Contracting in modern world
Introduction.
This paper considers some characteristics of mass contracting, without dwelling on the analyses that have already been widely explored in the literature. For example, there will be no attempt to present a new, detailed exposition of the problem of minimising agency costs, which is controlled in hierarchized organisations 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 will also remain outside this analysis. Rather, the paper will conclude with a question: what will the future be like because of these new technologies that lower transaction costs? Will contracts be more detailed? And are they perhaps 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 abusive clauses and the recapitulation of the contract and its execution in a single act of stipulation.
a) The reduction in negotiations is the result first of all of the costs that this activity requires and of the costs required to manage personalized contracts; secondly, this reduction is the consequence of the greater advantage of mass- produced goods compared to personalized goods; thirdly and lastly, it also derives from the limit of the 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, an ineffectiveness that leads operators to adopt other remedies suitable for pursuing the same purpose, i.e., those that are used to be called “remedies of the state of nature”[1], first among them the remedy of the simultaneous nature of the exchange.
We shall now look more carefully at these explanations of the characteristics of mass contracting.
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 in fact 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 earning 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 we said, 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.
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 behaviors by one party are 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 effect[4]:
Note
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.↑
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 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 to 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.↑
