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1
The Economics of Standard Form Contracts
by
Enrico Baffi
Università degli Studi “Guglielmo Marconi”
Introduction.∗
This paper considers some characteristics of mass contracting without dwelling on
the analyses that have previously been widely explored in the literature. For
example, there will be no attempt to present a new, detailed exposition of the
problem of minimizing agency costs, which are controlled in hierarchized
organizations, such as large companies, through the constraints placed on agents
(those directly in contact with the clientele).
The attempt to represent what may happen in the future through a lowering of
transaction costs allowed by information technologies, and especially Internet
technologies, is also outside the realm of this analysis. Rather, this article will
conclude with the following questions: What will the future be like because of
the new technologies that lower transaction costs? Will contracts become more
detailed or are they already, which means that this paper is already dated?
1.
Some characteristic features of mass contacting.
There are basically four characteristic features of mass contracting: the reduced
negotiations, the dissemination of standard form contracts, the presence of
• I am deeply thankful to Carlo Drago and Giacomo Rojas Elgueta for their very helpful comments.
Any remaining errors are my sole responsibility.
abusive clauses and the recapitulation of the contract and its execution in a single
act of stipulation.
a) The reduction in negotiations is firstly the result of the costs that this
activity requires and of the costs required to manage personalized contracts.
Secondly, this reduction is the outcome of the greater advantage of mass-
produced goods compared to personalized goods. Thirdly and lastly, it is
derived from the limited range of possible clauses that can be inserted into the
contract, a limitation due to those very clauses that will be indicated in this
section as being at the basis of the phenomenon of “uno actu recapitulation of
the contract’s conclusion and execution.”
b) The affirmation of standard form contracts is a consequence not so much of a
culpable inadequacy of legal provisions as of their objective inability to
regulate all possible contractual relationships.
c) The spread of inequitable clauses depends basically on a phenomenon of
adverse selection, by virtue of which the “bad” clauses drive out the “good”
ones. This adverse selection phenomenon is due to the information costs that
consumers have to bear.
d) The phenomenon of uno actu recapitulation of the contract’s conclusion
and execution is a consequence of the growing ineffectiveness of the
instrument of legal bindingness in controlling opportunistic behavior. Such
ineffectiveness leads operators to adopt other remedies suitable for
pursuing the same purpose, i.e., those that used to be called “remedies of the
state of nature,”1 first among them being the remedy of the simultaneous
nature of the exchange.
We will now scrutinize these explanations of the characteristics of mass contracting.
1 We use the expression coined by A. Kronman, Contract Law and the State of Nature, 1 J. Law, Econ.,
and Organ.5 (1985), p. 6.
3
a. Reduction in negotiation.
Normal negotiating activity can be said to be aimed at achieving two purposes,
which can be summarized as follows:
1) The purpose of seeking an opportunity for exchange that is mutually
advantageous for the parties and seeking exploitation of all possible joint
earnings;
2) The purpose of reaching an agreement for the division of the contractual
surplus.
Through negotiation, individuals seek to determine whether mutually advantageous
exchanges are possible between them. Sometimes the parties—or one of them—
know that the space for a mutually advantageous exchange exists between them.
This situation occurs very frequently, inasmuch as parties interested in trading
generally release information about their willingness to conduct certain contractual
operations. In many cases, in fact, it is more economical to convey information by
means of instruments addressed to indeterminate audiences of subjects rather than
by means of mechanisms suitable only for ensuring communication with specific
parties.
In addition, when the parties negotiate, they do not limit themselves to identifying
the existence of a space for a possible advantageous agreement; they also aim at
exploiting all possible opportunities for earnings associated with that agreement.
When they draw up the contract, the contracting parties seek to identify all those
clauses that involve services and counter-services that are advantageous for both.
These clauses, which are aimed at maximizing the joint return, are also called
“efficient clauses”2 and, as previously indicated, are usually sought out by the
traders. In fact, any clause suitable for increasing the joint return can ensure a
Paretian improvement, i.e., an improvement in the wellbeing of the parties
involved in the operation. This possible result pushes the parties to seek them out.
