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Contracting in modern world

di - 13 Novembre 2012
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In addition, it must be noted that negotiation of the contract is a necessary activity especially in those cases in which the object of the main service is also personalized. But, the increase in productivity of the production factors basically required standardized production. This means that the greater production capacity of economic systems is basically associated with lowering the costs of producing standardized goods. It follows from this that the cost relating to personalized goods compared to standardized goods has increased steadily in recent decades.
All these considerations lead us to believe that the changes in costs relating to goods and services – changes due primarily to technological innovation and to the accumulation of capital – have given consumers a strong impetus to give up “negotiated contractual regulation” and personalized contracts in order to use the wealth (including the wealth obtainable by using one’s own time in work rather than in negotiations) thus saved for the acquisition – without negotiation – of standardized goods and services.
Finally, we must look at two further considerations regarding the reasons for the decline in negotiating activity. In examining the purposes that traders may achieve through negotiations, we underscored the parties’ interest in seeking efficient clauses. In fact we showed that the inclusion of an efficient clause can generally ensure a profit for both parties. However, we pointed to circumstances in which this result cannot be achieved, since the increase in the joint earning probably or even necessarily carries with it a reduction in the earning of one party. We saw how this impediment to seeking efficient solutions can obtain when opportunistic behaviors are possible.
Now, what we want to assert is that certain transformations occurring in today’s society seem to favor opportunistic behaviors, and hence seem to discourage the search for efficient clauses. If this is true, it seems reasonable to maintain that interest in undertaking negotiations is destined to undergo a consequent decline, inasmuch as the spaces in which the parties can look for clauses to include in the contract are being restricted. This hypothesis will be examined when we consider the causes of that phenomenon which has been defined as a “uno actu recapitulation of the contract’s conclusion and execution”[8].

b) Affirmation of standard form contracts.
As stated above, the decline in the possibility of negotiation – for companies – has not meant giving up an auto-regulation of contracts. In fact, by using the general contract conditions, firms have been able to define the rules of the contractual relationships different from those defined by legal regulations. This phenomenon must be attributed to the objective inability of lawmakers to draft provisions suitable for satisfactorily filling in any gaps that may be present in each type of contract. The great variety of goods sold in the marketplace is such as to make it extremely difficult for a lawmaker to draw up a legal provision that manages to take into account this extreme variety[9].
However, it does not seem unreasonable to assume that some companies have begin resorting to this tool for the main purpose of being able to include inequitable clauses, possibly justifying this with consumers by unjustifiably citing the imperfection of legal provisions.
The diffusion of standard form contracts has also been a consequence of a dimensional growth of many firms: when the owner cannot sign himself contracts or make use of some family members, he must resort to strangers. In this situation the principal-agent problem emerges and the standard form contract becomes a tool to create bonds for the agent[10].
It is however right to stress that both legislative and jurisprudential law has favoured the spread of standard form contracts, both in Europe and in the United States[11].

c. The spread unbalanced clauses.
The phenomenon of the spread of inequitable clauses – that is, the affirmation as part of the general contract conditions of clauses so unbalanced in favor of the party dictating them as to lead one to believe that in normal contracting they would not be accepted, has been underlined in the seventies. The notion developed in the 1970’s and fleshed out in the following decade[12] stated that the clauses in the general conditions of the contract would be subject to a phenomenon of adverse selection, by which the “bad” clauses would tend to drive out the “good” ones. In summary, this phenomenon can be explained as follows: study of the contract’s general conditions by consumers carries with it costs for the latter, mainly represented by the opportunity cost of the time that must be devoted to this activity. These costs are such that the consumer finds it more economical to waive evaluating all the clauses and to concentrate on a few of them, i.e., on those most important from an economic point of view (for example, the clause setting the fee in money, or certain clauses governing the more important guarantees)[13]. Based on this rational choice, the consumer carries out his comparison of the various proposals available to him, taking into consideration only the clauses he has selected. His attention thus does not fall on those clauses deliberately ignored[14]. Once they have understood the selection made by consumers, the companies supplying the goods or services requested, which operate in competition with one another, are pushed to save as much as possible on those clauses that are not evaluated by potential consumers so as to be able to improve – in order to prevail in the competition to competing firms – those clauses based on which the choices are made. In other words, companies too focus only on the clauses selected by the consumers, and, in order to improve their offer with reference to these clauses, exploit all possible savings which are possible by worsening the other clauses. Over time, this mechanism leads to the presence of many inequitable clauses accompanied by other clauses that are particularly advantageous.

Note

8.  Some aspects examined in this paper cite the comments made by R. Posner and L. Bebchuk, One-Sided Contracts, available on http://ssrn.com/abstracts=845108 who maintain that companies often offer contracts that are unbalanced to their advantage even while behaving fairly towards their clients. Their explanation is that, if the companies dictated balanced contracts, opportunistic behaviors by consumers would become too easy, so in the end the balanced approach would be disadvantageous for the same consumers. The idea that will be defined in this work as “uno actu reduction of contract conclusion and execution” seems in part to hark back to the idea of the two authoritative authors. The expression used here was coined by Professor Natalino Irti, who discussed it in many papers and in his classes.

