Inequality of bargaining power between parties is a significant concern in contract law. Parties are not always equal, and negotiations may occur under conditions of power imbalance, impacting the contract terms.
A fascinating new article by Rebecca Stone explores which determinants of inequalities of bargaining power between contracting parties should be legally relevant.
The article begins by defining bargaining power as the party’s ability to ensure that the contract terms serve their own objectives. Inequality of bargaining power means that one party possesses a greater ability to do so than the other. Bargaining power is influenced by factors both within the party’s control (such as their interest in the contract) and outside their control (such as the actions of the other party and social conditions), as well as by objective factors (such as the market) and the parties’ perceptions (such as a party’s beliefs regarding the other party’s interests).
Inequality of bargaining power has legal consequences and may lead to invalidation or adjustment of the contract under doctrines such as unconscionability, duress, undue influence, fraud, and misrepresentation. Which inequalities of bargaining power should be legally relevant? The article examines several theories and demonstrates how each theory yields a different answer to this question.
Economic analysis of contract law assumes that parties are rational self-interested agents entering a contract to maximize their welfare. Therefore, this theory advocates a procedural approach to address inequalities that hinder the disadvantaged party’s rational pursuit of their ends. Consequently, some instances of informational asymmetries, coercion, or exploitation warrant intervention to enhance efficient outcomes. However, the distribution of welfare is largely beyond the reach of contract law.
Rights-based analysis may endorse one of three different notions of justice. Under the procedural justice approach, contract law is committed to formal equality and free will. Therefore, contract law should intervene in cases of inequality of bargaining power that impede the disadvantaged party’s consent. Under the transaction-specific justice approach, contract law should also consider substantive requirements of transaction-specific fairness alongside procedural requirements. This approach is broader, justifying, for example, regulation of standard form consumer contracts due to consumers’ cognitive biases. According to these two notions of justice, contract law generally need not intervene in cases of situational inequalities. Under the systemic justice approach, contract law is committed to substantive justice, which is the broadest notion of justice of the three. That is, contract law should consider systemic background inequalities and support just relations between the parties. Under this approach, a contract must meet both procedural and substantive standards to be morally valid. This approach justifies, for example, mandatory rules and consumer regulations.
This thought-provoking article raises several interesting issues: First, there are different kinds of bargaining power. The stronger party might gain its advantage due to individual reasons (for example, being better informed than the other party) or due to systemic advantage (for example, sellers over consumers) due to personal reasons (such as less interest in the contract than the other party) or social reasons (such as discrimination based on gender, race, or class). Accordingly, there are also thin concepts of the inequality of bargaining power principle (that consider only procedural requirements) and thicker ones (that consider moral, substantive requirements). Second, according to some approaches not only courts but also other branches of government should police inequality of bargaining power. That is, alongside contract law doctrines (such as unconscionability, duress, undue influence, fraud, and misrepresentation), legislation and regulations (for example, consumer law) also reduce disparities of bargaining power. Third, according to some approaches the law can be committed not only to reducing inequality of bargaining power but also to promoting equality and just relations between the parties. That is, the law should invalidate contracts due to inequality of bargaining power as well as actively advance social equality by empowering disadvantaged parties.
By analyzing inequality of bargaining power from different theoretical perspectives, this article beautifully demonstrates the richness of theories of contract law.
