Legal ignorance and information-forcing rules.

Author:Verkerke, J.H.
Position:II. Problem with a Legal-Information-Forcing Justification through Conclusion, with footnotes, p. 931-960

    In this Part, I identify a significant practical problem with legal-information-forcing rules. As a result, legal ignorance persists even in the face of fully informative express contract terms. (120) Scholars, and to a lesser extent judges, have sometimes considered this problem, but their analysis does little to clarify the appropriate scope or design of these default rules. (121) One possible response to the shortcomings of legal-information-forcing defaults would be to develop more effective ways to convey legal information to unsophisticated parties. I argue, however, that we currently lack essential empirical facts about how people obtain and process legal information. Moreover, many parties are rationally ignorant about contract terms and efforts to make them fully informed would be socially wasteful.

    1. The Persistence of Legal Ignorance

      As the previous Part demonstrated, contract documents that we encounter in our everyday lives as consumers and employees include an extraordinary quantity of legal information. In light of the ubiquity of express contract terms, it is nothing short of remarkable how little we seem to know about the law governing our diverse transactions. (122) But a moment's reflection reveals a straightforward explanation for this divergence between the quantity of information provided and the level of legal understanding achieved. A major premise underlying the argument for legal-information-forcing rules is almost certainly false. To put the matter most simply: people quite often ignore the text of written contracts.

      Almost no one reads contracts carefully enough to digest the legal information that these default rules are designed to force. (123) Indeed, the ostensible audience for this legal information--consumers, employees, and other comparatively unsophisticated parties--is the least likely to invest sufficient time and attention to benefit from the newly available contractual terms. Thus, if the purpose of these default rules is to convey legal information to all, or even many, unsophisticated parties, the default rules likely frustrate that objective.

      In response to this problem, courts have developed some doctrinal requirements designed to ensure that parties understand their contractual undertakings. (124) Commentators and legislators have focused their attention on mandatory disclosure regulations. (125) The next Section discusses these efforts and explains how they differ from and relate to legal-information-forcing default rules.

    2. Judicial and Scholarly Perspectives on Legal Ignorance

      Several strands of the scholarly literature bear some relation to the problems we have been considering.

      1. Disclosure Requirements

        First, a substantial body of work explores the potential benefits of imposing legal disclosure requirements in various transactional settings. For example, federal law requires lenders to disclose repayment terms and annual percentage rates in a standardized format. (126) Similarly, food and drug law requires product labels to include ingredient lists and nutritional information. (127) And federal securities law mandates that issuers publish a comprehensive prospectus describing any new offering in excruciating detail. (128)

        Considerable effort has gone into evaluating the success or failure of particular disclosure obligations. An early article by William Whitford, for example, reviewed studies of how truth-in-lending laws affect consumer knowledge of credit terms. (129) More recently, commentators have argued that excessive disclosure requirements create a danger of information overload. (130) Still other work relies on experimental studies of consumer behavior to challenge the information-overload hypothesis. (131) These papers show that consumer search strategies readily adapt to the presence of too much information by simply ignoring the excess. (132) As a result, excessive disclosure may well be worthless, but it does not cause consumers to make poor choices as a result of an "overload" of information. (133)

        In a recent book, Omri Ben-Shahar and Carl Schneider expand their prior critique of mandatory disclosure regulations. (134) They argue that most people have little taste for reading mandated disclosures. (135) Consumers ignore the flood of information contained in boilerplate terms and instead make decisions on the basis of simpler rules of thumb. Ben-Shahar and Schneider observe that disclosure regulations particularly appeal to legislators because, as compared to more intrusive substantive rules specifying permissible contract terms, mere disclosure requirements appear to impose far less intrusive obligations on businesses. (136) Moreover, designing mandatory rules for consumer transactions requires much more empirical information and necessarily runs the risk of causing unintended effects on the supply of goods and services. They conclude that the current regulatory strategy produces far more harm than good. (137) In their view, the current disclosure regime should be abandoned and replaced with more direct consumer protection measures when sufficient evidence warrants intervention. (138)

        The disclosure literature undoubtedly sheds light on consumers' information-processing techniques. Skeptical scholarly assessments of mandatory disclosure regulations also tend to confirm our conjecture that unsophisticated parties derive little or no benefit from the boilerplate language that legal-information-forcing rules inspire. (139) However, disclosure regulations and legal-information-forcing defaults differ in important respects. The sanction for violating disclosure rules is typically a civil or criminal penalty of some kind. (140) In contrast, a party who fails to provide the information targeted by an information-forcing default must carry out the transaction under an unfavorable legal rule. The most appropriate remedy for excessive disclosure regulations is simply to eliminate the unproductive legal requirements. Fixing a malfunctioning legal-information-forcing default, in contrast, requires a lawmaker to determine an appropriate legal rule to govern the transaction in question. Moreover, disclosure regulations typically specify with great precision what information parties must disclose, and how they must make these required disclosures. Information-forcing defaults are ordinarily cast in more general terms and leave the details of contract drafting to the discretion of the disclosing party. (141) This lack of standardization significantly complicates the task of evaluating the effectiveness of a legal-information-forcing default rule.

      2. Boilerplate and Contracts of Adhesion

        One salient fact about legal-information-forcing rules is that the targeted information is most often communicated in a standardized form contract, such as a bill of sale, an employee handbook, a standard form insurance contract, a release of liability, or a rental agreement. (142) Another important strand of contracts scholarship examines the problems associated with enforcing such standard form agreements, which are typically offered on a take-it-or-leave-it basis. Often referred to as contracts of adhesion, these form contracts have been the subject of frequent academic criticism. (143)

        In a widely discussed recent book, Margaret Jane Radin has launched a wide-ranging critique of contemporary consumer contract practices. (144) She documents the ubiquity of fine-print terms in consumer transactions that limit liability, restrict remedies, and impose mandatory arbitration. Focusing first on the question of consent, Radin rejects arguments that consumers impliedly agree to these terms. (145) Mere awareness that such terms are likely to be a part of any transaction cannot substitute for the manifestation of mutual assent at the core of traditional contract doctrine. Nor is it sufficient to argue that boilerplate terms economize on transaction costs or promote efficient risk allocations. Radin indicts lawmakers for their inattention to these problems and contends the routine enforcement of boilerplate ultimately undermines the rule of law. (146) She proposes various regulatory measures to control these private efforts to supplant legal obligations. Courts should scrutinize these "rights deletions" closely and, she contends, refuse to enforce terms that interfere with important public values. (147) Indeed, Radin suggests that the most egregious efforts to impose one-sided terms through boilerplate should subject the drafters to potential tort liability. (148)

        In contrast, many legal economists have defended contemporary contract practices. According to this competing account, legal ignorance is widespread, but economic efficiency compels mass-market sellers and service providers to develop standardized terms and rely on streamlined methods of obtaining consumer consent to those terms. (149) Individual negotiations with consumers are infeasible and would be wasteful. Instead, we can rely on competitive pressure and a small minority of comparison shoppers to police contract terms. (150) An unusually nuanced version of this efficiency argument proposes that business firms use standard-form contracts to establish a restrictive baseline from which they allow their managerial agents to negotiate discretionary exceptions granting benefits to which consumers are not legally entitled. (151)

        Judicial reaction to contracts of adhesion has been, for the most part, accepting and accommodating. Although judges express occasional misgivings about enforcing form contracts, courts have largely ignored the most extreme academic critics who would, for example, create a presumption against enforceability. (152) Instead, prevailing law enforces unfavorable form contract terms against unsophisticated parties so long as they meet minimal standards of procedural fairness. (153) Judges appear to assume that adhering parties are...

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