Standardization of standard-form contracts: competition and contract implications.

Author:Patterson, Mark R.
 
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ABSTRACT

Standard-form contracts are a common feature of commercial relationships because they offer the advantage of lower transaction costs. This advantage of standard contracts is increased when there is a second layer of standardization under which multiple firms agree on a standard contract. Trade associations and similar entities often effect standardization of this kind through collective agreement on a standard contract, sometimes under the aegis of state actors. Multifirm contract standardization can provide not only the usual transaction-cost advantages of standard-form contracts, but also increased competition among firms, because a standard contract makes comparison among firms' offerings easier. But standardization among firms also eliminates competition on the standardized terms, adding market power to bargaining power and making it less likely that the needs of all parties will be served.

The collective formation of standard-form contracts has recently begun to receive academic attention. This attention, however, has for the most part focused on contract interpretation, emphasizing the fact of standardization and the nature of the standardizing entity. Less attention has been paid to issues of contractual fairness. Moreover, the competitive effects of contract standardization, which implicate primarily antitrust law, are distinct from those addressed by contract law. When sellers agree on contract terms, they eliminate competition among themselves on those terms. This sort of agreement can be undesirable even if the agreed-upon terms of the contract are fair and reasonable in themselves, because the standard contract can eliminate competition among reasonable terms.

Fundamentally, the standardization of contracts is a standardization of the package offered to customers, in much the same way as is standardization of a product, and antitrust law has often been skeptical of such standardization. But contract standardization can also be viewed as altering not the product itself, but the legal background governing the purchase. Under that view, the contract simply standardizes the legal backdrop for what otherwise continues to be a competitive and vigorously bargained transaction. Which of these perspectives more accurately describes contract standardization likely differs from case to case, yet the courts generally have considered neither whether competition law should apply differently to standardization of contracts than to standardization of other "products" nor whether and how contract law should alter the competition analysis.

This Article addresses the issue of contract standardization by exploring the interaction of antitrust and contract law in three basic respects. The first is substantive, focusing on product terms and considering standardization of terms both to reduce costs (interoperability standards) and to improve the contract (quality standards). This focus on terms is consistent with the antitrust approach of the Department of Justice, which has asked whether standardization involves "competitively significant" terms, but as the Article describes this standard is not well defined. The Article then moves to procedure, considering different contexts in which contract standardization occurs and discussing the implications of different means of negotiation. Third, the Article considers the possibilities both of voluntary adoption of contracts and of adoption incentives created by private organizations and by the state. The Article then draws on these discussions to suggest some analytical approaches to contract standardization.

TABLE OF CONTENTS INTRODUCTION I. COMPETITION LAW AND CONTRACT LAW II. TYPES OF STANDARD-FORM CONTRACTS A. Product Standards and Contract Standards 1. Uniformity Standards: Transaction Cost Reduction 2. Quality Standards: Legal Self-Regulation B. Examples of Standardized Contracts 1. American Trucking Associations 2. American Institute of Architects 3. Insurance Services Office III. COMPETITION AND CONTRACT ANALYSIS A. Substance: Price-Fixing v. Standardization 1. Agreement on Price and Related Terms 2. Uniformity: Agreement on Minor Terms 3. Quality: Agreement on Fair Terms B. Process: Transaction Costs and Bargaining 1. Open Access to the Standardization Process 2. Balance in the Standardization Process 3. The Business-to-Consumer Context C. Adoption of Standardized Contracts 1. "Voluntary" Standards 2. Organizational Constraints 3. The State and Contract Standardization IV. ANALYTICAL APPROACHES TO STANDARDIZED CONTRACTS A. Incentives and Effects B. Terms and Severability C. Trade Associations as Standard-Setters D. Modification of Standardized Contracts CONCLUSION INTRODUCTION

Standard-form contracts are a common feature of commercial relationships, (1) where they offer both advantages and disadvantages. The primary advantage is a reduction of transaction costs, because the parties need not negotiate a new contract for each transaction. (2) Standard contracts can also provide greater certainty regarding the meaning of contractual terms (3) and a reduction in agency costs. (4) Despite these benefits, courts and especially commentators also express concerns regarding standard contracts. (5) Many of these concerns arise from the use of standard-form contracts in the consumer context, where they often are contracts of adhesion that consumers neither read nor have the power to negotiate. (6) Whether the parties are consumers or businesses, though, a single, standard contract may not be appropriate for every transaction, so some parties will not be well-served by contract standardization. (7)

Both the advantages and the disadvantages of standard contracts are increased when there is a second layer of standardization. This additional standardization--the subject of this Article--is present when a standard contract is not only used by a single seller in multiple transactions, but also by multiple sellers. Trade associations and similar entities often effect standardization of this kind through collective agreement on a standard contract, sometimes under the aegis of state agencies. Multifirm contract standardization can provide not only the advantages noted above, but also increased competition among firms, because a standard contract makes comparison among firms' offerings easier. (8) But standardization among firms also eliminates competition on the standardized terms, adding market power to bargaining power and making it even less likely that the needs of all parties will be served.

The collective formation of standard-form contracts has recently begun to receive academic attention. (9) The attention, however, has for the most part focused on contract law, emphasizing the implications for contract interpretation of the fact of standardization and the nature of the standardizing entity. (10) The implications of collective formation of standard contracts, however, go beyond contract law. Most importantly, any agreement on terms of a transaction raises antitrust issues. (11) When sellers agree on contract terms, they eliminate competition among themselves on those terms. Whether this elimination of competition leaves contracting parties worse off depends at least in part upon whether the standardized terms are important ones and upon whether sellers continue to compete on other, arguably more important terms like price.

It is important to recognize that these competition issues are distinct from issues of fairness under contract law. To the extent that contract law regulates form contracts, it does so primarily through a focus on oppressive terms. (12) The antitrust issue is a different one: that the terms of the standard-form contract are the product of an agreement, and therefore eliminate competition. This concern exists even if the agreed-upon terms of the contract are fair and reasonable in themselves, because the standard contract can still eliminate competition in the range of reasonableness, that is, among reasonable terms. As a result of the elimination of alternative terms, the needs of different customers may not be met.

Another layer of complication is introduced when standardization of form contracts is used to perform what might be thought of as a regulatory function. For example, sellers might agree not to use particular terms considered to be oppressive. Or the standardization might mandate desirable terms or disclosures. The goals here are not to reduce transaction costs, or even to promote efficiency more generally, but to channel contracts and contracting practices in a particular direction. But standardization for these purposes might also violate antitrust law. (13) In general, antitrust law views self-regulation by groups of competitors skeptically, largely because of a concern that a self-regulating group may be tempted to adopt rules that exclude their competitors. (14)

Thus, contract law and competition law may view standardization of standard contracts differently. This Article compares the approaches to standardization of the various contract doctrines focusing on unfairness and the antitrust emphasis on competitive effects. The Article also addresses these issues comparatively by considering both the United States and Europe. The law in Europe provides a helpful complement and contrast to that of the United States because European law focuses on several issues that are relevant to standardization. Most importantly, the European Union's push toward integration of the European economy has led to the goal of harmonizing European contract law, and standard contracts have been advanced as one means of achieving such harmonization. (15) The European Union also has a more active and formal approach to addressing contractual fairness, (16) and is engaged in a larger debate concerning the potential convergence of the objectives of antitrust law and consumer protection. (17)

Part I of the Article begins by describing a recent case...

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