buyer’s reliance on their expertise – see (UCC section 2-315).

2.5.2 Express warranties

An express warranty arises from an affirmation of fact or promise provided by the seller relating to the goods or services, by conduct or from descriptions of goods provided by a seller. Samples, specifications, correspondence, or other communications from a supplier can also form express warranties. The contract is based on the buyer’s understanding that the seller will supply goods or services in accordance with the provided description, sample etc. For consumers, these express warranties offer crucial protections and provide legal recourse in the event that the goods or services to not meet expectations (see UCC section 2-313).

2.5.3 Disclaiming a warranty

Warranties may be excluded or limited by inserting the appropriate language into the consumer contract (UCC section 2-316). In order to exclude or disclaim the implied warranty of merchantability, conspicuous language must be written into the contract. That language must be written into the contract, and must specify the warranty and state that it is being disclaimed. Other implied warranties, like fitness for a particular purpose, also need to be excluded in writing but don’t require specific mention. A simple statement like ‘there are no warranties beyond the description here,’ or even ‘this item is sold ‘as is’ may suffice.

For more detailed information, see How-to guide: Understanding consumer protection terms and conditions in contracts for the sale of goods.

2.5.4 Federal law – the Magnuson-Moss Warranty Act

Background

The main federal Act is the Magnuson-Moss Warranty Act which governs warranties on consumer products, including vehicles, appliances, and electronics.

Passed in 1975, this is a federal law designed to protect consumers by regulating written warranties on consumer products. It doesn’t force businesses to offer warranties, but if they choose to do so, they must comply with the Act’s provisions. This law focuses solely on written warranties for tangible products (such as those described in the paragraph above) used primarily for personal, family, or household purposes. It excludes, products intended for resale or for commercial use.

Objectives

When enacting the Magnuson-Moss Act, Congress had several key objectives in mind. The first objective was to ensure that consumers were well-informed about warranty terms and conditions before they made a purchase, leading to informed decisions and increased customer satisfaction. By making warranty information readily available, consumers have the ability to compare coverage options and to select products that are best suited to their needs and their budgets. This transparency also encourages businesses to compete with one another to offer consumers attractive warranty packages.

Furthermore, the Act gives companies the motivation to uphold their warranty obligations, both promptly and efficiently. While the Act enables consumers to bring lawsuits for breaches of warranty, it also encourages alternative dispute resolution methods, to resolve issues quickly and efficiently. Ideally, these methods will allow the resolution of complaints before they escalate to litigation. This approach benefits both consumers and businesses by reducing the need for costly and time-consuming litigation.

Requirements

The Magnuson-Moss Act sets out specific requirements for warranty providers, including a requirement that warranties be labeled clearly as either ‘full’ or ‘limited,’ and a requirement that detailed coverage information be provided in a clear, concise document. The Act also mandates that warranties be readily accessible to consumers at the point of sale.

Prohibited practices

The Act prohibits several practices, including:

disclaiming or modifying implied warranties – this means customers will always receive the basic protection of the implied warranty of merchantability. There is one exception for limiting the duration under a ‘limited warranty’ – using an example from Federal Trade Commission (FTC) guidance noted below, if you offer a two-year limited warranty, you can limit implied warranties in two years – see Titling Written Warranties as ‘Full’ or ‘Limited’;
using ‘tie-in sales’ provisions – these are provisions that that force consumers to use specific products or services to maintain their warranty coverage; and
deceptive or misleading warranty terms – these are strictly prohibited – you cannot offer a warranty that appears to provide coverage where there is none or where the warranty promises services that the warrantor has no intention of providing.

For further information, read about the FTC’s business guide to federal warranty law and the Magnuson-Moss Warranty Act.

2.6 Right to cancel

The ‘right to cancel’ allows consumers a certain amount of time in which to terminate certain contracts without penalty. The right to cancel is designed to protect consumers from hasty or pressured decisions by allowing them time to reconsider their commitments. To exercise this right, consumers must generally notify the seller in writing, and follow the process for cancellation that is usually outlined within the contract itself.

The timeframe for cancellation is mandated by federal or state law. It varies depending on the nature of the contract. For example, under the FTC’s Cooling-Off Rule, consumers have three days to cancel certain sales contracts made at the buyer’s home or outside a seller’s usual place of business. However, not every contract comes with a right to cancel. The right to cancel is usually dictated by the circumstances under which the contract is presented to the consumer.

Drafters must keep in mind these points:

state laws on cancellation rights vary significantly. Drafters must research carefully the specific jurisdiction and type of contract to determine the applicable rules;
cancellation clauses should be written in plain, easily understood language that states clearly the timeframe for cancellation, method of notification, and any specific procedures and requirements; and
don't bury cancellation rights in fine print. Make these crucial clauses easily noticeable for consumers within the contract.