4
There are, however, very significant circumstances in which efficient clauses are not
sought. These circumstances are characterized by the fact that the increase in the joint
return (the size of the pie) probably or necessarily includes a reduction in the
contractual surplus obtained by one party (the share of the pie). Based on this result, the
party destined to be injured is driven to avoid including the efficient clause.
The most important hypothesis under which such a situation occurs comes when
opportunistic behavior by one party is possible, for which reason the other party, so
as to avoid improper behavior, must oppose inclusion of the efficient clause.3 There are
three types of opportunistic behaviors that can cause this effect4:
I) Firstly, there is manifest non-performance. Thus, for example, if the contract’s
legal effectiveness is not adequate to intimidate anyone intending not to
perform, it may be worthwhile for one party to avoid calling for the other to
perform second, and thus to construct the contract so that the services are
performed simultaneously.
II) Secondly, there is opportunistic strategic behavior associated with court costs.
If, in fact, a court system applies some costs to the winning party as well, then
an unfair contracting party might adopt a strategy of threatening a legal
2 On the “efficient clauses” see M. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets
the Real World, 24 Ga. L. Rev. 583 (1990).
3 On the opportunistic behavior of contractors, Oliver Williamson’s contributions are fundamental. See O.
Williamson, The Economic Institutions of Capitalism. Firm, Markets, Relational Contracting, The Free Press,
New York, 1986. On the same topic: R. Posner, Economic Analysis of Law, VI edition, New York, 2003, p. 94 s.
4 There is also another important case examined by I. Ayres & E. R. Gertner, Filling Gaps in Incomplete
Contracts,: An Economic Theory of Default Rules, 99 Yale L. J. 87 (1989), in which one party waives inserting
efficient clauses so as not to be included in the category of worst clients and hence be able to continue being treated
like an average client. A thorough critique of the position of these two authors was made by E. Posner, There Are
No Penalty Default Rules in Contract Law, available at http://ssrn.com/abstracts=690403. For an attempt to re-
examine the theory of penalty default rules, see E. Baffi, Ayres and Gertner v. Posner. A Re-examination of the
Theory of Penalty Default Rules, available at http://ssrn.com/abstracts=948916.
5
challenge even in the event he is wrong. This could happen, because it is
possible that the likely winner will fear the court dispute more than the party
likely to lose. This situation may be even more likely when the results of the
dispute are uncertain. In a situation of this type, efficient clauses that might
permit strategic court behaviors are avoided.
III) Thirdly, there is opportunistic behavior consisting of exploitation of asymmetric
information that enables a party to carry out actions that the other party cannot
know about. In fact, this opportunistic behavior falls into the category of moral
hazard.
In this case of opportunistic behavior, there is no incentive for maximizing the joint
return.
However, when such impediments are not present, interest in maximizing the joint
earning is present, and efficient clauses can be sought through negotiations.
In addition to the purpose indicated, the activity of negotiating, consisting of a search
for an opportunity for exchange and for exploitation of efficient clauses, also serves
another purpose. This purpose is represented by division of the contractual surplus. For
simplicity’s sake, let us assume an exchange consisting of a purchase and sale. Let us
imagine that X, the buyer, values the property at $100, whereas Y, the seller, values it
$50. Let us also assume that there is a guaranty clause that X is valued at $10 while for
Y, it involves a cost of $5. Let us also assume that Y is obligated to provide transport
for the property and that this service is valuated at X at $30, whereas it costs Y $10.
In a situation of this type, the contractual surplus is equal to: $100 - $50 + $10 - $5 +
$30 - $10, or $75. One of the purposes at which the negotiation is aimed consists of
establishing a division of the contractual surplus, which in the example considered is
represented by earnings of $75.
Having thus identified the two main purposes pursued through negotiation, we can
now turn to a study of the motives that seem to push individuals and companies to give
up this activity. However, before attempting to solve this problem, a further
preliminary examination is necessary, an examination regarding the structural
characteristics of the activity of negotiation, especially in order to determine what type
6
of costs it carries for those involved.
Negotiating activity, as traditionally practiced, requires the commitment of both parties.
