Julian Nyarko, Stickiness and Incomplete Contracts
(Sept 1, 2019), available at SSRN
According to prevailing conceptions, the primary role of contract law is to give effect to the parties’ will (the so-called will theory of contract), thereby enhancing overall human welfare (the standard law and economics perspective). Thus, the law may legitimately intervene in the content of contracts, or otherwise try to influence the contracting process and its outcomes, only if there is some flaw in the contracting process (such as duress) or if there is a market failure (such as a monopoly or an acute information problem). In recent years, the notion of market failure has been extended to encompass behavioral market failures as well—that is, deviations from the assumption that people are invariably rational maximizers of their own utility. However, it is still commonly believed that the need for compulsory (mandatory rules) or choice-preserving interventions (nudges) is limited to transactions with relatively weak and unsophisticated parties—such as consumers, employees, and tenants. When it comes to commercial transactions in competitive markets, the very fact that a contract does or does not contain a given term is perceived as a proof that that term (or its absence) is optimal—that is, maximizes the joint surplus of the parties. Otherwise, why would sophisticated parties include (or fail to include) that term in the contract? In fact, some scholars have grounded an entire theory of contract law on such strong belief in the rationality and competence of commercial contracting parties (Schwartz & Scott).
Until recently, people’s beliefs about these issues were primarily based on anecdotal evidence, personal experience, and ideological inclinations. With the advancement of empirical legal research, observational and experimental studies offer more reliable and systematic evidence about such matters (which does not mean, of course, that ideology ceases to play a role, as people often do not allow themselves to be confused by the facts). In his intriguing new research, Julian Nyarko uses cutting-edge methods of machine learning to study the inclusion or non-inclusion of choice-of-forum clauses in hundreds of thousands of contracts contained in a dataset of commercial agreements reported to the U.S. Securities and Exchange Commission (SEC). He then examines what factors might explain the inclusion or non-inclusion of such clauses in any agreement.
The study found that, while 75% of the contracts in the dataset include a choice-of-law provision, only 44%—less than half—include a choice-of-forum clause. (P. 32.) The latter figure is surprising, given the potentially large practical importance of choice-of-forum clauses (Pp. 10–19) and the prevalent opinion among practitioners that failing to include such a clause verges on malpractice. (P. 63.) Surprisingly, firms do not show consistency in this regard. While very few firms consistently include (or fail to include) such clauses in all (or any) of their agreements, most firms display considerable variance in this respect: the consistency measure—ranging from 0 (choice-of-forum not included in any of the firm’s contracts) to 1 (choice-of-forum included in all of the firm’s contracts)—is normally distributed around 0.5. (Pp. 33–34.) Similar inconsistency is revealed when breaking down the data by industry. (P. 35.) Unsurprisingly, choice-of-forum clauses are more prevalent in some types of agreements than in others (e.g., 61% in joint-venture agreements, compared with only 47% in transportation agreements). (P. 36.) Such clauses are also more prevalent in contracts drafted by leading law firms. (Pp. 38–40.)
If neither the consistent preferences of firms nor the types of industry or agreement explain the decision as to whether or not to include a choice-of-forum clause in an agreement, are there other observable variables that can explain it? It turns out that whether or not a choice-of-forum clause is included in the contract is largely determined by the lawyers that draft the contract. Moreover, in this regard lawyers do not appear to prioritize their own interests over those of their clients. Rather, there is strong evidence to suggest that “whether or not the final contract includes a choice-of-forum provision is determined almost exclusively by the template that a law firm uses.” (P. 7.)
Admittedly, given the observational (rather than experimental) nature of the study, there was an outside chance that “reverse causality” might be at play—namely, that firms hire lawyers who use the most beneficial template for each of their deals. However, the study largely rules out this theoretical possibility by examining the impact of two “external shocks.” One is the fact that some law firms collapsed during the period of observation, thus forcing firms and clients to hire new external counsel. (Pp. 44–46.) The other is significant changes in the legal default rules concerning the courts’ jurisdiction, which appear to have had no noticeable impact on the inclusion or non-inclusion of choice-of-forum clauses. (Pp. 50–58.)
The author readily (and commendably) concedes the limitations of the study. (Pp. 58–63.) For one thing, the study pertains to a particular type of term, which usually does not attract the attention of the negotiating parties, or even their lawyers. More studies are necessary to examine the generalizability of the findings with regard to both primary and secondary contract clauses. For another thing, the study only analyzes observable variables—primarily those that can be extracted from the dataset—and one cannot rule out the possibility that the inclusion or non-inclusion of choice-of-forum clauses in contracts is determined or mediated by other, unobservable factors.
Notwithstanding these limitations, the findings are intriguing, and their potential policy implications important. First, the findings highlight the role of lawyers in commercial transactions—thus questioning the common treatment of each contracting party as a unitary entity. The findings also cast doubt on the attempt to derive normative conclusions from observations of prevailing provisions in commercial contracts (see, e.g., Benoliel).
Furthermore, the strong evidence suggesting that whether a choice-of-forum clause is included in a contract is determined by the language of the boilerplate used to prepare the first draft (rather than by any rational deliberation), lends support to the observation that cognitive heuristics and biases—in this case, the status quo and omission biases that result in a default effect (Zamir & Teichman, Pp. 48–50)—are not limited to laypersons making mundane decisions (see Id., Pp. 114–17). They affect even top-tier professionals who charge large sums of money to handle transactions worth millions of dollars. This observation must be taken into account even if one is solely interested in maximizing overall social utility, to the exclusion of any other normative concern. Among other things, it bears upon the design of legal default rules, and on the appropriate division of labor between the contracting parties and the law (see also Zamir; Ayres).
