The role of nonprofits in the production of boilerplate.

• Author: Davis, Kevin E.
• Position: Boilerplate: Foundations of Market Contracts Symposium

TABLE OF CONTENTS INTRODUCTION I. NONPROFITS THAT PRODUCE BOILERPLATE A. Trade Associations B. Bar Associations C. Other Nonprofits II. DIFFERENCES BETWEEN PRODUCTION OF BOILERPLATE BY NONPROFITS AND FOR-PROFITS A. Objectives 1. Externalities Associated with Drafting Contracts 2. Nonprofits' Responses to Externalities B. Perceptions 1. Ability to Offer Credible Assurances 2. Ability to Attract Other Users C. Production Costs 1. Access to Volunteers 2. Other Potential Differences in Production Costs D. Tax Treatment III. WELFARE IMPLICATIONS IV. LEGAL IMPLICATIONS A. Should the State Intervene in the Production of Contracts? B. How Should the State Intervene in the Production of Contracts? CONCLUSION INTRODUCTION

Drafting contracts--by which I really mean the documents that embody contracts--requires investments of time, experience, and ingenuity. Those investments may yield significant returns because the quality of contractual terms can be an important determinant of the gains that parties realize from trade. (1) This in turn suggests that, from an economic perspective, it is important to understand how contracts are produced. It seems particularly important to examine the production of contracts or individual contractual terms that are widely used--that is to say, "boilerplate." (2) In a market-oriented society, boilerplate is the predominant feature of the network of legal obligations that provides the formal structure of economic activity. As a result, depending on the extent to which parties' behavior tracks their formally defined obligations, the quality of boilerplate can be a crucial determinant of overall patterns of economic activity. Understanding the determinants of the quality of boilerplate is an important step toward understanding whether and how the state ought to intervene in its production.

Recent academic literature on this topic has focused on production of boilerplate by either for-profit actors--whether for their own use or for use by their clients--or the state) The dominant theme is that for-profit actors typically have sub-optimal incentives to invest in production of contractual terms because they often cannot capture all of the benefits that flow from those investments. As for the state, the main concern is that it lacks the competence to formulate contracts that are suited to the diverse needs of private commercial actors.

This Article takes a different tack and focuses on the role played by entities that are organized as nonprofits ("nonprofits")--a broad category that includes charitable organizations as well as distinctly non-charitable organizations such as trade associations--in the production of boilerplate. The analysis here begins with and is motivated by the observation that, in the United States at least, nonprofits, and in particular trade associations, seem to play a substantial role in producing boilerplate. Specifically, many non profits produce contractual terms that seem likely to be used with little or no modification by a significant number of other parties. (4)

The core argument here is that, as a theoretical matter, there are at least four reasons to believe that it makes a difference whether boilerplate is produced by a nonprofit as opposed to a for-profit. The first reason is that, because of their distinctive mandates, when making decisions nonprofits sometimes take into account benefits and costs that are not recognized by for-profit organizations. Second, some nonprofits are relatively well placed to stimulate demand for contracts by credibly assuring prospective users of their value. Third, some nonprofits can produce contracts of a given quality at a relatively low cost because they have superior ability to attract volunteer labor. Fourth, nonprofits can produce contracts at a relatively low cost because they enjoy preferential tax treatment. (5) Understanding the reasons why nonprofits are so heavily involved in producing contracts constitutes an important step toward understanding whether this state of affairs is likely, from society's perspective, to be optimal. This understanding can in turn inform analyses of whether and when the state ought to play a role in the formulation of contractual terms. It also sheds light on the question of whether state intervention in this area ought to involve encouraging or discouraging the production of boilerplate by nonprofits. Finally, this analysis provides a counterpoint to studies that focus on the socially harmful anti-competitive activities of nonprofit trade associations. (6)

Part I of this Article describes the significant roles that a range of nonprofits play in producing boilerplate in the United States. Part II discusses the reasons why production of boilerplate by nonprofits might be different from production of boilerplate by for-profits. Part III discusses whether it is desirable from society's perspective for nonprofits to play a substantial role in producing boilerplate. Part IV discusses the legal implications of the preceding Parts. A brief Conclusion follows.

1. NONPROFITS THAT PRODUCE BOILERPLATE

   There are a number of different types of sources of boilerplate. Sometimes terms that eventually become boilerplate originate in contracts that are drafted by parties for their own use with little or no assistance from anyone else. On other occasions terms are drafted by for-profit actors--typically legal professionals--for use by other parties. These terms become boilerplate either because they are widely copied or because they are used repeatedly by the drafter or its client. Still other examples of boilerplate are drafted from the outset for widespread use and are marketed by for-profit firms as "forms" or "model contracts." In the past these contracts were distributed in paper form. Now, however, many farms distribute their products in electronic form, and often over the Internet. (7) Some of the more sophisticated suppliers allow parties to assemble their own contracts electronically either by picking from a range of standard terms or by responding to queries about their preferences. (8)

   Although a great deal remains to be written about the production of boilerplate under these circumstances, the focus of this Article is on another situation: the production of boilerplate by nonprofits for use by others. There is no obvious and readily available source of information on the number of occasions on which parties use contractual terms that have been drafted, in whole or in part, by nonprofits as opposed to other types of organizations. It is, however, possible to get a sense of the magnitude of nonprofits' role in the production of boilerplate in the United States by examining the range of nonprofit organizations engaged in producing contractual terms intended for widespread use. Most of those nonprofits are trade associations. However, bar associations and a few other types of organizations are also active in this field.

   1. Trade Associations

      In the United States there are several industries in which trade associations are heavily involved in producing contracts. For instance, many trade associations representing various professions involved in the construction industry produce contracts. The best known of these may be the American Institute of Architects ("AIA"), which has been distributing contracts since 1888. The AIA now offers over ninety distinct contracts and documents. The AIA contracts were originally distributed in paper form. However, like many other organizations, the AIA now also licenses its contracts in electronic form. In fact, the AIA contracts are embedded in a sophisticated customized software package that contains a number of potentially useful features. For instance, the software allows information pertaining to a particular project to be inputted only once and then automatically entered where necessary on all of the contracts associated with a given project. The software also permits users to modify the standard terms but still view a record of the deleted material. Users can choose between licenses that allow them to print fixed or unlimited numbers of copies. (9)

      An interesting feature of the construction industry in the United States is that there are a number of trade associations offering forms that can serve as substitutes for one another. For instance, in addition to the architects, the Associated General Contractors of America ("AGC") offer a range of contracts that is almost as extensive as that of the AIA. Many of the AGC contracts are close substitutes for the AIA contracts and AGC's customized software is similar in terms of the level of sophistication. (10) In fact, AGC appears to have begun drafting contracts in response to perceived shortcomings in the AIA contracts. Interestingly, by way of comparison, the trade associations involved in the construction industries in England and Canada have chosen to collaborate to produce a single set of forms. (11) This kind of collaboration has occurred to a more limited extent in the United States under the auspices of the Engineers Joint Contracts Documents Committee ("EJCDC"). (12)

      Besides the construction industry, another industry in which trade associations appear to play a significant role in drafting contracts is real estate brokerage. In the United States, state and local associations of realtors draft various contracts for use in connection with the sale of real estate. Access to the contracts is typically provided to the associations' members as one of the benefits of membership. Many of the contracts are distributed electronically through a software package marketed by a for-profit entity that is a joint venture of the National Association of Realtors and the California Association of Realtors. (13)

      There are other U.S. industries in which trade associations play a prominent role in drafting contracts. For example, trade associations focusing on natural products such as cotton, (14) grain and feed...