In the event of an exchange between the entrepreneur and the consumer, negotiation
requires an activity on both their parts. Their activities are characterized by being labor-
intensive for both, i.e., they basically require work as their cost. If we did not wish to
consider the client’s activity as work, it would be more correct to use the term time-
intensive rather than labor-intensive.5 In other words, negotiation basically requires
that the entrepreneur use the work factor, whereas it mainly requires a commitment of
time from the consumer. These activities are also both characterized by their not
having enjoyed – to date – the advantages associated with technological innovation.6
These two aspects lead us to conclude that the cost of negotiations has risen
considerably in the last few decades, in tandem with the increase in the cost of the
labor factor and the opportunity cost of t ime.
Examined in light of what was said regarding the purposes typically pursued through
contracting, this conclusion leads us to two considerations. The first is that the activity
aimed at division of the contractual surplus is destined to decline. Indeed, with the
increase in the cost of labor and of the opportunity cost of time, the costs of negotiations
5 The expression “time intensive” was coined by G. Becker, A Theory of Allocation of Time, 75 Econ. J. 493 (1965).
6 In 1967 economist, W. Bawmol, Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis, 57
Amer. Econ. Rev. 415 (1967), made a distinction between productive activities that have experienced increased
productivity because of technological innovations and the accumulation of capital and those that have not
experienced such increased productivity. He used the term “technologically progressive activities” to indicate the
former and “nonprogessive activities” to indicate the latter. Bawmol shows that the difference between
progressive and nonprogressive activities involves a constant increase in the relative costs of the goods produced
through nonprogressive activities as opposed to goods produced by means of progressive activities. As the cost
of goods produced by nonprogressive activities thus rises, it is possible that their production will tend to diminish
to the point of disappearing. Bawmol theorises that this may be the fate of theatrical performances, for
example, of extremely luxurious homes, of made-to-order clothing and of hand- decorated ceramics. However,
for those goods for which demand is increasing as individual incomes increase, this end does not seem
predetermined.
7
aimed at dividing the surplus also increase without the possible earnings from such
activity increasing proportionately. If, for example, it is possible to achieve a
contractual surplus of $100 after one hour of negotiation, whether it is worthwhile
to undertake the negotiation depends on whether the cost of the labor factor is $10
per hour or $200 per hour, and, likewise, on whether the opportunity cost of time is
$10 or $200 per hour. The second factor is that this increase in costs relating to
negotiation may also carry with it a reduction in negotiation, including the search for
efficient clauses.
It is not only the increase in the cost of negotiation that influences the decline in
this activity. There is also a worsening of relative costs required to manage
personalized contracts, which has made them less economical. Only in recent years
has the activity of managing personalized contracts begun to enjoy some form of
lowering of costs associated with innovations in the IT field. Prior to the changes that
occurred with the introduction of the electronic processor, the activity of managing
personalized contracts seemed “stagnant,”7 and hence its cost, relative to all
“progressive” activities, underwent major increases.
In addition, it must be noted that negotiation of the contract is a necessary activity
especially in those cases in which the object of the main service is also personalized.
But, the increase in productivity of the production factors basically required
standardized production. This means that the greater production capacity of economic
systems is basically associated with lowering the costs of producing standardized
goods. It follows from this that the cost relating to personalized goods compared to
standardized goods has increased steadily in recent decades.
7 See supra note 6 on William Bawmol’s conceptions.
8
All these considerations lead us to believe that the changes in costs relating to goods
and services—changes due primarily to technological innovation and to the
accumulation of capital—have given consumers a strong impetus to give up “negotiated
contractual regulation” and personalized contracts in order to use the wealth, including
the wealth obtainable by using one’s own time in work rather than in negotiations,
Thus, this time can be saved for the acquisition—without negotiation—of
standardized goods and services.
Finally, we must look at two further considerations regarding the reasons for the
decline in negotiating activity. In examining the purposes that traders may achieve
through negotiations, we underscored the parties’ interest in seeking efficient clauses.
In fact, we have shown that the inclusion of an efficient clause can generally ensure a
profit for both parties. However, we point to circumstances in which this result cannot
be achieved, since the increase in the joint earning probably or even necessarily
carries with it a reduction in the earning of one party. We have shown how this
impediment to seeking efficient solutions can result when opportunistic behaviors are
possible.