Finally, Nyarko (P. 65) aptly offers a more general lesson for legal theory in contract law and beyond: rather than trying to theorize away gaps between expectations and reality, we should try to understand these gaps.
According to Columbus, the protagonist of Zombieland (2009), “enjoy the little things” is Rule #32 for surviving a zombie apocalypse. Professor Emily Kadens’ Cheating Pays explores the darker side of enjoying the little things against the backdrop of the 1622 trial of a London grocer, Francis Newton. Specifically, Professor Kadens argues that in the context of cheating by heavily networked commercial actors, it is the little things—small-scale but regular cheats in transactions with contracting partners—that pay off in the end. Small cheats are potentially more lucrative than large cheats because small cheats are unlikely to be discovered or may be discounted as mistakes even if discovered, the cheater can take steps to misdirect attacks on the cheater’s reputation, and contracting partners are unlikely to take significant measures to punish the small-scale cheater even after the cheats are discovered.
In this sordid tale of petty lies, betrayal, and revenge, the villain was not particularly glamorous nor interesting in terms of the scale of his misconduct. Francis Newton was a successful grocer who routinely cheated customers and suppliers by subtly altering the length of balance scale arms, substituting low quality goods in sales to buyers, changing tare weight markings on shipping containers, and secretly attaching extra weights to scale platforms. These cheats presented lighter weights on goods sold by suppliers and heavier weights on goods sold to customers. Newton apparently carried on this scheme of regular, small-scale cheats for at least a decade before rumors of his dishonesty began to spread. Although earlier cheats had been discovered by others, it was not publicly sanctioned until Newton’s enemies began a campaign to spread news of the cheats and ultimately bankrupted themselves bringing Newton to trial. Newton was found guilty of dishonest practices and forced to make a public apology and pay a £1000 fine. Nonetheless, Newton appears to have continued more-or-less successfully in business after that public punishment.
Professor Kadens uses this story to critique the standard trope in contract theory that fear of reputational harms will cause repeat players in business networks to resist the temptation to cheat their contracting partners. Ultimately, Kadens lays out a detailed, original, and powerful case demonstrating that while reputational concerns likely do curb large scale cheating, small-scale cheating by contract partners not only will likely go unpunished but also may not yield serious consequences for future dealings even when discovered and punished.
London grocers of Newton’s time were members of a trade guild with the power to sanction individual grocers for wrongdoing. Grocers engaged in repeated transactions with their regular customers and suppliers, but those customers and suppliers also interacted with each other and with other grocers regularly. In this network, reputational information regarding individual players could be disseminated relatively inexpensively as actors within the network shared news and gossip about their dealings with each other.
In this context, theories of private ordering predict that actors in the network have strong incentives to deal honestly with each other. Any member of the network who believes their contracting partner has behaved dishonestly can punish that behavior by spreading the news of the cheating through the network. Consequently, assuming there are no extrinsic factors controlling morality such as ethical or religious beliefs, actors in such contexts will refrain from cheating behavior where the cost of cheating exceeds the benefits. Thus, in such a system, we might expect to see a retiring corporate officer embezzling $20 million if the officer has confidence in being able to relocate to a jurisdiction with no extradition treaty because the return on investment is significantly in excess of the expected loss from discovery. But such grand opportunities are rare, especially compared to opportunities for lower level cheats such as hiding personal expenses on a corporate credit card, selling misbranded products, or cheating customers and suppliers in calculating prices. In the latter situations, private ordering theories predict that the potential reputational costs (and expected losses discounted by the likelihood of discovery and punishment) of small order cheating just aren’t worth it. In other words, potential cheaters should be guided by the maxim, “Go big or go home.”
Kadens counters this narrative by observing that many factors make regular, small-scale cheating profitable.
While private-ordering theories may accurately predict that fear of the loss of reputation will keep cheaters from committing big cheats, they do not have the same disciplinary power over small cheats. Cheaters are clever; victims can be ignorant of their victimization or unwilling to broadcast it; and gossip can be ambiguous. All of these real life factors render reputation an imperfect policing mechanism. As a result, low-level cheating may be—and indeed is—a common cost of doing business. Such low-level cheating certainly seems to have been embedded in the grocery market of early seventeenth-century England…. (P. 543.)
This article is an important insight into the limits of private ordering and insightfully analyzes the factors contributing to the success of dishonest actors even within a commercial network that should serve to impose reputational costs that should prevent cheating. As Kadens notes, it is unclear whether Newton was an anomaly or whether all actors in his network simply assumed that everyone engaged in small-scale cheating as a cost of doing business in that network. Newton’s accusers, for instance, engaged in their own small-scale cheats. While such trade expectations may ameliorate the immorality of cheating within the network, it remains that cheating reduces economic efficiency and activity. To counteract this drain, however, regulatory and private contract solutions must account for the possibility that the cost of remediation may exceed the economic benefits. At the end of the day, we may be left with the conclusions that cheating will occur and that cheating pays for those who just enjoy the little cheats.
Just after the turn of the millennium, it was common to hear the burgeoning data economy ethically justified through the following refrain: “If you’re not paying for it, you’re the product.” Consumers, wittingly or unwittingly, pay for free services by giving companies access to their personal information and data logs.
In this way, Article 9 and the Bankruptcy Code amplify the impact of transfer of data and encourage its transfer. Corporations borrowing money and taking risks is the lifeblood of the American economy. A company would be putting itself at a disadvantage if it did not seek to borrow against its consumer data and take advantage of secured credit. And the more control a company gives itself over consumer data in its privacy policies, the more flexible it can be in the case of bankruptcy. The shadow of what might happen if bankruptcy were to occur influences creditor and investor behavior.