Case law examples and drafting considerations:

Unclear cancellation terms: courts have struck down contracts with ambiguous or poorly disclosed cancellation rights. In Williams v Walker-Thomas Furniture Co 350 F.2d 445 (DC Cir 1965), a contract was deemed unconscionable when it contained a confusing installment payment clause that effectively prevented the consumer from cancelling.
Automatic renewals and cancellation: contracts must provide clear and conspicuous notice of automatic renewal terms and cancellation procedures, as emphasized by recent FTC actions taken against companies like online dating services and subscription boxes.

Understanding the nuances of cancellation rights and staying abreast of relevant case law allow contract drafters to create agreements that are both legally compliant and consumer-friendly.

2.6.1 Automatic renewals

Automatic renewal clauses provide that a consumer’s contractual obligations – such as a health club membership, or cable subscription – will automatically be renewed at the end of the contractual term agreed to unless the consumer takes some affirmative action to cancel. If not canceled, the consumer will be responsible for ongoing charges. The Restore Online Shoppers’ Confidence Act (ROSCA) requires clear and conspicuous disclosure of terms before a seller or vendor may obtain a consumer’s consent to automatic renewals of online memberships or subscriptions. This ensures consumers are not bound to continuous obligations without their knowledge or consent.

Most US states have adopted some form of automatic renewal clause regulation; however, the definitions, scopes, and exemptions in these regulations vary significantly. For instance, California’s recently law carves out an exception for month-to-month service contracts. Meanwhile, Utah’s automatic renewal clause law, which focuses primarily on real estate transactions, could potentially be read as extending to home warranties covering appliance or heating, ventilation and air conditioning (HVAC) repairs.

Contract drafters must be careful when researching and understanding the specific automatic renewal clause requirements in each relevant jurisdiction. Overlooking these intricacies could lead to non-compliant contracts, exposing businesses to legal challenges and potentially harming consumers.

For further information, see How-to guide: The Restore Online Shoppers’ Confidence Act – what is it and why does it matter and Checklist: Recurring payments – business and compliance considerations.

2.6.2 FTC ‘click to cancel’ rule

The FTC’s final ‘click-to-cancel’ rule, announced in October 2024, was poised to make a radical change to business-to-business and business-to-consumer contract drafting. The rule, which was scheduled to go into effect on January 14, 2025, would have required contracts to offer a straightforward online cancellation method that mirrors the subscription process.

Recently, a federal appeals court nullified the Negative Option Rule. Custom Communications, the U.S. Chamber of Commerce, and other groups filed suit challenging the amendments to the rule, contending that the FTC did not follow proper procedures in enacting them, and the Court agreed. This decision, combined with the Trump administration’s regulatory freeze makes it unlikely that this rule will be revived by the FTC any time soon. See Custom Communications, Inc. v Federal Trade Commission, No. 24-3137 (8th Cir. July 8, 2025) Businesses should be aware, however, that many states have enacted laws similar or even more restrictive than the federal rule.

California, for example, has enacted legislation that was effective July 1, 2025. This new law is designed to ensure that consumers:

are fully informed before committing to a recurring or auto-renewing charge
are able to simply and quickly cancel subscriptions
receive timely reminders of automatic renewals and conversions from free trials to paid plans
receive timely notices of price increases

Consequently, while the federal rule has been struck down, businesses need to conduct adequate research to determine whether they are subject to these state enacted requirements.

2.7 Post-contract assistance

In the absence of a specific provision in a consumer contract, sellers are generally not obligated under contract law to address consumer complaints. Under the Magnuson-Moss Warranty Act warrantors are required to clearly disclose the terms of their warranties, making it easier for consumers to understand their rights, and must respond to consumer disputes in a timely and effective manner. Additionally, state consumer protection laws may apply to conduct after a sale, influencing how sellers handle consumer complaints, as demonstrated in cases like Showpiece Homes Corp v Assurance Co of Am, 38 P.3d 47, 58 (Colo. 2001). In that case, the court held that an insurer’s post-sale or bad faith conduct and unfair claims handling practices could constitute a violation of the Colorado Consumer Protection Act. While a seller can charge for additional services requested by a consumer after fulfilling contractual obligations, charging a consumer to submit a complaint regarding performance may violate consumer protection statutes, as seen in Gray v N Carolina Ins Underwriting Association, 529 S.E.2d 676, 683-84 (N.C. 2000).

Section 3 – Limitations on remedies

It Is common for consumer contracts to contain clauses that limit the remedies available under the contract. These limitations will generally be upheld if the consumer has been given adequate notice of them.

3.1 Limiting liability

Limiting liability is common in consumer contracts, where companies seek to reduce their exposure to legal claims. These limitations include caps on damages, exclusions of certain types of liability (such as consequential damages), requirements for arbitration instead of litigation, or exclusion of liability for misrepresentation.

A consumer contract might include terms that restrict the remedies available for a breach. For instance, in the sale of goods, a term might limit the buyer’s options to returning the goods for a refund or to the repair and replacement of defective items, but if such a limitation ‘fails of its essential purpose,’ that limitation may not be upheld in certain situations (UCC section 2-719). For example, if a contract restricts the remedy to repair, but repeated repairs do not resolve the issue, the limited remedy may be considered to have ‘failed of its essential purpose’ and thus may not be enforceable. See Razor v Hyundai Motor America, 854 N.E.2d 607, 615 (Ill. 2006), which deals with a claim for breach of warranty, where the court held the warranty disclaimer to be unconscionable and unenforceable.