We next want to assert that certain transformations occurring in today’s society seem
to favor opportunistic behaviors, and hence seem to discourage the search for efficient
clauses. If this is true, it seems reasonable to maintain that interest in undertaking
negotiations is destined to undergo a consequent decline, inasmuch as the spaces in
which the parties can look for clauses to include in the contract are being restricted.
This hypothesis will be examined when we consider the causes of that phenomenon
which has been defined as a “uno actu recapitulation of the contract’s conclusion and
execution.”8
8 Some aspects examined in this paper cite the comments made by R. Posner and L. Bebchuk, One-Sided
Contracts, available on http://ssrn.com/abstracts=845108 who maintain that companies often offer contracts that
are unbalanced to their advantage even while behaving fairly toward their clients. Their explanation is that if the
companies dictated balanced contracts, opportunistic behaviors by consumers would become too easy, so in the
end, the balanced approach would be disadvantageous for the same consumers. The idea that will be defined in
this work as “uno actu reduction of contract conclusion and execution” seems in part to hark back to the idea of
9
b. Affirmation of standard form contracts.
As stated above, the decline in the possibility of negotiation for companies has not
meant giving up an auto-regulation of contracts. In fact, by using the general
contract conditions, firms have been able to define the rules of the contractual
relationships different from those defined by legal regulations. This phenomenon must
be attributed to the objective inability of lawmakers to draft provisions suitable for
satisfactorily filling in any gaps that may be present in each type of contract. The
great variety of goods sold in the marketplace makes it extremely difficult for a
lawmaker to draw up a legal provision that manages to take into account this extreme
variety.9
However, it does not seem unreasonable to assume that some companies have begin
resorting to this tool for the main purpose of being able to include inequitable clauses,
possibly justifying this with consumers by unjustifiably citing the imperfection of legal
provisions.
the two authoritative authors. The expression used here was coined by Professor Natalino Irti, who discussed it in
many papers and in his classes.
9 E. Roppo, Contratti standard, Milano, 1999, unchanged reprint of the 1975 edition, p. 43:
“An additional perspective from which to look at the role played within the corporate organization by the use of
general contract conditions is available to anyone who compares the standard contractual regulations contained in
business forms with the legislated regulations. That such standards often create a gap-filled system inadequate to
the situations and relationships institutionally governed by them is a phenomenon made largely inevitable by the
evolution of socioeconomic relationships and (in particular) by the needs expressed by the system of companies
which, in times of rapid technological progress, change constantly, worsening the tension between economic
realities in constant movement and legal forms crystallized in the codes. But for the deficiencies of a regulatory
system that is often incapable of providing adequate responses to the “legal question” expressed – in increasingly
complex and sophisticated terms – by the enterprise system, the latter has a remedy. By setting up autonomous
negotiating schemes (and hence legal regulations alternative to the legal system’s regulations), enterprises,
in fact, create for themselves a “law that (…) better corresponds to the situation and dynamics of market
relationships.”
10
The diffusion of standard form contracts has also been a consequence of a dimensional
growth of many firms: when the owner cannot sign contracts himself or make use of
some family members, he must resort to strangers. In this situation the principal-agent
problem emerges, and the standard form contract becomes a tool to create bonds for the
agent.10
It is, however, correct to stress that both legislative and jurisprudential law has
favored the spread of standard form contracts, both in Europe and in the United
States.11
c. The spread of inequitable clauses.
The phenomenon of the spread of inequitable clauses, that is, the affirmation as part of
the general contract conditions of clauses so unbalanced in favor of the party dictating
them as to lead one to believe that in normal contracting they would not be
accepted, was underlined in the 70s. The notion was developed in the 1970s and gained
substance in the following decade.12 It stated that the clauses in the general condition of
10 See R. Pardolesi e A. Pacces, Clausole vessatorie e analisi economica del diritto: note in margine alle ragioni
(ed aelle incongruenze) della nuova disciplina., 2 Dir. Priv. 377, p. 399 (1996).
