Asymmetric Concerns in Standard Form Contracts

Standard Form Contracts (SFCs) are executed between firms that sell products and services, and individuals, who consume them. It is nowadays clear that such contracts account for nearly all contractual relationships, including the most significant and unusual ones. While this reality was probably true at least as early as 30 years ago, the predominance of SFCs is, at present, even more evident in several industries today, in the financial services, Maritime, E-Commerce etc. Since typical consumers do not read and cannot negotiate SFCs, such contracts challenge the basic assumption of informed consent as a pre- requisite for contract formation. Accordingly, Courts are frequently called to provide redress to aggrieved consumers by providing judicial revenue for exploited consumers (ex post protection). Legislatures are also called to intervene in SFCs by regulating contract terms (ex ante protection).

This article will attempt to discuss the main concerns of SFCs from a legal and economic perspective, the common law “duty-to-read” and the fundamental problem of asymmetric information (also called “imperfect information”) in fine prints.

Downside of SFCs

According to the classical paradigm of contract law, a contract is a result of a negotiation process held by parties who exercise their freedom of contract. Negotiating parties are deemed to meet each other on a footing of social and approximate economic equality, at the same time, it has been noted that mass production and distribution generated a need for standardised contracts. SFCs are employed to reduce negotiation costs. This is not to argue that individual exchanges via SFCs do not contain any bargaining whatsoever. Typical forms leave blank spaces for some salient and regularly variable aspects of bargains, which are left to be determined at the time of contracting. Such terms usually include quantity, price, method of payment, and mode of delivery. One of the worrisome departures and/or concerns of SFCs from conventional contracts paradigm, is that these contracts include provisions that are determined in advance by one of the parties. These commercial parties that draft SFCs, are frequently associated with strong bargaining and market power, and at times even with the existence of monopolies. There are additional aspects in which SFCs depart from the classical paradigm of contract law. It is very common, for example, that agents who work on behalf of the sellers negotiate and contract with individual consumers. Those agents are generally not empowered to make changes to the content of the contracts they offer. This reality further illustrates that SFCs are typically presented on a “take–it–or–leave–it” basis, and seldom can they be negotiated and altered. Hence, it has been repeatedly argued that the “take-it-or-leave-it” feature of SFCs gives the drafting party an inequitable degree of control over the bargaining process, depriving the weak party of its freedom of contract. The notion of “contract of adhesion,” which is frequently used to refer to SFCs, reflects this thinking. Consequently, since contract terms are dictated by the superior party, no true assent from consumers’ perspective, should be inferred.

Some Advantages of SFCs

On the flip side, from an economic perspective, most of the negative features of SFCs highlighted above do not necessarily pose serious challenges. First and foremost, a free market transaction is presumed to maximise social welfare, by assuring that resources will be held by those who appreciate them most. Moreover, SFCs minimise transaction costs such as solicitor’s fees which come at great expense, firms and consumers save themselves expenses from adopting SFCs. Additionally, SFCs guarantee mutual treatment to all consumers. Where consumers feel that all prospective buyers receive the same set of benefits and obligations, their fear of subsidising others or being exploited by the SFC at hand, may be reduced dramatically. From an efficiency perspective, therefore, contract law should seek to address market failures that undercut social wealth maximisation. Such imperfections do not lie in the two-person commercial interaction. Rather, they require an analysis of the market as a whole.

Danger in Obligatory Asymmetric Information

The debate and controversy over what kind of duty-to-read should be imposed on consumers, illustrates the concern that consumers might not actually know what they are entering into when adhering to SFCs. These concerns coincide with the general problem of contractual asymmetric information. Generally speaking, the term “asymmetric information” refers to situations where parties are differently informed, with one party having access to better or more information than the other. Lack of familiarity with contractual terms, is a specific category of asymmetric information. One party, the contract drafter, is well-informed about the terms of the contract; whereas, the contract signer is imperfectly informed.

The existence of obligational asymmetric information is a serious market failure which can undermine the efficiency of many consumer transactions. Contracts will systematically increase welfare if, and only if, contracting parties have the information necessary for an informed evaluation of all transactional aspects (including, of course, contract terms). Put differently, information inequalities can undermine the maxim that consumers are the best judges of their own utility. Where asymmetric information exists, the ability of parties to maximise utility via open market transactions will inevitably decrease.

Distrust towards Consumer Contracts

The market-based solution is also susceptible to criticism based on a “consumer confidence” problem. By using the term “consumer confidence” I mean to argue that even if SFCs are fair and efficient, many scholars believe that they are not. Such perception is destructive to consumers’ autonomy, as consumers might feel threatened when transacting via SFCs and the law may take such views into account when construing such contracts. Apparently, this unpleasant reality affects not only consumers, but sellers as well. Consequently, if the law advances a different approach perceived by consumers to be fair and efficient, consumers and sellers will be able to conduct their commercial interaction in a more pleasurable and trustful manner. These concerns have attracted legislative intervention and review by courts. Attention will be centred more on judicial intervention, as there is a dearth of legislative intervention to SFCs in Nigeria.

