Jim Whitney Economics 357

    IV. Contracts
    C. Enforcing contracts
    3. Unacceptable conditions
    b. situational monopoly (cont'd.)

    Seemingly related to duress: form contracts
    contracts of adhesion - "take it or leave it contracts"
    Consumers retain choice between competing suppliers
    Form contracts reduce drafting costs, eliminate the problem of the firm having to control the employee who negotiates the individual contracts.
    The argument for freedom of contract holds in this case since the firm, in drafting the contract, will take account of benefits and losses to its customers. Anything that makes the terms of the deal more attractive to the customer will also increase the amount he is willing to pay.
    Even for a monopolist: The more unfavorable the contract is to the consumer, the lower the price the monopolist will be able to charge. Customers still have the alternative of not buying the good.
    Courts sometimes refuse to enforce the terms of form contracts on the grounds that they represent a sort of duress. These arguments suggest the courts are wrong.

 

    Williams (d) v. Walker-Thomas Furniture Co. (p), 350 E2d 445 (1965)

  1. P: What are the facts of the case?
  2. P: What are you requesting? Why do feel to entitled to it?
  3. P: What is the total sale price amount of the items repossessed?
  4. D: What is your defense?
  5. D: What is the nature of your financial circumstances?
  6. P: Were you aware of these financial circumstances?
  7. D: Why weren't you aware of the relevant terms of your contract?
  8. D: Did the court support your claim? Why?
  9. P: What key argument did the dissent raise on your behalf?

    Contracts with unconscionable terms are not enforceable

 

    Unconscionable => an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

    it's another case of "unequal bargaining power" but not in the context of temporary circumstances => it should be possible to shop around for a better deal

    related case: Weaver v. American Oil Co., 257 Ind. 458, 276 N.E.2d 144 (1971) a contract was found unenforceable in part on the basis of unequal bargaining power

    Controversial:
    From Walker v. Williams opinion: Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain.

    What economic purpose could stringent repossession terms serve?
    (multiple items and no distribution to buyer of net proceeds from resale)
    Facilitates sales to consumers with bad credit and insufficient funds for a down payment
    If repossession "occurs early the seller sustains a windfall loss; he has received only a small part of the price, too little to cover both the depreciation of the good and the costs of repossession. (This assumes, but realistically, that the seller will not be able to collect the unpaid balance directly from the buyer, by suing him.) As long as competition among sellers of consumer goods is sufficiently vigorous to eliminate supracompetitive profits, limiting the windfall gains of late defaults would lead sellers to require larger down payments or higher initial installment payments, or charge higher prices, in order to protect themselves against windfall losses from early defaults." (P117)

    => "the broad interpretation of unconscionability... makes it more difficult for poor people to borrow, thus harming them ex ante though benefiting some of them ex post." (P117)

 

    IV. Contracts
    D. Interpreting contracts

    Progress so far:
    --The parties have made a contract--offer, acceptance, consideration
    --The contract is a valid one, enforceable by the courts--the contract has acceptable parties, purpose and conditions

    Concern now:
    The parties have a dispute about the details of the contract and turn to the court to resolve a dispute about its interpretation

   Fundamental question: Why not just enforce the contract as it is written?

    Presumption: freedom of contract --> Pareto optimal exchange
    --efficient contract terms create the largest potential gain for the contracting parties to divide up, so that's what we would expect the parties to achieve
    --the contract price should be tailored to the contract's terms--regarding quality of performance, allocation of risks, etc.

    Sources of litigation regarding interpretation of contracts:
    1. filling gaps in contracts -- some relevant clauses is omitted
    2. interpreting and modifying contract language -- some included clause is misspecified

    Should efficiency or intentions govern how the court interprets contracts?
    --Ordinarily, intentions, since parties likely knew what they wanted better than the courts do. (P96)
    --Court interference with intentions will make parties write longer contracts, which is costly. (F)

 

    1. filling gaps in contracts

    There is never enough fine print to cover all aspects of a bargain, so we need some rules for filling in the gaps
    Parties omit clauses if cost of contracting exceeds benefits

    This gives a role for the court in contract disputes:
    filling out the parties' agreement by interpolating missing clauses. (P96)
    goal of courts is to try to fill in terms the parties would have come up with (F160)
    --efficient; and
    --cuts contract costs since parties know that court will promote a mutually beneficial back-up role

 

    (1) Implicit understandings

    Wood v. Duff-Gordon, 222 N.E. 88 (1917) "contract for an exclusive dealership contains an implied condition that the dealer shall use his best efforts to sell the supplier's product." -- good example of implied terms; designer (P95n4)

  1. P: What are the facts of the case?
  2. P: Do you believe you have a contract?
  3. D: Do you agree that you have a contract? Why not?
  4. D: If you do have a contract, why would it restrict what you've been doing?
  5. P: Why do you contend that you do have a contract despite the absence of any clause commiting you to actually perform any duties?
  6. P: Why didn't you explicitly state in the contract the duties you would perform?
  7. D: Who won the case?
  8. D: So what will you have to do as a result?

    some gaps in contractual protection may be deliberate--the product of a tradeoff between the dangers of opportunism on the one hand and the direct and indirect costs (including the risk of error) of litigation, on the other." (P95)

 

   (2) Unforeseen and unprovided for events (P96)
    --allocation of risk revisited

    Suydam v. Jacskon 54 N.Y. 450 (1873) illustrates initial rental agreements, with tenants liable

  1. P: What are the facts of the case?
  2. D: Why do you feel that you should be allowed to no longer pay rent on your lease?
  3. P: Does your lease say anything explicit about whether or not rent is due if the building becomes uninhabitable?
  4. P: What makes you think you are entitled to collect rent even though the lease doesn't say you are?
  5. D: How do you respond to that?
  6. P: What is the economic sense of making tenants responsible for ordinary repairs?
  7. D: Did the court decide you owed the rent or not?

 

    Greenfield v. Kolea 475 Pa. 351 (1977)

  1. P: What are the facts of the case?
  2. D: Does your lease agreement specify whether you owe rent or not?
  3. P: What makes you think you are entitled to collect rent even though the lease doesn't say you are?
  4. D: What 2 exceptions are available to you to get out of paying rent?
  5. D: Which exception do you think applies in your case?
  6. P: What 2 alternatives does the court discuss for allocating risk?
  7. D: Did you win or lose?
  8. P: Does the court adhere to common law precedent in its opinion? How does it justify its decision?