11 For example, §1341 of Italian Civil code imposes upon the weaker party ordinary diligence in attesting the
content of the contract (standard form contract). On this point see C. Cicoria, The Protection of the Weak
Contractual Party in Italy v. United States Doctrine of Unconscionability: A Comparative Analysis, Global
Jurist Advances, vol. 3, issue 3, p. 1 ss. (2003), spec. pp. 10 ss. One particular case was considered by G. Gorla,
Standard Conditions and Form Contracts in Italian Law, 11 Am. J. C.omp. L., 1 (1962), who assumed that “the
document signed by the customer, or an oral contract, makes express and clear reference to standard conditions,
but these are to be found elsewhere. The majority of our legal writers seem to maintain that in this situation
too the customer has to take the trouble to find the standard conditions and read them.” It needs to be stated,
however, that, according to the second paragraph of §1341 of the Italian civil Code, one-sided clauses, in order to
be incorporated into the contract, must be specifically approved in writing. The second paragraph of § 1341 gives
a list of such clauses.
12 The idea of a possible adverse selection involving the clauses inserted in standard form contracts can be
found in an article written by D. Slawson in 1970, Standard Form Contracts and Democratic Control of
Lawmaking Power, 84 Harv. L. Rev. 529 (1970), but it was Lewis Kornhauser who expressly states the
11
the contract would be subject to a phenomenon of adverse selection, by which the
“bad” clauses would tend to drive out the “good” ones. In summary, this
phenomenon can be explained as follows: study of the contract’s general conditions
by consumers carries with it costs for the latter, mainly represented by the
opportunity cost of the time that must be devoted to this activity. These costs are
such that the consumer finds it more economical to waive evaluating all the clauses and
to concentrate on a few of them, i.e., on those most important from an economic
point of view (for example, the clause setting the fee in money, or certain clauses
governing the more important guarantees).13 Based on this rational choice, the
consumer carries out his comparison of the various proposals available to him, taking
idea, Unconscionability in Standard Form, 64 Cal. L. Rev. 1087 (1976) p. 1177: “When confronted with an
oppressive contract, one must ask why and how did the market arrive at the production of a “bad” or non-optimal
good. Conventional economic theory has few models of product selection. One model suggests the
difficulty is an informational one: the ordinary consumer cannot distinguish between good quality and bad
quality goods. Since it is more expensive to produce high quality goods and purchasers cannot distinguish the
good from the bad, the market will produce low quality merchandise. Complex, fine line print standard forms
might be viewed as goods whose quality people cannot determine (…) As consumers are making decisions upon
price grounds, a seller offering a better warranty must either suffer a lower profit margin at the same price or
charge a higher price and attempt to disseminate information to prevent a loss of sales because of the raised
price. Dissemination of information might be difficult...”
Some years later, a similar idea was expressed by Todd Rakoff, Contract of Adhesion: An Essay in
Reconstruction, 96 Harv. L. Rev. 1174 (1983), pp. 1227, according to whom: Drafting parties introduce contracts
of adhesion to minimize their exposure to external risks and to further internal organization aims. Adherents
respond not by reading, but instead by focusing on a few items. They compete in regard to those items. The
incentive for the firms is to save whatever they can with defensive form terms and employ the savings to compete
with respect to the shopped terms.”
After these first explanations, the idea that a phenomenon on adverse selection could involve some clauses of
standard forms contracts with the possibility of a “lemon equilibrium” became widely accepted. But see now R.
Posner and L. Bebchuk, supra note 8, who have given the new explanation already exposed.
13
We have stated that the cost of being informed discourages consumers from acquiring an adequate awareness of
contractual clauses. It must, however, be added that possibly more economical mechanisms for producing
information run into the classic market failures. Indeed, a decidedly more economical mechanism for ensuring
that consumers acquire information could be represented by the collection and processing of such information
by specialized companies, which could then sell this information to consumers. The problem that this
mechanism runs into is represented by the fact that producing information involves very high costs, whereas
once it is produced, anyone can sell it at a very low
12
into consideration only the clauses he has selected. Thus his attention does not fall on
those clauses, which have been deliberately ignored.14 Once he understands the
selection made by consumers, the companies supplying the requested goods or
services, which operate in competition with one another, are pushed to save as much
as possible on those clauses that are not evaluated by potential consumers. This is
done in an effort to improve those clauses based on which the choices are made, in
order to prevail in the completion with other firms. In other words, companies also
focus only on the clauses selected by the consumers, and, in order to improve their
offer with reference to these clauses, exploit all possible savings which are possible by
worsening the other clauses. Over time, this mechanism leads to the presence of many
inequitable clauses accompanied by other clauses that are particularly advantageous.
