The sound of one form battling.

• Author: Craswell, Richard
• Position: Response to article by Daniel Keating in this issue, p. 2678

Comments on Daniel Keating's `Exploring the Battle of the Forms in Action'

Daniel Keating has provided a thoughtful and useful study of the way that businesses form contracts.(1) In particular, he has given us a good deal of data concerning the problem known as the "battle of the forms." Commercial lawyers have, of course, been wrangling over this problem for decades, so it is no small accomplishment to be able to offer a useful contribution.

In Part I below, I describe more precisely just what Keating's data does and does not illuminate. Parts II and III then focus on a particular contracting practice that Keating has identified: the practice of getting both parties to sign a "master agreement" in advance of a series of deals. These master agreements let the parties agree in advance to the terms that will govern their subsequent deals, without leaving those terms to depend on the invoices and other forms that will subsequently be exchanged. This encapsulation of the parties' agreement in a single document could be said to eliminate the battle entirely, for it certainly solves many of the technical problems that plague commercial lawyers whenever the parties' documents fail to match. I argue, though, that these master agreements may not solve all of the objections that some courts and some scholars have raised in "battle of the forms" cases. While I believe these objections are misguided, they may nevertheless be influential, so there is at least a question about how often these master agreements will be upheld by courts.

1. THE BEHAVIOR BEHIND THE CONTRACTING BEHAVIOR

   At the outset, it is worth clarifying what Keating's study does and does not address. His study tells us a good deal about contracting behavior: about how businesses draft standard forms, negotiate with one another, and so on. However, his study does not attempt to examine the underlying economic behavior those contracts govern -- that is, Keating does not study the production, pricing, or sale of actual goods. As a result, his study does not address the issues that are most central to the normative literature on the battle of the forms.

   For example, one issue raised by that normative literature is whether it should be easier or harder for sellers to displace the U.C.C.'s standard default rules. Unless the parties agree otherwise, the U.C.C. makes sellers liable for all consequential damages caused by any defect that leaves a product less than "merchantable,"(2) and this rule is sometimes criticized as inefficient.(3) If this criticism is correct -- an issue to which I return below -- then it might be desirable to give sellers an easy way to contract around those default rules, perhaps by specifying some other remedy in their standard form. Other scholars, however, argue that sellers' forms may be inefficient in the opposite direction, by being overly stingy toward buyers (for example, by disclaiming any warranty entirely).(4) If this criticism is correct, we might be better off with a battle-of-the-forms rule that made it harder for sellers to contract around the U.C.C.'s default remedies.

   My only point here is that a study such as Professor Keating's cannot resolve the question of whether the U.C.C.'s default remedies are either more or less efficient than those that appear in sellers' (or buyers') standard forms. This is because the efficiency of any remedial provision -- either a default remedy in the U.C.C., or a remedy stipulated in a standard form -- depends on the underlying economic behavior that will be governed by the contract. For example, a clause disclaiming all warranties might indeed be inefficient (all else being equal) if the resulting freedom from liability reduced sellers' incentives to produce merchantable products, leading to inefficiently low levels of product quality. To test this hypothesis, though, we would need to measure actual product quality to see whether sellers whose forms disclaimed warranty liability tended to produce lower-quality products than those whose forms did not. In other words, the underlying economic behavior -- in this case, the level of quality produced by sellers -- is what must be studied to resolve this normative debate.

   The same is true of the contrary claim, that the U.C.C.'s default remedies are inefficient because they are overly generous to buyers. For example, the default remedy of full liability for all consequential damages might be inefficient if it unduly reduced buyers' incentives to take their own steps to reduce those consequential damages. This default remedy might also be inefficient if it led to cross-subsidization of some buyers by others(5) -- for example, if small buyers who were unlikely to suffer large consequential damages were charged the same price as larger buyers whose consequential losses were likely to be more severe. To tests these hypotheses, though, we would again have to study the underlying economic behavior of buyers and sellers. To evaluate the first effect, we would have to study the actual precautions taken by buyers to minimize their consequential damages in the event of a breach. To evaluate the second, we would have to study the actual prices set by sellers who were subject to liability for full consequential damages. In particular, we would have to study the extent to which those prices did or did not vary with the consequential damages likely to be suffered by any particular buyer.

   Obviously, Professor Keating's study does not attempt to shed light on this underlying business behavior. Keating interviewed lawyers to learn how businesses draft standard forms, and how they respond to forms offered by others. He did not interview engineers to learn how businesses make product quality decisions, or accountants and sales managers to learn how businesses set prices. This is what I mean when I say that Keating's study tells us much about contracting behavior, but little about the underlying economic behavior those contracts might affect.

   I should add at once that this observation is not a criticism of Professor Keating. Keating's method of interviewing business people is a useful way of gaining insights into how contracts are formed, but I doubt that it would have been nearly so useful as a way of assessing underlying price and quality behavior. There are, after all, any number of factors that influence the price that a business charges; and a sales manager who is asked about her pricing decision is unlikely even to mention U.C.C. section 2-207 as one of the factors in her decision. She is more likely to respond only in general terms -- for example, "We charge enough to cover our costs," or "We charge whatever the market will bear." Interviews of product quality engineers likely will produce similarly general answers -- for example, "We produce the most durable product that we...