Article 9 and Bankruptcy Code predated what Elvy calls “the IoT data gold rush” by several decades, and the results of their interaction were not intended by policymakers. In fact, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was intended (among many other things) to address consumer privacy concerns arising from data sales following several high-profile corporate bankruptcy cases. As Elvy describes in detail in the article, however, BAPCPA has many limitations, most notably its limitation to personally identifiable information (a dinosaur of a concept in an era where anonymized data can be readily re-identified) and deference to privacy policies.
Elvy proposes two principal solutions to the consumer-unfriendly landscape she describes. She notes that deferring to the concept of notice and choice does not adequately protect consumers; it gives consumers no control over their data while increasing the ability of companies to profit from that same data. Elvy also suggests bright-line rules limiting biometric data use in secured transactions and sale during bankruptcy because unlike other personal information like credit card numbers or addresses, fingerprints and eye scans cannot be changed.
Ultimately Elvy’s most valuable contribution is the bringing together of the various sources of law that govern transfer of personal information. American law is characteristically sector and subject matter specific. However, looking at the problem of personal information transfer in the IoT economy exclusively as a commercial lawyer, a consumer protection lawyer, or even a privacy lawyer is not sufficient. Policymakers, scholars, and stakeholders should periodically take a big picture approach to see how different areas of the law fit together and reinforce (or undermine) each other.
There is a deeply held American cultural tendency to hold individuals responsible for fine print in contracts. However, Elvy’s piece shows that when and how personal information is transferred between companies is largely not determined by contract law at all, but rather a combination of commercial law and sector-specific privacy law. Who has access to what type of data held by a company is a creature of commercial law, determined by the internal policies of that company and contractual relationships between debtor and creditor.
When one enters into a contractual agreement with another, expectations are created on both sides. Party A expects to receive something from Party B, and Party B expects to receive something in return from Party A. When courts become involved in contractual disputes, ensuring the fulfillment of these expectations is often one of their primary goals. The pursuit of this goal, however, must be balanced against other contracts principles, particularly those related to defenses against the enforceability of contracts. Professor Grace Giesel explores the balance between expectations and enforceability in her recent thought-provoking article, A New Look at Contract Mistake Doctrine and Personal Injury Releases.
Professor Giesel’s article begins with an informative discussion about the terms typically included in a personal injury release agreement. In particular, she notes that such agreements often require the injured party to relinquish “claims for all injuries relating to the incident whether those injuries are known or unknown” (P. 542) and whether those injuries have presently developed or will develop in the future. When those unknown injuries manifest themselves after the execution and payment of the release agreement, parties seek to invoke the mistake doctrine to challenge the enforceability of the agreement in their efforts to recover for additional related injuries. As Professor Giesel argues, injured parties will have a steep uphill battle to successfully make a case for mutual or unilateral mistake under such circumstances.
After discussing the rules related to contract mistake doctrine, Professor Giesel identifies several stumbling blocks that could impede injured parties’ ability to make a successful case for mutual mistake. First, as a threshold matter, there may not be a mistake of fact as the doctrine requires, but rather a mistaken prediction or speculation about the future. In addition, if a mistake of fact truly exists, it may not be shared by both the releasor and the releasee. Finally, the injured party may be deemed to bear the risk of the mistake either through conscious ignorance or contract allocation. Professor Giesel also identifies additional rules-based obstacles for those asserting a theory of unilateral mistake.
Despite the fact that in theory any one of these obstacles could successfully defeat a mutual or unilateral mistake claim, Professor Giesel asserts that courts struggle in their application of the doctrine in the context of personal injury releases. Their application is often more nuanced and less straightforward resulting in more successful mistake claims than perhaps would be expected “[i]f a court applies traditional contract doctrine.” (P. 553.) For example, some courts have drawn a distinction between an injured party’s mistaken belief regarding the existence of an injury as opposed to the consequences of an injury thereby permitting contract mistake doctrine to “apply to a mistake of diagnosis but not one of prognosis.” (P. 556.) Considering that such an analysis requires courts to wade into the “high weeds” of medical injuries, Professor Giesel expresses her and courts’ concerns that judges without medical training may be ill-equipped to consistently apply such a test, which could result in inconsistent holdings.
Professor Giesel also notes inconsistencies in courts’ holdings when they apply the unconscionability doctrine and traditional notions of contract interpretation to claims of mistaken personal injury releases. Competing policy concerns contribute to discrepancies in the courts’ analysis and decisions. As Professor Giesel notes:
Several policies are at play. On the one hand are the policies in favor of enforcing contracts freely entered into and the policy in favor of encouraging settlement. On the other side of the ledger, courts have spoken of the unknowability of the human body and thus its injuries, a desire that injured parties be compensated by the wrongdoer and not become a public burden, the noncommercial context, and a need to protect injured parties because of their weakness or lesser bargaining position. (P. 565.)
If one were to characterize the competing policies in terms of a “rules versus justice” dichotomy, it is safe to say that Professor Giesel would favor rules. After a thorough yet critical discussion of courts’ rationales to justify holdings that seemingly contradict traditional applications of contract doctrine, Professor Giesel concludes that “in order to protect the sanctity of contracts, contracts should be set aside only when a traditional doctrine demands that,” and for her, “[n]o policy put forward in support of providing more favorable treatment to personal injury releasors demands that preferential treatment.” (P. 572.)
In her skillful critique of arguments that plaintiffs and judges advance for setting aside a personal injury release, Professor Giesel makes a convincing case that more careful consideration should be afforded to the potential costs associated with misapplying traditional contract doctrine in this context. She worries that judicious application of the mistake doctrine in other situations may be compromised, and she cautions courts against contorting “traditional contract doctrine to reach a result desired.” (P. 575.)
