Standard form contracts have long been thought to be, well, standard. One size for all. A long and distinguished line of commentary has convincingly explained why mass contracts, like mass products, are standardized, what benefits uniformity brings to business and even to consumers, and why a take-it-or-leave method of negotiating them is inevitable.
But a recent empirical line of scholarship has begun to cast doubt on that idée fixe. Standard form contracts, the new perspective suggests, are uniform in paper but personalized in practice. They are handed equally to all customers, but they merely serve as baseline for what some scholars previously called “tailored forgiveness.” In the shadow of boilerplate contracts, businesses exercise discretion and negotiate with individual parties specific accommodations and other variations from the text.
This conjecture—that standard form contracts are in fact adjusted individually—has now received powerful empirical support from Manisha Padi, but with a twist. Against the earlier theoretical accounts, which viewed discretionary variations from one-sided “adhesion” contracts as good news, Padi’s account is more troubling. She finds that the negotiated variations from the standard terms indeed offer some relief from harsh consequences, but are not distributed evenly or fairly across consumers. Businesses reserve these accommodations to select groups among their clientele. To whom are these discretionary benefits directed? Not surprising, to those who need them least. To the more affluent consumers.
Padi’s forthcoming law review article is based on her earlier empirical work, which looked at mortgage loan modifications during the financial meltdown of the early 2000’s. Borrowers who fell behind on their debt payments—who breached their promise to repay—faced the risk of foreclosure. Lenders had the unambiguous contractual rights to foreclose and liquidate the homes, but they exercised these rights selectively and with personalized discretion. After all, lenders, too, stood to lose from foreclosure, recouping only a fraction of each loan in the ensuing fire sales. They therefore often agreed to modify the loans, avert liquidation, and afford the borrowers more manageable payment plans. Padi’s data shows that foreclosure avoidance occurred more often in the more affluent neighborhoods. She estimates the magnitude of the dollar loss poorer borrowers suffered by not being granted the same reprieve.
Padi recognizes (albeit in a footnote) that we don’t know the reasons for these disparities. Maybe more affluent borrowers are also more capable of demonstrating a realistic path for repayment. Or maybe they are more likely to fight foreclosure tooth and nail with every legal means and inflict higher enforcement costs on the banks. But, in truth, it doesn’t matter. What we see is a form of regressive distribution of a specific benefit—the benefit of tailored contractual modification. Those least likely to recover from personal financial ruin are also least likely to be offered a rescue plan.
This pattern, Padi thinks, must be occurring in other consumer contract sectors. Businesses are negotiating with their customers discretionary treatments beyond the contractual rights, but are (probably) distributing them unequally. Indeed, Meirav Furth-Matzkin found in a (yet unpublished) field study that retail stores accept returned merchandize even when shoppers do not abide by the uniform return policy, but that such extra-contractual privileges are distributed unequally across shoppers, favoring whiter and more affluent consumers.
Padi’s insight of post-contractual inequality illustrates a far broader distribution paradox in society. The pattern is familiar. It starts with the enactment of a protective program, to address the hardships people encounter. It offers some benefits or grants access to open resources. But access is not exercised equally. The benefits of the program are enjoyed disproportionately by those who need them less—those more sophisticated who better identify and know how to deploy the programs. Elsewhere, I labeled this phenomenon “the paradox of access justice” and showed that it occurs more often than we realize, with harsh regressive consequences. Governments, for example, provide subsidized insurance that benefits wealthier people; Disclosure schemes which aim to make people more informed and thus more protected are used more effectively by the educated, younger, healthier, and wealthier recipients of the information. In short, many pro-consumer programs have unintended regressive effect.
What, then, can be done about post-contractual inequality? Padi proposes an information-based reform. Governments should require lenders to report patterns of loan modifications, so as to identify the inequality. And do what? Well, unfortunately not much. They might be able to pressure banks to institute more progressive loan programs, or, in extreme cases, sue for violations of civil rights. Or maybe (this is a bit quixotic) trigger reputational sanctions. In the end, it is hard to find a solution because the inequality of tailored standard contracts is yet another artifact of the injustice of poverty. The poor buy worse products at higher prices with more risks and less insurance. And they also—it is important to realize—are disfavored in their post-contractual treatment.