The Search Interest in Contract

Author:Joshua A.T. Fairfield
Position:Associate Professor of Law, Indiana University School of Law, Bloomington
Pages:1240-1291
SUMMARY

Parties often do not negotiate for contract terms. Instead, parties search for the products, terms, and contractual counterparties they desire. The traditional negotiation-centered view of contract leads courts to try to determine the meaning of the parties where no meaning was negotiated and to waste time determining the benefits of bargains that were never struck. Further, while courts have... (see full summary)

 
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    Associate Professor of Law, Indiana University School of Law, Bloomington. Thanks to Tom Merrill, Avery Katz, Margaret Jane Radin, Richard Epstein, Philip Hamburger, Ken Dau-Schmidt, Jeff Stake, Gene Shreve, Eric Rasmusen, Timothy Jost, Lee Fennell, Leandra Lederman, Amitai Aviram, and Adam Mossoff for comments at crucial junctures. Special thanks to Ted Castronova and the American Association for the Advancement of Science, James Pfander and the faculty at the University of Illinois College of Law at Urbana-Champaign, and to all the faculty participants in the Big Ten scholarship conference for the opportunity to present these ideas. Thanks to Matthew Lawless and Michael Ott for their thoughtful research.

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I Introduction

Contract law suffers from misplaced focus. Currently, the magical moment in contract law is the "meeting of the minds," the moment at which negotiated contract terms are solidified in the minds of all contracting parties. The model of contract with which legal scholars are most familiar imagines parties meticulously negotiating contract provisions with counterparties.

This meeting of the minds, or "negotiation model," is not how most people (except large corporations) engage in contracting. Rarely today do parties negotiate terms with a specific counterparty. Rather, prospective purchasers search for counterparties that offer the set of contract terms they desire. For example, prospective purchasers generally do not negotiate for the price of computers or television sets. Instead, inquiring buyers might go to a website to compare prices, guarantees, and warranty terms already on offer. (Even the offline shopper will find that he spends more time searching than negotiating-the cost of shoe leather in comparison shopping is higher than the amount of time spent negotiating with store proprietors.) The primary cost of contracting is not in negotiating the fine details of the contract with the store; the cost of contracting is finding a store that sells the desired product coupled with the desired contract.

An example may help make the issue concrete. Suppose that you desire a house with two fireplaces. You go to a contractor and, although the standard house that the contractor builds has only one fireplace, you and she sit down and begin to negotiate. You draft a building contract that, among its many provisions, has a clause indicating that the home will have two fireplaces. You accept significant price increases and building schedule delays in order to get what you want. You suffer opportunity costs because you have decided to negotiate with this contractor instead of going elsewhere. Both you and the contractor initial the "two fireplace" clause, indicating that you have specifically negotiated this clause. You then go on a world tour to publicize your new book, and the house is built while you are gone. You come back and find that the builder has nearly finished the house but that he has installed only one fireplace. Incensed, you take the issue to a court, with confidence that the court will have the tools to enforce your specifically negotiated provision.

Negotiation for those two fireplaces is not your only option. Instead of laboriously negotiating for the contract term stipulating two fireplaces, suppose you engage in a long and hard search for the home you desire. You search www.realtor.com, read listings in newspapers, hire a realtor to show you around, and engage in countless home visits. You are on a mission to find that perfect house with two fireplaces. Finally, you locate a house on the Web that seems to fit the bill. The listing clearly describes the house as having two fireplaces. Although you are on your book tour, the pictures andPage 1241 descriptions seem just perfect. You sign, but once you see the house, again, only one fireplace has been installed. Back to court we go.

In the first case, a court would have ample tools provided by legal reasoning and precedent to give the negotiated and initialed clause special force and effect.1 The court might consider the clause the "heart of the bargain" or might enforce the negotiated provision as against a non-negotiated provision that might seem to contradict it.2 The court may even order specific performance under limited circumstances. What is important is that courts have the tools to recognize the costs involved in the negotiation of the provision and have the legal tools to remedy the harm.

But this is not true in the second case. Courts lack the tools to give a "searched for" contract term the same force as a "negotiated" clause. Courts have no lens through which to view the search interest in contract. Without a framework for analyzing this interest, disparities between searched-for and negotiated contractual provisions will persist.3

Why does it matter if courts focus on negotiation costs while parties incur search costs? Courts spend judicial resources interpreting what parties "meant" in contracts where "meaning" was not negotiated (and, overwhelmingly, where the contract was not even read at all). Courts develop remedies giving force to parties' negotiated preferences where no negotiation occurred at all. The effect is that courts currently inefficiently subsidize negotiation and cause parties to forego otherwise valuable searches.

Thus, the basic proposal of this Article is this: Courts should have interpretive rules and remedies that permit them to respond to search costs in contracting. There is a continuum of legitimate contracting costs, running from negotiation costs through search costs. Courts have the tools to respond to the negotiation end of the continuum; however, they lack tools to respond to the search end. This Article does not, therefore, advocatePage 1242 changing the law. Rather, the goal of this paper is to delineate a value-the value of facilitating searches-that is already present in the law of contract but that courts insufficiently recognize. Once interpretive rules and remedies compensate for search costs of contracting, rather than only negotiation costs, the resolution of contractual disputes will more appropriately mirror actual contracting practice.

The Article proceeds in four Parts. The first discusses search costs generally and the literature of search. The second Part demonstrates that the search interest in contract is present in the common law and applicable statutes but that courts do not cogently recognize or sufficiently value this interest. The third Part examines the implications of a search-centered theory of contract on court remedies and interpretive rules. The fourth Part applies a search-centered theory of contract to make sense of two previously confusing areas of law: electronic contracting and sales law, as set forth in Article 2 of the Uniform Commercial Code.

II The Theory of Search

Most costs in modern contracting do not involve negotiating an individualized agreement.4 Rather, most modern contracting costs involve the searcher finding someone she is willing to contract with in the first place.5 For example, if a party wishes to buy a computer, she generally does not engage in a prolonged negotiation of terms with the computer seller. Instead, she searches (often on the Internet) for a list of computer sellers and selects one that offers the mix of contractual terms and technological features that she desires. The buyer spends time on the search, not negotiation.6 The next section defines and provides examples of such search costs.

A A Taxonomy of Search

A search cost is a transaction cost. "Transaction cost" is a...

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