Instead, Professor Giesel proposes that courts adopt “a release review doctrine,” similar to that applied when individuals agree to relinquish particular federal rights, to ascertain whether the injured party voluntarily and knowingly entered into the release agreement. In making their determination, courts could consider multiple factors such as “the education and experience of the releasor, whether the releasor had ample opportunity to review the release, whether the releasor enjoyed the assistance of counsel, whether the releasor was discouraged or encouraged to consult with counsel, and whether the release was clear or confusingly complex.” (P. 581.) According to Professor Giesel, adopting such a process-oriented approach could accomplish the dual goals of protecting the interests of both the releasor and the releasee while simultaneously preserving the sanctity of traditional contract doctrine on which parties and courts have traditionally relied. While it may be too soon to tell if courts will embrace Professor Giesel’s proposal and begin to employ a release review doctrine to analyze personal injury releases, doing so may lessen the number of inconsistent holdings that arguably result from courts’ “mistaken” application of the mistake doctrine to such contracts.
Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable
, 60 B.C. L. Rev.
__ (forthcoming, 2019), available at SSRN
Uri Benoliel and Shmuel I. Belcher answer the question posited in the title to this review with an absolute yes. In a well-written, concise, and quite persuasive article, the authors test the readability of 500 of the most popular websites’ “sign-in-wrap agreements,” which require online users to accept terms before using the website’s services. The authors employ two readability tests that measure the average length of sentences and the average number of syllables per word. After detailing the legitimacy of these tests, the authors report that the sign-in-wrap agreements are no more readable than academic journal articles and thus are “unreadable” by consumers. The article proceeds by providing a nice discussion of the nature of the two tests, the results, and the implications for contract law. The article adds important weight to other studies that conclude that Internet agreements challenge consumers. Although hardly revelatory, such empirical studies increase the pressure on lawmakers to revise the duty-to-read rule in the context of consumer standard-form contracts.
Benoliel and Becher recognize that long sentences and multi-syllabic words are only two of the many problems facing consumers who make Internet agreements. But they reason that paying attention to part of the problem provides a step in the right direction. They, therefore, suggest a series of regulatory moves and judicial responses. Perhaps most important, the authors argue that vendors drafting consumer Internet contracts should have a duty to draft agreements that receive a favorable readability score. The authors also sensibly call on courts to continue policing substantive terms and suggest that judges should relax the duty-to-read rule when consumers are faced with unreadable contracts. The authors are more tepid about another possible reform, requiring vendors to include a plain-language version of the agreement alongside the contract. They reason in part that two versions of the agreement can only create confusion over which version to read and which is binding.
Although Benoliel and Becher see the potential pitfalls of these and other solutions, they may have too readily discounted a few problems. Perhaps most concerning is the possibility that readability regulation may backfire by making consumer Internet contracts more likely enforceable without improving their substance. The authors recognize that sophisticated drafters may satisfy the readable tests with shorter sentences and words, but may substitute legalese that does not improve comprehension or may use deliberately flawed grammar. They also see the possibility that consumers will not read even more readable agreements because of their length, consumer over-optimism that nothing will go wrong, or the temptation to free ride on others reading. They respond in part that consumer behavior is not possible to predict, but that consumers may more likely read if they expect readable terms. However, if the authors’ prediction is mistaken, legalese remains a challenge, and consumers still don’t read, improving readability will only mean the loss of some consumer ammunition for overturning contentious terms.
Another quibble. Benoliel and Becher’s treatment of the role of Internet watchdog groups, which can evaluate and report on the fairness of Internet standard forms, is a bit confusing. At one point, the authors argue that market forces and reputational concerns likely will not help lead to more readable terms, but they do not consider whether watchdog groups can help change the equation. At an earlier point, however, the authors see the benefit of readable terms in reducing the transaction costs of watchdog group reporting, implicitly acknowledging the efficacy of such groups.
People should pay attention to The Duty to Read the Unreadable. The article not only substantiates the long-heard cries of the impossible nature of Internet standard forms, but does so with hard evidence. Further, the authors’ thoughtful evaluation of their proposed reforms underscores the difficult challenge of improving the plight of Internet consumers.
Meirav Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine Print Fraud
, 72 Stan. L. Rev.
__ (forthcoming 2020), available at SSRN
Sellers entice consumers to make purchases by advertising many lovely benefits of their products. It is quite common, however, to then qualify and narrow these marketing promises in the fine print terms attached to the transactions. What if sellers outright deceive consumers—by making loud promises that they surreptitiously negate or contradict in the fine print? What if, say, a phone carrier runs an ad for an “unlimited” data plan which, under the terms of service, is actually strictly limited?
In a surprising article, Meirav Furth-Matzkin and Roseanna Sommers (academic fellows at the University of Chicago Law School) expose the cognitive impact of this tension between explicit promises and fine print. Consumers, their experiments show, may feel committed to the fine print, even when it strips away explicit promises made to them. Laypeople are “intuitive formalists”: not only do they (incorrectly) believe that such conflicting fine print is binding, they also think this is how things should be! They blame themselves for not reading and knowing what’s in the boilerplate, and they are unlikely to complain or to hold the deceiving business accountable.
Lawyers know that consumer protection law does not permit deception. Material promises and representations made before the contract become part of it, and efforts to negate them in the fine print are ineffective, and rightly so. Luring consumers with phantom perks that the business has no intent to confer is fraud. But consumers don’t know what lawyers know. How do they react in the face of fine print terms that conflict with their expectations—those formed by the business’s explicit promises?