The inefficient outcome of this phenomenon lies in the fact that consumers might
prefer a different combination of clauses, for example a combination characterized by a
greater balancing of all clauses governing the relationship.
In this chapter, in which we seek to present the most credible reconstruction of the
salient aspects of mass contracting, we considered it our duty to cite this notion
developed by noted American jurists long ago, because we are convinced that it, more
than any other, succeeds in providing an explanation for the presence of so many
cost without having to bear the production costs. In other words, the production of information runs into the
same problems that characterize the production of innovations and that are sometimes defined as the “problem of
the appropriability of benefits.”
In addition, another mechanism for producing information could be represented by enterprises conveying
information to consumers. Here the problem of free-riding arises. In fact, much of the information that an
industrial company can convey to consumers also involves other companies with the consequence that the
company that produces the information also ensures a benefit for other companies. This situation may encourage
a behavior of waiting, in the hope that others produce the information. In addition, when information
production includes a cost such that it is not worthwhile for a single company to produce it but may be
economical for several companies together, the problem arises of agreement among them.
14 M. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets the Real World,
supra note 2, probably presented this theory in the simplest and clearest way.
13
inequitable clauses in the general contract conditions, even though noted authors
have criticized this reconstruction, including very recently.15
d. Affirmation of a new contract model.
We stated previously that a unique feature of the phenomenon of mass
contracting is represented by the affirmation of a model of exchange that
recapitulates uno actu the conclusion and execution of the contractual relationship,
i.e., a model characterized mainly by the simultaneous action between the
contract’s conclusion and execution of the services.
This phenomenon seems mainly the result of mass production. Mass production, in
fact, involving the standardization of products has made the acquisition by firms
of prior commitments by consumers for acquisition of the goods less necessary. The
standardized product, not having been made to meet the particular demands of an
individual consumer, but being aimed at broad categories of potential buyers, can
be produced even in the absence of specific orders from consumers. Instead,
once it is produced, the personalized product may be of interest only to the
consumer for whose needs it was adapted; but the standardized product, being
produced with standard characteristics adapted to the needs of broad categories of
consumers, can be sold indifferently to anyone belonging to those categories.
However, this explanation of the phenomenon of the uno actu recapitulation of
the contract’s conclusion and execution, while it certainly appears able to justify the
willingness of companies not to seek preliminary promises from consumers, does
not seem capable of offering an explanation for the other aspect of the phenomenon
15 See R. Posner e L. Bebchuk, supra note 5. In fact, R. Coase, The Choice of Institutional Framework: A
Comment, 17 J. Law Econ. 493 (1974), albeit for somewhat different reasons (regulator’s lack of jurisdiction,
market’s ability to function) had previously rejected the theory by which the public authorities should
intervene in contractual clauses of standard contracts to avoid a phenomenon of adverse selection.
14
in question, i.e., the tendency of businesses to require of consumers the immediate
execution of the counter-service.
We will now try to provide an explanation for this phenomenon.
The contract’s legally binding nature is provided by legal systems in order to
remove a situation of the “prisoner’s dilemma” type, which would impede the
implementation of a mutually advantageous exchange between two parties. There are
particular expedients that make it possible to remove this type of impediment to
exchanges with no need for the legal effectiveness attributed to the contract by law.
Indeed, a plausible method for avoiding fraudulent behaviors is to make the
exchanges more simultaneous.
In modern states, the legally binding nature of the contractual agreement is universally
recognized, albeit within limits that differ from one legal system to another. The
existence of the legal constraint ought to discourage opportunistic behaviors, and in
any case the possibility of undertaking the legal actions that derive from the legal
constraint ought to ensure remedies of restitution or compensation in the case of non-
performance.
