Joshua Fairfield, the Cost of Consent: Optimal Standardization in the Law of Contract

• Publication year: 2009

THE COST OF CONSENT: OPTIMAL STANDARDIZATION IN THE LAW OF CONTRACT

Joshua Fairfield^*

ABSTRACT

This Article argues that informed consent to contract terms is not a good to be maximized, but an information cost that courts should minimize. As a result, courts ought to minimize the cost sum of information costs and contractual surprise. The Article applies information-cost theory to show that information-forcing rules are often inefficient at both the micro- and macroeconomic levels. Such rules also impose greater costs on third parties than the benefits they create for the contracting parties. When one consumer creates an idiosyncratic deal, the information-savings benefits of standardization are reduced for all other potential consumers. The Article demonstrates that in some cases courts are already abandoning a rigid view of contractual consent when consent is too costly; but that under other doctrines, courts insist on an inefficient level of informed contractual consent.

INTRODUCTION ............................................................................................ 1403

I. LITERATURE ..................................................................................... 1405

A. Liberal Contract Theory ........................................................... 1406

B. Boilerplate and Coasean Bargains .......................................... 1409

C. Information Costs in Property .................................................. 1415

II. THE COST OF CONSENT .................................................................... 1422

A. Limits and Definitions .............................................................. 1423

B. Transaction Costs and Consent ................................................ 1425

C. Illustrating the Cost of Consent ................................................ 1427

III. THE BENEFITS OF STANDARDIZATION .............................................. 1431

A. Contract Information Externalities .......................................... 1432

1. Customization Increases Information Costs to Third

Parties ................................................................................ 1432

2. Standardization Lowers Information Costs for Third

Parties ................................................................................ 1435

B. Direct Benefits of Standardization to Consumers .................... 1435

C. Courts and Standardization ...................................................... 1438

1. The Numerus Clausus in Contract ..................................... 1439 a. The Statute of Frauds and Parol Evidence .................. 1439 b. Trade Use and Industry Custom and Practice ............. 1441 c. Standard Default Terms ............................................... 1441 d. The Battle of the Forms ............................................... 1443 e. Limited Corporate Forms ............................................ 1444

2. Standardization Through Anti-Standardization Doctrines . 1445

IV. CHALLENGES: STANDARDIZATION AND INNOVATION ...................... 1451

A. Micro-Modularity ..................................................................... 1452

B. Macro-Modularity .................................................................... 1453

V. PROPOSED CHANGES ........................................................................ 1456

CONCLUSION ................................................................................................ 1457

"DAD! Too. Much. Information!"

-Author's daughter, age 6.

INTRODUCTION

In contract theory, consent is indispensable and standardization disfavored.¹In practice, consent is costly, and standardization is the solution. This Article attempts to realign contract law with the broader discourse on standardization. It argues that contractual consent is an information cost and proposes that standardization is the way to reduce that cost.

Traditional theories of contract treat consent as an indispensable expression of will, of autonomy, or as a vital element of an ongoing relationship. Economic theories of contract, especially those in the Coasean tradition, have treated consent as incidental to negotiation over contract defaults. The Coasean bargain requires that a contracting party be able to gain its counterparty's contractual consent with minimal transaction costs.²As a result, economists have not strongly focused on consent as a transaction cost, and almost none have focused on it as an information cost.³

Traditional contract theories malign standardized contracts for increasing information costs.⁴The usual argument is that standardized contracts hide or backload terms, confuse consumers, and raise the costs of information.⁵But everywhere else that standardization is studied (for example, standardization in industrial manufacture, computer programming, or medical consent), standardization lowers the cost of information.⁶Thus, the anti-standardization doctrines of adhesion and unconscionability seem adrift in an age of mechanized production and electronic contracting.

A simple example shows why the leading views of consent and standardization are incomplete. Suppose you buy a cup of coffee. You have not consented to the fine print on the coffee cup in any way that is worth mentioning. You know roughly what is in the contract; it is, after all, standardized. There is no need to read it. Indeed, it would be an economic tragedy if you did read the fine print. The time cost of doing so might well exceed the benefit to you of purchasing the coffee. The cost of obtaining your consent could kill the deal.

This Article contradicts the received wisdom of contract theory. I focus on the cost of consent, rather than its presence or absence. This redefines the question of consent. The relevant question, I posit, is not whether the customer has purchased enough information to have meaningfully consented to the contract. Rather, the important question is how much information is efficient for the consumer to purchase. I also propose that standardization reduces, rather than increases, the information costs of consent. As a result, I propose that courts should minimize the cost sum of contractual consent and surprise, just as they minimize the cost sum of precautions and accidents in torts. Finally, I propose that courts reconsider the use of information-forcing rules in the mass-market context.

This leads to a counterintuitive payoff. If standardized deals lower information costs, customized deals may raise them. I argue that customized deals that economic theory has long considered efficient instead increase information costs for third parties and thus can be suboptimal across the run of mass-market contracts. This may explain why firms will not negotiate with consumers for idiosyncratic but otherwise efficient contract terms. (Imagine negotiating over the counter at Best Buy, even for terms for which you are willing to pay more than the cost to Best Buy. Best Buy is unlikely to agree, even though the terms are efficient between the parties.⁷)

A caveat: these insights apply best to mass-market, high-volume, low-value transactions, in which the slight increase in transaction costs engendered by information-forcing rules actually threatens a percentage of the potential transactions. Nobody wants to dicker terms over a purchase of a cup of coffee; everyone wants to negotiate over terms in a home-purchase agreement. In individuated, customized contracts, the parties themselves clearly believe that the cost in time and money of dickering terms is lower than the potential damage caused by deviation from one or both parties' expectations. Thus, I confine my discussion to the mass-market context.

This Article proceeds as follows: Part I discusses the traditional literature of contractual consent, the economic literature of Coasean bargains and incomplete contracts, and the literature of information costs. Part II illustrates the economic cost of requiring consumers to buy too much information. It argues that contractual consent is a transaction cost to be minimized, not a good to be maximized. Part III shows that even when information exchange is efficient for two contracting parties, their creation of an idiosyncratic agreement may increase information costs for third parties. Part IV addresses and ultimately rejects concerns that contract standardization may stifle innovation in contract terms. Part V closes with final observations and recommendations.

I. LITERATURE

Contract theory is an old field, and it is useful to examine what has gone before. Liberal theory has enshrined consent at the center of the contract process and encourages courts to maximize consent by maximizing information exchange.⁸Economic theory has largely ignored issues of consent, focusing instead on the Coasean bargain.⁹To the limited extent that economists have focused on consent costs, they too have encouraged courts to maximize information exchange.¹⁰This Article asserts that consent is costly and that information exchange should be minimized in certain cases.

The first section below discusses liberal theories of contractual consent. The second section discusses economic views of consent and the development of information-forcing rules. The third section discusses the literature of information costs, a literature that has not yet been applied to contract law. Throughout this Part, I identify the gaps that my analysis fills in the current literature, as well as points of departure between prior literature and the current analysis.

A. Liberal Contract Theory

Traditional theories of contract rely on informed consent as a linchpin of contract, whether as an expression of a contracting party's individual autonomy or as a building block in a reciprocal relationship that is the foundation of the business relationship between two parties.¹¹Traditional theory asserts that without meaningful informed consent, there is no contract.¹²

These theories express the liberal...