In prior work, Tess Wilkinson-Ryan showed that obligations appearing in the fine print are viewed by people as morally and legally legitimate even when they are not. But what if they directly conflict with an explicit assurance? In a set of experiments, a disturbing effect is drawn out: people feel subservient to the fine print. In one scenario, subjects were asked about a car loan guaranteed to be “without any fees” but which in fact came with Terms and Conditions requiring a $3 fee with each payment (totaling, overall, hundreds of dollars). The scenario was presented to lay people (M-Turk) as well as to Harvard/Yale legally trained folks. The two populations agreed that in light of the advertised promise it would be unfair to hold to a consumer bound to pay the fees. But they differed in two important ways. The legal elite correctly doubted whether the consumer “consented” to the fees, and tended to think courts are unlikely enforce them. The larger population reported a glummer attitude, saying that the consumer consented and that courts would enforce the boilerplate.
People do recognize fraud when they see it; and yet, the presence of fine print alters their judgment. In a separate experiment, respondents were given the same “no fees” express promise and were subsequently (and fraudulently) charged the fees. But one group did not receive any fine print disclosure of the fees (“fraud only” treatment), whereas the other group did receive an unread disclosure (“fraud and fine print” treatment). In the “fraud only” condition, the vast majority of respondents (85%) condemned the business for its fraudulent practice and wanted to take some kind of action. In the “fraud and fine print” condition, by contrast, most people (73%) surrendered and yielded to the fee. Given a disclosure—albeit a useless one—they no longer thought that they were wronged, and did not even intend to post a negative review of the business’s deceitful tactics.
The enormous power that fine print exerts on people’s perceptions of their obligation was further demonstrated when comparing “fraud and fine print” to a different treatment in which there is no fraud, only fine print. For one group of respondents, the disclosed fees conflicted with the advertised terms. For another group, there was no advertisement and thus no conflict—they were simply charged fees that were stipulated in the fine print. One would expect consumers to be more upset when the fine print terms conflict with an explicit promise. But no! misrepresentation or not, in both cases the existence of fine print leads people to feel equally beholden to the obligations buried in it.
These results reinforce the sobering insight of prior work: consumer protection doctrines are weakened by people’s cognitive response to fine print. Forget lawsuits, even the modest hope that consumers would denounce fraud by posting negative reviews may be over-estimated. The psychology of fine print seems to join the economics of litigation as barriers to private actions by consumers.
The article correctly recognizes that an entirely different regulatory action—relying on public rather than private enforcement—may be needed to address deception. But, like many other studies of consumer trouble, this article too does not resist the allure of the disclosure panacea. Could the easiest of all regulations—the one-size-fits-all mandated disclosure—solve the problem of consumers’ intuitive formalism? Could consumers be taught that fine print does not absolve fraud? The authors want to test this possibility, and indeed find that telling their participants about the law—about the rule that small terms cannot contradict the explicit statements made before the contract—has a modest effect in counteracting the psychological effect of fine print. They conclude that “education” about the law could be effective. They acknowledge that the effect they measure in the lab may not apply in the real-world, where consumers are overwhelmed by disclosures. Still, I am left wondering: why design a disclosure treatment known (and candidly admitted in the ensuing discussion) to be externally ineffective? Why dilute the agonizing lesson of the study with a gesture towards useless disclosure solutions?
Puzzled as I may be about ending such an excellent article with the superfluous notion of consumers’ “education,” my appreciation for the authors’ primary insight remain unshaken. I now realize the deeper futility of the pervasive hopes that consumers could read the fine print and rebel against its deceptive portions.
Cite as: Omri Ben-Shahar, Fine Print Subservience
(July 30, 2019) (reviewing Meirav Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine Print Fraud
, 72 Stan. L. Rev.
__ (forthcoming 2020), available at SSRN), https://contracts.jotwell.com/fine-print-subservience/
Both of the first two chapters of this new edited volume–The Contractualisation of Labour Law by John Gardner and Is the Contract of Employment Illiberal? by Hugh Collins—grapple with the structure of employment relationships and how they relate to their legal form. (We are lucky to have had another important recent treatment of this question by Elizabeth Anderson in Private Government (2017).)
John Gardner does not ask precisely the question of my title, but he does offer an answer to it. Gardner is primarily critical of a trend toward what he sees as the contractualization of labour, which he regards of a more general trend toward the contractualization of relationships generally. Tracing our obligations back to contract, he argues, tends to lead us to think that our contracts are the reason we owe other people what we owe them. We also tend to look at our contracts as the fountains of obligation, rather than the nature of our relationships with other people.
Gardner does not resist—or advocate for—any particular legal change. His is mostly a cultural lament. His target is the contractual model of employment, which is taken to justify authoritarianism at work and the idea that “work is there to pay for the life of the worker without being part of that life.” We tend now, he argues, to lose sight of how one’s role as a worker and her employment relationship can play a meaningful part in an employee’s life.
Gardner comes at the problem of authoritarianism at work indirectly. He suggests that the emphasis on contract and its content-independent reasons for employer authority tend to distract from the matter of whether authority is well-used, which turn on the content-dependent reasons for an employee’s substantive obligations. Neither the reasons relating to the employee’s own life plan, such as a desire to put her talents to good use, nor the reasons relating to the employer’s purposes, such as the need to get some task done, are relevant to the employee’s obligations under contract. Those derive just from the fact that she is being paid; so as long as she is paid, anything can be asked of her. The employer has no duty to use his authority reasonably, at least in a popular imagination that has fully contractualized employment (Gardner, Pp. 43-44.) The problem with the resulting private tyranny in Gardner’s picture is that it leaves employees lives empty. Most of their day is spent earning compensation; work just makes it possible to live and at best to pursue life projects in the few remaining hours outside work. The charge is subtle, but yes–contract is to blame.