The guarantee thus given to the parties making the exchanges should exclude the need
to rely on those other expedients indicated above. However, in the event this guarantee
is ineffective, in what behaviors should businesses engage in order to prevent
opportunistic behaviors, or in any case to ensure compensatory remedies?
Is it possible that this tendency to recapitulate uno actu the conclusion and execution of
the contract is the consequence of the ineffectiveness of the legal constraint and of all
remedies other than simultaneous exchange to check opportunistic behaviors?
As we said, manifest non-performance and strategic opportunistic behavior can be
effectively controlled by the legal constraint. In fact, the legal constraint can discourage
opportunistic behaviors, while the legal action deriving from this constraint can
ensure remedies of restitution and compensation. However, this result is achieved
only if these two conditions are obtained: 1) that positive law ensures the winning party
of a complete indemnification and 2) that there are no ex ante doubts regarding the
15
rights and duties of the parties. If these two conditions are not present, the effectiveness
of the legal constraint as an antidote to opportunism and of legal action as an
instrument for obtaining remedies of restitution are partially compromised.
These two conditions do not seem to exist at all in today’s legal systems; it may even be
utopian to imagine that they may occur in any social system. Generally not all litigation
costs are charged to the losing party, and in any case, the result of the proceeding
almost never seems certain. If we take into account trial costs, costs that have risen in
recent years because of the length of the trials themselves and because of the
characteristics of the activities that are carried out in them,16 it may be imagined that
interest in keeping legal disputes from arising is very strong among companies.
However, this preference to avoid legal disputes must necessarily push companies to
seek other expedients to ensure performance of the counter-services.
So what are the mechanisms that seem capable of functioning in today’s society?17
The first thing to be considered is the mechanism of reputation. This mechanism
requires that operators be able to collect and utilize a great deal of information about
the parties making the exchanges. In a world in which information about individuals
does not circulate readily, interest in maintaining a good reputation wanes. On this
basis, it can be concluded that in today’s large cities, characterized by the fact that
individuals move about essentially anonymously, the mechanism of reputation does not
seem capable of correcting the opportunistic behaviors of individuals, particularly of
consumers.
16 The activities carried out in trials are characterized by requiring almost exclusively the use of the work factor,
of the judge and of counsel. The costs of these activities are increased in the same way as all “nonprogressive
activities.”
17 The taxonomy used here was developed by A. Kronman, Contract Law and the State of Nature, supra note 1,
passim.
16
The use of hostages18 to ensure compliance with contractual commitments can be
found only in residual hypotheses, and this scarcity denotes its particular
ineffectiveness. For example, some hotel companies normally withhold their
customers’ ID documents until all obligations have been met. Rather than
responding to the company’s desire to be able to know its customers’ precise data
and to be able to rely on possible proof in the event of a legal dispute, this
practice seems to respond to the company’s interest in making it worthwhile for the
customer to fulfill his obligations, since the loss of his ID documents could
involve costs greater than the earnings obtainable through non-performance. The
scant use of this expedient seems to be attributable not just to its intrinsic drawbacks
but to the fact that there are strong legal limitations in modern law on recourse to it.
The use of collateral19 is also not very widespread. Forms of precaution in
which we can recognize the characteristics of the technique called “use of
collaterals” include, for example, the demands that some companies make that
they be able to hold receipts for authorization to credit sums by credit card without
indicating the amount being authorized. In this case, the creditor reacts to failure to
comply with the obligation (for example, with reference to a fairly widespread
circumstance, failure to return a rented car) by taking a sum of money as
compensation for damages. However, use of this technique runs up against the legal
18 The hostage is an asset or an individual having a value for the debtor but having less value for the
creditor. Consider, for example, the debtor who gives “as hostage” a young and rather sickly child. In this
case the debtor’s interest lies in performing in order to have the loved one back, whereas the creditor’s
interest does not lie in holding the hostage and waiving performance of the service. The risk of using
hostages lies in the fact that the asset or individual may be of little value for the debtor as well, in which case
the latter relinquishes performing the service and leaves the hostage to the creditor, the hostage being of
no value for the latter.