For further information, see How-to guide: How to draft and negotiate limitation of liability clauses.

3.1.1 Unconscionable limitations of liability

Courts may refuse to enforce liability limitations if they are deemed unconscionable or if they significantly undermine consumer rights. For instance, a limitation that leaves a consumer without a reasonable remedy in case of a breach may be invalidated.

Whether a contract is unconscionable is something determined by the court, after a contract has been executed and breached. The doctrine of unconscionability is a defense to an action for a breach of contract. Courts will decline to enforce a contract that is found to be unconscionable to prevent unjust outcomes. Unconscionability is largely a matter of state contract law. It is a common law doctrine that has also been incorporated into the UCC – see UCC section 2-302(1).

If a contract contains an unconscionable limitation of liability, depending on severability and other contract terms, courts may invalidate the contract, refuse to enforce the limitations term, or apply it in a manner ‘to avoid any unconscionable result’ – see UCC section 2-302(1). If a court chooses to strike an unconscionable limitations term and insert a substitute term, it may be either:

a term that is reasonable in the circumstances;
a term that effects the minimal correction necessary to bring the contract into compliance with the mandatory rule; or
if the contravening term was placed by the business in bad faith, a term that is calculated to give the business an incentive to avoid placing such terms in consumer contracts.

See How-to guides: How to draft and negotiate limitation of liability clauses and What makes a consumer contract invalid.

3.2 Limitation periods

A jurisdiction’s governing statutes of limitations for claims brought for breach of warranty, design defect, manufacturing defect, or statutory unfair practices determine the limitation periods for consumer claims that relate to defective or misdescribed products. The defendant has the burden of proving any statute-of-limitations defense, while the plaintiff must prove any such claim by a preponderance of the evidence.

3.3 Arbitration

In addition to provisions limiting substantive liability, consumer contracts often include arbitration clauses that limit the consumer’s ability to litigate disputes in court or pursue class action lawsuits. These clauses are typically enforced unless deemed unconscionable. See Am Exp Co v Italian Colors Rest, 570 US 228, 236-38 (2013).

The Federal Arbitration Act (FAA) of 1925, 9 USC ch 1, is a federal statute that provides the legal framework for the enforcement of arbitration agreements. According to the FAA, a contract’s ‘written provision’ that requires arbitration for any arising disputes is ‘valid, irrevocable, and enforceable,’ except for grounds that would revoke any contract under law or equity – see 9 USC section 2. The Supreme Court has applied this provision, overturning a state court’s refusal to enforce a mandatory arbitration clause in a consumer contract when the state court failed to ‘place arbitration contracts on equal footing with all other contracts’ and therefore did ‘not give due regard … to the federal policy favoring arbitration’ (DIRECTV, Inc v Imburgia, 577 US 47, 58 (2015)). Essentially, arbitration clauses can be deemed unenforceable only on the same grounds applicable to any contract under state law.

For further information, see How-to guide: Practical steps to consider when drafting consumer arbitration agreements.

3.4 Class action waivers

Many consumer contracts involve relatively small amounts of money. A consumer who brings a lawsuit to enforce their rights under such a contract often finds that their legal fees and court costs far exceed any potential recovery. Class action lawsuits allow consumers with the same or similar complaints to join together and file a single lawsuit to seek damages collectively.

Class action waivers can limit consumers’ ability to seek collective redress. These state that the parties to a contract agree that any lawsuit based on a dispute between the parties must be on an individual basis and not brought as a class or collective action. This reduces potential exposures to the threat of class actions which can result in significant financial penalties for companies.

The US Supreme Court has held that class action waivers, at least when included as a part of an arbitration clause, are enforceable. See AT&T Mobility LLC v Concepcion, 563 US 333 (2011). Some courts have held that class action waivers that are not connected to an arbitration clause (so-called ‘naked’ class action waivers) are invalid as against public policy. See, for example, Metcalfe v Grieco Hyundai LLC, No. 22-378 (D RI Oct 3, 2023) which considered a class action waiver in a car leasing agreement under the laws of Rhode Island. Other state courts have held that such waivers are enforceable, even when not accompanied by an arbitration agreement. See, for example, Pace v Hamilton Cove, 258 NJ 82, 317 A.3d 477 (2024) (applying New Jersey law).

3.5 Consequential damages

A contract may include terms that limit or exclude consequential damages ‘unless the limitation or exclusion is unconscionable’ (UCC section 2-719(3)). ‘Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not’ (UCC section 2-719(3)). Moreover, these limitations generally should be ‘prominently, conspicuously, and clearly set forth’ (Gladden v Cadillac Motor Car Div, Gen. Motors Corp, 416 A.2d 394, 402 (NJ 1980)).