Hugh Collins comes at the question of private tyranny more directly. He begins with the observation that “[t]he contract of employment embraces an authoritarian structure that appears to be at odds with the commitment in liberal societies to values such as liberty, equal respect, and respect for privacy.” (Collins, P. 48.) Collins concludes by the end that there is indeed “an inherent tension between some liberal values and the institution of the contract of employment that can only be resolved by labour law adopting a particular, worker-protective, legal framework for employment relations.” (Collins, P. 51.)
Collins is not concerned that workers submit to their employers on the latter’s terms. He finds more problematic the subordination of employees to employers on a daily basis as an instrument for the latter’s ends. It is not just that the employer has coercive power by way of threatening termination; by virtue of their contract, the employer exercises practical authority over the employee. Finally, the open-ended nature of the employee’s obligations gives the employer a kind of lesser “prerogative power,” or wide managerial discretion.
Collins suggests that one problem for liberalism arises from the fact that civil liberties, like the right to speech, become subject to employer permission. There is also a contingent but serious risk that managerial discretion will be dominating. Finally, the different levels of esteem associated with the status of employer and employee, respectively, conflict with a principle of equal respect. Collins concludes that we need restrictions on the content of employees’ obligations, restrictions on employers’ restrictions of civil liberties, and restrictions on discipline and dismissal. Collins’ account of the conflict between liberalism and modern employment is more direct than Gardner’s but he similarly concludes that the employment contract as we know it is illiberal. However, he is more sanguine about the power of legal reform to redeem it. While Gardner sees the problem as an ideological one that doctrinal changes cannot undo, Collins suggest that concrete limits on employers can make the employment contract just.
First and foremost, these essays are an essential read because they grapple deeply with a pervasive moral challenge to modern society. If we cannot justify the private tyranny that is modern employment for most Americans (and most people generally—note both Gardner and Collins are British), one of the basic structures that most concretely shapes our everyday lives is unjust. It is hard to know where to start with such a problem. Gardner’s analysis takes as its object the individual relationship of employment and what it means for individual employees. It is a depressing analysis. Collins studies features of employment from a more social or systemic perspective. His analysis is not quite as depressing but it is not happy either. Between the two of them, they capture a lot about what is wrong with private tyranny. This reader is sympathetic to some of Collin’s prescriptions but is persuaded by Gardner that they would not sufficiently temper private tyranny at work, or ensure that work is more than just a means to live. We might hope, though, that even if most employees cannot find meaning in their relationships with their employers, they might still find satisfaction in other dimensions of employment, including relationships with co-workers, customers and the actual work, whether manual or intellectual. We might need to hear next from psychologists, or just more people, about whether we are capable of separating out the contractual and noncontractual dimensions of work life in this way.
Additi Bagchi, What is the Moral Problem with Private Tyranny? Is Contract to Blame?,
(October 1st, 2019)(reviewing John Gardner, The Contractualisation of Labour Law, in Philosophical Foundations of Labour Law
(Collins et al. eds., Oxford U. Press, 2019); Hugh Collins, Is the Contract of Employment Illiberal?, in Philosophical Foundations of Labour Law
(Collins et al. eds., Oxford U. Press, 2019)), https://contracts.jotwell.com/?p=789&preview=true.
David A. Hoffman & Erik Lampmann, Hushing Contracts
, __ Wash. U. Law Rev.
__ (forthcoming), available at SSRN
Contracts should not be confused with contract law: contracts are private tools, but contract law is public. This distinction is particularly evident when the legal system provides enforcement services to parties who cannot work out their relationship without seeking state help. What, then, is this legal system supposed to do when asked to enforce a private contract that threatens to harm the public? While this question is centuries old, it has re-surfaced in recent years with unusual urgency. The contemporary rise of the issue may be linked to peak levels of inequality: in their carefully drafted contracts, stronger parties use their power not only at the expense of their counter-parties, but many times also in ways that negatively impact the wellbeing of third parties and the fundamental values that support our social existence.
In Hushing Contracts, David Hoffman and Eric Lampmann provide an important case study of this problem by closely examining the practice of using non-disclosure agreements in the context of sexual misconduct in a deliberate effort to conceal sexual misbehaviors. To elicit our most intuitive ability to recognize the predicament, the authors powerfully open with a reminder of the USA Gymnastics sexual abuse scandal. They invite us to recall the “national furor” that followed the revelation that USA Gymnastics used a contract to buy the silence of McKayla Maroney, a gold-medal winning American gymnast, in an effort to hide the sexual scandal from the public eye. Such national furor in and of itself evidences a core idea of the article: that private contracts have the potential to infringe upon matters the public strongly and justifiably cares about.
Moreover, Hoffman and Lampmann highlight the point that, when exposed, hushing contracts that were drafted to hide sexual misconduct generate an emotional public response of disgust. The reported appearance of disgust, which is a moral emotion, is meaningful. It signals that at least in our #MeToo times the act of burying wrongdoing by contract is widely perceived as morally wrong, as adding an insult to an injury. As the article updates, such view of hushing contracts as wrongful has already induced legislative responses in a variety of jurisdictions. However, the article also makes clear that hushing contracts are “hard to kill” via legislation (read the article to see why). That leaves us with the authors’ main proposal: to revive the doctrine of public policy and use it to invalidate those hushing contracts that create the externality of harming the public. Fears of the unruly horse of public policy aside, the challenge is, of course, defining with enough carefulness and respect for contracts (as private tools) the reasons that may justify a refusal of contract law (as a public institution) to enforce hushing contracts. It is concerning this challenge that the article offers a particularly inspiring analysis.
