Friday, February 29, 2008

Vindication for the Contract of Adhesion

This past week my Contracts class examined mass market transactions, the contract of adhesion and the doctrine of unconscionability. Yesterday, Overlawyered featured a post on Judge Easterbrook's opinion in IFC Credit Corp. v. United Business & Industrial Federal Credit Union. The case is jammed with scintillating issues of commercial law-- a veritable bag of chips with no diminishing marginal returns. Of note for Contracts students is this excerpt on the enforceability of non-negotiated terms in a standard form agreement (citation omitted):

Ever since Carnival Cruise Lines, Inc. v. Shute enforced a forum-selection clause printed in tiny type on the back of a cruise-ship ticket, it has been hard to find decisions holding terms invalid on the ground that something is wrong with non-negotiable terms in form contracts. As long as the market is competitive, sellers must adopt terms that buyers find acceptable; onerous terms just lead to lower prices. If buyers prefer juries, then an agreement waiving a jury comes with a lower price to compensate buyers for the loss-though if bench trials reduce the cost of litigation, then sellers may be better off even at the lower price, for they may save more in legal expenses than they forego in receipts from customers.

There is no difference in principle between the content of a seller's form contract and the content of that seller's products. The judiciary does not monitor the content of the products, demanding that a telecom switch provide 50 circuits even though the seller promised (and delivered) 40 circuits. It does not matter that the seller's offer was non-negotiable (if, say, it offered 40-circuit boxes and 100-circuit boxes, but nothing in between); just so with procedural clauses, such as jury waivers. As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention. Making the institution of contract unreliable by trying to adjust matters ex post in favor of the weaker party will just make weaker parties worse off in the long run.

For the last statement, Judge Easterbrook cites to the court's opinion in Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., (Posner, J. 1992):

The idea that favoring one side or the other in a class of contract disputes can redistribute wealth is one of the most persistent illusions of judicial power. It comes from failing to consider the full consequences of legal decisions. Courts deciding contract cases cannot durably shift the balance of advantages to the weaker side of the market; they can only make contracts more costly to that side in the future, because [the other side] will demand compensation for bearing onerous terms.

All true. Yet, I doubt that the next edition of Farnsworth, et al, Contracts will omit the section on contract "fairness."

Cross posted at Red Lion Reports.


Anonymous said...

Judicial intervention into contracts does no good when:

1. The parties are perfectly informed, with no relevant informational asymmetries.
2. The parties are perfectly rational.
3. Neither party has market power, including bilateral monopolies.
4. The transaction is a spot transaction, with no relational component.
5. The relevant contractual term has a unique meaning.
6. There are no externalities.

In other words, there is no point to judicial intervention in a colloquy between Judges Easterbrook and Posner. Mileage may vary for the rest of the world.

-Joe S.

Anonymous said...

Judge Easterbrook's waving of the magic wand of 'competition' might emit pretty sparks, but even those sparks illuminate the wand's shortcomings. "As long as the market is competitive" might be a necessary, but it's not a sufficient.
Informational asymmetries impede efficient contracting regardless of the competitiveness of the market, and judicial recognition of the truth that information in adhesion contracts is not equally held between the two parties is "caving in" to reality, not favoritism.
It's the economic equivalent of saying emancipation is sufficient for democracy, who needs freedom of speech or press?

Anonymous Law Grad said...

Does the "as long as the market is competitive" language speak to the increasing trend where entire industries use the exact same boilerplate language? Hypothetically, all photographers in a given market employ the same limitation of liability language. If a consumer wants to hire a photographer, he/she has no choice but to agree to the language regardless of the provider.