Review by Court

Generally, courts have taken a practical approach on the enforcement of SFCs. The Supreme Court of Nigeria in SONNAR (NIG.) LTD v PARTENREEDRI M. S. NORDWIND

OWNERS (1987) LPELR-3494 recognised the existence of SFCs, but took a liberal and/or a policy approach, by declining to enforce the jurisdiction clause inserted thereto, to defeat the action in its forum.

Courts have equally developed additional doctrines which help address the problem of unfair, self-serving terms. Since contract law seeks to enforce only voluntary and informed agreements, courts will not enforce transactions that are made under fraud, duress or mistake. Though these doctrines are well established, they are not applicable to all cases where self-serving terms are found in print. For example, where contractual transactions suffer from fraud, duress or mistake but not to a degree that satisfies the requirements of these doctrines, the corrupt aspect is severed from the whole in a flexible fashion. Among these are the “public interest” considerations, the duty to act in “good faith,” which is only generally articulated in statutory provisions as in Section 144 of the Nigeria Evidence Act, 2011 and more importantly the unconscionability doctrine which will be addressed in some details.

Unconscionability Doctrine

Courts rely on the unconscionability doctrine, inter alia, in order to protect the allegedly weak party who adheres to the SFC. The frequently criticised case of the United States Court of Appeals, District of Columbia 9th Circuit in Williams v Walker-Thomas Furniture Co 350 F.2d 445 (D.C. Cir. 1965) demonstrates this argument and illustrates that the unconscionability doctrine plays an important role in the law that governs SFCs.

Another Notably decision is the case by the Supreme Court of New Jersey in Henningsen v Bloomfield Motors, (1960) 161 A. 2d 69 where the court interpreted a standardised term that limited the warranty protection for a new car bought by the plaintiff. Although in this case the court did not rely extensively on the unconscionability doctrine, it nonetheless noted that, unequal bargaining power allows courts to deviate from the fundamental principle of the duty-to-read, which implies that bargains should be enforced according to their written terms and to “avoid enforcement of unconscionable provisions in long printed standardised contracts.” Accordingly, these two cases under reference, are sometimes viewed as an influential attempt to create specific contract rules which will be tailored to the problems related to form contracts.

While in the past, courts employed the unconscionability doctrine without any explicit statutory ground, at present the doctrine has enjoyed statutory flavour in the US. First, Section 2-302 of the UCC, titled “Unconscionable Contract or Clause,” provides in part (1) that:

“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result”.

In addition, the restatement has a similar provision. Section 208, titled “Unconscionable Contract or Term,” addresses the unconscionability concept as well

These provisions therefore, allow courts to apply this doctrine in an open and direct, perhaps more efficient–way. The rationale is further informed by the fact that, often times, after pre-trial disclosure, it is revealed that the default resulting in the dispute is obviously not the fault of the consumer, but that of the supplier who doubles as the drafter, instead of exhibiting good faith, the supplier insists on its indemnity or other unconscionable clause, to exculpate themselves from liability. A typical example is indemnity agreements inserted in most fine prints in SFCs of financial institutions, mostly with online products. These clauses are expressly at variance with the mantra with which the product is being advertised- usually in these words ‘SAFE, SECURE & CONVENIENCE”. Once there is third party infiltration which the discovery clearly exenterates, the consumer and suggest the supplier as complicit, they will quickly take refuge in the indemnity by seeking to enforce same.

Conclusion

The idea of asymmetric information in the context of SFCs overlaps with the usage and employment of the doctrine of unconscionability. Most prominently, the unconscionability doctrine is an important judicial tool for coping, under the relevant circumstances, with transactions that are made in situations of imperfect information. Moreover, the flexibility of the unconscionability doctrine allows and encourages the development and creation of other related doctrines. All these doctrines are frequently employed by courts, in order to protect adherent consumers from one-sided–usually unknown–contractual terms, that allegedly create obligational asymmetric information.

"ONE OF THE WORRISOME DEPARTURES AND/OR CONCERNS OF SFCS FROM CONVENTIONAL CONTRACTS PARADIGM, IS THAT THESE CONTRACTS INCLUDE PROVISIONS THAT ARE DETERMINED IN ADVANCE BY ONE OF THE PARTIES. THESE COMMERCIAL PARTIES THAT DRAFT SFCS, ARE FREQUENTLY ASSOCIATED WITH STRONG BARGAINING AND MARKET POWER, AND AT TIMES, EVEN WITH THE EXISTENCE OF MONOPOLIES"