Victims of sexual harassment may keep their injuries to themselves not only out of fear or shame but also because their lips “[are] sealed with a signature.” Such a mechanism of contractual silencing, the article argues, carries significant antisocial consequences. First and most directly, it allows the original wrongdoing to continue and expand because it operates “to leave in place abusers.” (P. 12.) Second, the investment in concealing the problem by definition impedes any hope for finding solutions such as organizational engagement in preventive interventions. Instead, “firms send a message to would-be harassers that they too will find protection––rather than accountability––in management.” (P. 17.) Ultimately, “a culture of complicity” develops, in which victims more generally feel themselves unwelcome. (P. 14.) In support of these alarming claims, the authors share data that have illuminated some of the possible costs of this contractual way of enabling, or even fostering, sexual harassment. For example, they describe a few studies that show that the problem amounts to “an organizational stressor that has significant negative outcomes,” and additionally cite an estimation that in just two years the damage caused by workplace sexual harassment reached a total of $327.1 million. (Pp. 16-17.) Finally, the authors emphasize the long-term emotional and political consequences of hushing contracts. Drawing a fascinating comparison between LGBTQ people and sexual harassment survivors, they explain how, in both contexts, silencing—as opposed to the freedom to speak by “coming out”—disempowers not only the suppressed individuals but also the social movements that fight for bringing about change on their behalf. For all these reasons combined, the article makes a very persuasive call for limiting the enforcement of hushing contracts.
The last part of the article broadens the discussion and importantly adds to the emerging literature regarding the expressive role of law in general and of contract law, and contract law’s defenses, in particular. The argument on this point beautifully adheres to the theme of favoring voice over silence. Shifting the focus from survivors’ voice to that of the judiciary, the authors posit that “when courts believe that there is significant third-party harm, they ought to loudly proclaim that public policy is violated.” (P. 47)(emphasis added). As powerful social institutions that are heavily involved in the shaping of social norms and deeply impact people’s behavior, courts should send a clear message that contract law is “infused with concerns for social welfare.” (P. 58.) Framed that way, judicial refusal to enforce contracts that threaten fundamental societal values does not stand in conflict with the central idea of freedom of contract but rather operates to enhance it—restoring the social value of the practice of contracting and with it the legitimacy of contract law. Such a re-legitimization project is, according to Hoffman and Lampmann, “an urgent social task” in an era that is flooded by “click-to-consent” agreements and other unauthentic acts of “consenting” that have even become the subject of widespread ridicule (on this point the authors dedicate a footnote to an episode from the satirical show of South Park). (P. 56, 58.) What’s necessary in this moment of increasing suspicion towards the contractual system, is what the authors call “a way to shock the audience”: a judicial creation of “a counter-story” to the myth of consent, one that underscores contract law’s “concern for social welfare.” (P. 58.)
Throughout the article, the authors do not shy away from discussing possible objections to their argument. Indeed, they originally raise one of the most severe problems: that hushing contracts may never get to courts to allow judges to scrutinize them for public policy concerns, as proposed by the authors. The risk stems from the rapidly growing use of arbitration clauses by stronger parties who utilize their dominance to mute their challengers and insulate themselves and their contracts from judicial review. I would therefore suggest that the next step should be to overcome the arbitration problem by applying the article’s proposal to arbitration clauses, especially those that also include one of the most aggressive hushing techniques—class action waivers. In other words, the authors’ compelling conclusion—“that courts should generally refuse to enforce contracts which create particularly egregious third-party harms”—is valuable beyond the scope of their case study. (P. 61.) Courts should be able to exercise similar refusal powers against other methods of using contracts to silence people. First and foremost, the judiciary should take a stand against attempts to contractually to prevent cases from even arriving in courts—attempts that are increasingly threatening to hush contract law itself.
The unique qualities of digital contracts—weightless, easily duplicable—have made them ubiquitous and much longer than their paper counterparts. Consequently, they are everywhere and accordingly, nobody reads them. Yet, courts have consistently argued that digital or “wrap” contracts (shrinkwrap, clickwrap, browsewrap, etc.) are just like paper contracts and that the same doctrinal rules should apply. Sure, tech giants like Facebook and Google use wrap contracts to vacuum our data under the guise of consent, and companies have used them to impose onerous one-sided clauses, but isn’t that just the same old “lack of consumer bargaining power in a capitalist society” problem that we’ve always had dressed up in digital form? It’s not like digital contracts will lead to the end of civilization as we know it—or will they? In Chapter 6 of their fascinating, original book, Re-Engineering Humanity, Brett Frischmannn and Evan Selinger argue that ubiquitous, digital contracts may have profound negative consequences for humanity.
It may seem an odd choice to select a non-contract specific book for a contracts section JOT, and even more so to focus specifically on a particular chapter in that book. Even though Re-Engineering Humanity is about more than contracts, it is also and importantly about contracts. Frischmann and Selinger argue that contracts are doing something much more sinister than implementing one-sided bargains and deleting our rights with a click. They argue that contracts are actually erasing our humanity and turning us into simple machines.
Their focus is on electronic contracting and how the “design of this environment might incline people to behave like simple stimulus-response machines” that become “increasingly predictable and programmable.” (P. 60.) They note that contracting practices have changed to “accommodate changes in economic, social, and technological systems” so that instead of enhancing individual and group autonomy, contracts “implemented in electronic architecture” may actually be “oppressive.” (P. 60.)