9.  E. Roppo, Contratti standard, Milano, 1999, unchanged reprint of the 1975 edition, p. 43:
“An additional perspective from which to look at the role played within the corporate organization by the use of general contract conditions is available to anyone who compares the standard contractual regulations contained in business forms with the legislated regulations. That such standards often create a gap-filled system inadequate to the situations and relationships institutionally governed by them is a phenomenon made largely inevitable by the evolution of socioeconomic relationships and (in particular) by the needs expressed by the system of companies which, in times of rapid technological progress, change constantly, worsening the tension between economic realities in constant movement and legal forms crystallized in the codes. But for the deficiencies of a regulatory system that is often incapable of providing adequate responses to the “legal question” expressed – in increasingly complex and sophisticated terms – by the enterprise system, the latter has a remedy. By setting up autonomous negotiating schemes (and hence legal regulations alternative to the legal system’s regulations), enterprises in fact create for themselves a “law that (…) better corresponds to the situation and dynamics of market relationships.”

10.  See R. Pardolesi e A. Pacces, Clausole vessatorie e analisi economica del diritto: note in margine alle ragioni (ed alle incongruenze) della nuova disciplina., 2 Dir. Priv. 377, p. 399 (1996).

11.  For example, §1341 of Italian Civil code imposes upon the weaker party ordinary diligence in attesting the content of the contract (standard form contract). On the point see C. Cicoria, The Protection of the Weak Contractual Party in Italy v. United States Doctrine of Unconscionability: A Comparative Analysis, Global Jurist Advances, vol. 3, issue 3, p. 1 ss. (2003), spec. pp. 10 ss.
One particular case was considered by G. Gorla, Standard Conditions and Form Contracts in Italian Law, 11 Am. J. C.omp. L., 1 (1962), who assumes that “the document signed by the customer, or an oral contract, makes express and clear reference to standard conditions, but these are to be found else where. The majority of our legal writers seem to maintain that in this situation too the customer has to take the trouble to find the standard conditions and read them”.
But it needs to be said that, according to the second paragraph of §1341 of Italian civil Code, one-sided clauses, in order to be incorporated into the contract , must be specifically approved in writing. The second paragraph of
§ 1341 gives a list of such clauses.

12.  The idea of a possible adverse selection involving the clauses inserted in standard form contracts can be already found in an article written by D. Slawson in 1970, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 Harv. L. Rev. 529 (1970), but it’s Lewis Kornhauser who expressly states the idea, Unconscionability in Standard Form, 64 Cal. L. Rev. 1087 (1976) p. 1177: “When confronted with an oppressive contract, one must ask why and how did the market arrive at the production of a “bad” or non- optimal good. Conventional economic theory has few models of product selection. One model suggest the difficulty is an informational one: the ordinary consumer cannot distinguish between good quality and bad quality goods. Since it’s more expensive to produce high quality goods and purchasers cannot distinguish the good from the bad, the market will produce low quality merchandise. Complex, fine pine print standard forms might be viewed as goods whose quality people cannot determine (…) As consumers are making decisions upon price grounds, a seller offering a better warranty must either suffer a lower profit margin at the same price or charge a higher price and attempt to disseminate information to prevent a loss of sales because of the raised price. Dissemination of information might be difficult…”
Some years later, a similar idea is expressed by Todd Rakoff, Contract of Adhesion: an Essay in Reconstruction, 96 Harv. L. Rev. 1174 (1983), pp. 1227, according to whom: Drafting parties introduce contracts of adhesion to minimize their exposure to external risks and to further internal organization aims. Adherents respond not by reading, but instead by focusing on a few items. They compete in regard to those items. The incentive for the firms is to save whatever they can with defensive form terms and employ the savings to compete with respect to the shopped terms.”
After these first explanations the idea that a phenomenon on adverse selection could involve some clauses of standard forms contracts with the possibility of a “lemon equilibrium” became widely accepted. But see now R. Posner and L. Bebchuk, supra note 8, who have given the new explanation already exposed.

13.  We have stated that the cost of being informed discourages consumers from acquiring an adequate awareness of contractual clauses. It must however be added that possibly more economical mechanisms for producing information run into the classic market failures.
Indeed, a decidedly more economical mechanism for ensuring that consumers acquire information could be represented by the collection and processing of such information by specialized companies, which could then sell this information to consumers. The problem that this mechanism runs into is represented by the fact that producing information involves very high costs, whereas once it is produced anyone can sell it with a very low cost without having to bear the production costs. In other words, the production of information runs into the same problems that characterize the production of innovations and that are sometimes defined as the “problem of the appropriability” of benefits.”
In addition, another mechanism for producing information could be represented by enterprises conveying information to consumers. Here the problem of free-riding arises. In fact, much of the information that an industrial company can convey to consumers also involves other companies, with the consequence that the company that produces the information also ensures a benefit for other companies. This situation may encourage a behavior of waiting, in the hope that others produce the information. In addition, when information production includes a cost such that it is not worthwhile for a single company to produce it but may be economical for several companies together, the problem arises of agreement among them.

14.  M. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets the Real World, supra note 2, probably presented this theory in the simplest and clearest way.

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