19 Collateral is an asset or individual having value for both the creditor and debtor. The use of
collateral is much riskier, because if the appraisal is not correct. the debtor could leave the collateral to the
creditor and not perform, but most of all the creditor might keep the collateral and ask for the performance
called for in the contract. Consider the case of the debtor having given as collateral an especially beautiful
daughter. The creditor might keep the daughter and waive performance of the service.
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limit represented by the prohibition against forfeiture agreements.
However, we must note that deposit of the sum of money, which the ability to
obtain payment through the credit card amounts to, seems to be destined to
become widespread. It must also be noted that knowledge of credit card data by
many companies offering goods and services at a distance constitutes an effective
deterrent to non-performance or partial performance. From this standpoint, the
economic system seems to have thought up an effective remedy to non-payment or
to the request for compensation for damages. However, as previously stated, we
will deal only superficially with the changes that the new technologies bring us.
In today’s world, the instrument of self-enforcing agreements20 seems to be entirely
unutilized, and this denotes either its excessive cost or clear ineffectiveness.
Regarding the remedy of creating affective bonds, there is no doubt that in many
cases the bonds of friendship among partners is a guarantee that contractual
relationships will be respected. However, the large number of consumers with
whom each company stipulates contracts certainly makes it difficult to use this
expedient.
Finally, there remains the remedy of making exchanges simultaneously, with just a
few obligations destined to live after the conclusion of the contract. This remedy
seems to be the one that most effectively and without many drawbacks manages to
avoid the risk of opportunistic behaviors, especially that opportunistic component
represented by complete non-performance.
Therefore, the preference of firms for simultaneous exchanges is justified by taking
this need into account. As in other historic periods, when the legal constraint and
interest in reputation did not appear to be effective deterrents for avoiding
improprieties or even instruments suitable for removing the harmful consequences
20 Self-enforcing agreements are agreements stipulated before a group of citizens, meaning that failure to
respect them leads to loss of reputation and hence the possibility of subsequently stipulating new agreements
with other associates. In Kronman’s classification, self-enforcing agreements do not share anything with
Nash’s equilibria by which the parties may agree to follow specific strategies.
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caused by these improprieties, so today when the “costs” of trials and the scant
interest in reputation do not encourage respect for the rules of cooperation and
loyalty, the exchange system is implemented essentially through contractual
operations that require the simultaneous performance of the services of the
exchange.
2.
Conclusion.
We have seen how the contract has changed over the last century, both in the
way it is concluded and in its content. The motivations we have recognized seem
economic and not mere whims, or worse, political programs of businesspeople
banding together. This does not mean, however, that contract law should remain
the same. On the one hand we need to be cautious in reform, as critics of the
theory of the adverse selection of contractual clauses demonstrated with regard to
the conviction that the courts should intervene. For example, in 1993 the
European Commission adopted Directive 13/93, intended to invalidate all
clauses, which to the consumer’s harm, cause a significant imbalance between
the parties’ rights and obligations. Now, in light of the work by Posner and
Bebchuk, this arrangement seems to risk ultimately harming those who were to be
protected, i.e., consumers. The risk of unintended consequences, when a
phenomenon is not fully understood, always hangs over the work of the regulator
(or legislature); in other cases, it is possible to proceed ahead. From a liberal and
economic-efficiency standpoint, we should ask what the consumer is requesting
from the State. Does the consumer want to delegate control over contractual
clauses to the State? Does he want imperative clauses, i.e., clauses that the
parties cannot amend? Does he want some regulation other than error or
withdrawal imposed from above? We will attempt to answer these and other
questions in order to respect the sovereignty of the consumer and of liberal
principles.
The initial question remains unanswered: Will information technologies change the
situation as it is today? Will the consumer’s ability to read proposed contracts on
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the Internet at any time, i.e., when his time has the least value, lead to greater
awareness of them, and to more comparison of them? The ease with which
contractual alternatives can be explained, even in the case of standardized
alternates, leads to more personalized contracts (consider the existing possibility
Internet purchasing of insurance coverage or choosing a type of transport service).
And will the exchange of information which the Internet allows among consumers
make it possible to have more knowledgeable buyers? These questions remain
unanswered at the present time.