Frischmann and Selinger characterize the “contracting problem” in two ways: First, they argue that the “electronic contracting environment should be understood as a techno-social tool for engineering human beings to behave automatically, like simple machines.” Their second characterization is a bit abstruse and requires a foray into Frederick Taylor’s theory of scientific management (which they discuss in the preceding chapter). Basically, Taylor turned the late 19th century workplace into the more efficient and productive 20th century workplace. He did so by focusing on how workers could be better managed to be made more efficient, essentially viewing them as tools whose efficiency could and should be maximized. Often, this required workers to perform repetitive, discrete tasks without considering the dehumanizing effect that this might have on the worker, or how it might degrade the worker’s skills, essentially treating the worker as a machine. (Pp. 53-59.) Frischmann and Selinger describe the problem of electronic contracting as “a system of scientific management that’s directed toward consumers” in much the same way that laborers in Taylorist workplaces were conditioned to behave like efficiency machines. (P. 61.)
Contracts were intended to be tools to implement autonomy but in the electronic environment they have the opposite effect, “they condition us to devalue our own autonomy,” (P. 61.) by making us act like automatons, clicking and swiping as obediently as well-programmed robots. Their argument “is not about the goodness or badness of contract terms per se. Nor is it about the outcomes in specific contracts, transactions, or cases. Rather, our concern is with the social costs associated with rampant techno-social engineering that devalues and diminishes human autonomy and sociality.” (P. 62.) In Appendix E, they engage with contract theory more directly, finding that “even if electronic contracting perfected markets by lowering transaction costs and improving efficiency, society might nonetheless be much worse off.” (P. 316.) In their view, the real threat to society is not from the substantive terms in a given transaction, but from the design of digital contracts which is intended to make us humans act like “simple stimulus-response machines.” (P. 78.)
Frischmann and Selinger present a compelling argument that digital contracts are actually erasing our humanity and turning us into simple machines. The ubiquity of contracts and their design mean that we are constantly clicking and swiping without thinking. Frischmann and Selinger offer a unique and very big picture perspective which should disabuse those who might think of contracts solely as tools of efficiency. They urge that the law of electronic contracting should be reformed because more is at stake than the (unread) terms and conditions—it is the concept of human autonomy itself. Chapter 6 and Appendix E alone are worth the price of the book, but the other chapters of Re-Engineering Humanity are equally compelling. I urge you to put down your phone and give it a careful, non-tech distracted read.
Uri Benoliel, The Impossibility Doctrine in Commercial Contracts: An Empirical Analysis
, __ Brooklyn L. Rev.
__ (forthcoming), available at SSRN
The use of theoretical economics to analyze legal rules faces a special challenge in contract law, particularly when applied to default rules rather than mandatory ones: it has to match up with what contracting parties are actually doing. One of the foundations of the economic analysis of contract law is that business parties ordinarily know what’s in their own best interests, so economic prescriptions about default, gap-filling rules are also ordinarily predictions: they are statements of what parties actually wanted but didn’t express or what they would have wanted if they had thought about a particular problem in advance.
Economic pronouncements about rules of contract law, therefore, are subject to a particular type of empirical verification unavailable in at least many other areas of law: we can simply look at what sophisticated business parties are doing and see if it matches up with what economists predict they will do. This is precisely what Uri Benoliel has been doing. And the result of his recent empirical study on the impossibility doctrine in contract law, The Impossibility Doctrine in Commercial Contracts: An Empirical Analysis, bears out Grant Gilmore’s famous observation in The Ages of American Law that “no historian, social scientist, or legal theorist has ever succeeded in predicting anything.”
The specific prediction that Professor Benoliel analyzes and helps disprove comes from Richard Posner and Andrew Rosenfield’s foundational legal-economic analysis of the doctrine of unexpected circumstances (mainly impossibility and impracticability) in contract law. Posner and Rosenfield’s analysis is subtle, but its core is that the law should assign the risk of unexpected events to the party best able to avoid or bear them. As an example of avoiding a risk, the seller of goods may more easily be able to take precautions to reduce the risk of fire while the goods are still in its possession; as an example of bearing a risk, the government, or a party able to purchase insurance, may be able to absorb it at lower cost than its counterparty. Posner and Rosenfield argue that the party best able to avoid or bear a risk should be made to bear it because that is what rational contracting parties do, or would do. As Posner and Rosenfield explain, if a draft of a contract assigns the risk differently, the parties can produce a new contract that is better in the aggregate, for both of them, and they can simply adjust the price accordingly so that each party is better off than under the original draft agreement.
Though this argument remains immensely influential, there are many theoretical objections to it. As Mel Eisenberg has pointed out, the rule that Posner and Rosenfield propose would probably be impossible to administer in practice. As I have argued, there is no reason to assume rational parties are focused on particular cost-reductions associated with impossibility or impracticability, and once we recognize that parties may have other considerations, the cleanliness of Posner and Rosenfield’s argument falls apart and it becomes extremely difficult to make predictions about their views on impossibility or impracticability.
Either way, however, Posner and Rosenfield’s argument comes down to a relatively simple prediction: rational parties will assign risks to those best able to bear them. This is what Professor Benoliel’s study tests. And he finds, after reviewing a database of almost 2000 commercial contracts disclosed to the SEC, that parties do not behave in the way that Posner and Rosenfield have predicted. Commercially sophisticated parties are free to choose, explicitly, the rule that Posner and Rosenfield have identified—or to adopt a clause that roughly mirrors it. But they do not. They seem, in other words, to be happy with the traditional legal rule, with all its potential ex post fuzziness and admission of noneconomic criteria, than with the structured variant that Posner and Rosenfield have proposed. That is, the contracts in Professor Benoliel’s study came from sophisticated firms that easily could have allocated the risks of impossibility as Posner and Rosenfield suggest, but in fact a majority chose not to contract around the traditional default at all—and of the minority that did, none explicitly used the superior-risk-bearer formulation, and few seemed consistent with it. The findings, as Professor Benoliel succinctly puts it, “cast significant doubt on the validity of the existing economic analysis of the impossibility doctrine.”