A 'Fair Contracts' Approval Mechanism: Reconciling Consumer Contracts and Conventional Contract Law

Abstract

Consumer contracts diverge from the traditional paradigm of contract law in various conspicuous ways. They are pre-drafted by one party; they cannot be altered or negotiated; they are executed between unfamiliar contracting parties unequal in their market power and sophistication; they are offered frequently by agents who act on behalf of the seller; and promisees (i.e., consumers) do not read or understand them. Consumer contracts are thus useful in modern markets of mass production, but they cast doubt on some fundamental notions of contract law.

To reframe the long-lasting debate over consumer contracts this Article develops a superior legal regime whereby sellers can obtain certification of a form contract by an independent third-party. Such approval may be viewed as a quality certification, akin to a Good Housekeeping Seal of Approval, for standard form contracts.

The many impediments to the design of such a project notwithstanding, its overall advantages are promising. The tension between the duty to read contracts and the common practice of signing consumer contracts without reading will be better reconciled. The adverse consequences of asymmetric information possessed by typical sellers and consumers will be obviated. This regime will also minimize sellers' ability to manipulate consumers' bounded rationality; increase social welfare by reducing transaction costs; diminish socially undesirable litigation over standardized contracts; make a notable step towards minimizing the alleged anomaly that punitive damage awards create in consumer contract cases; and promote market participants' autonomy by advancing trust between the contracting parties.

Keywords: Consumer form contracts, appproval, contract law

JEL Classification: K12, K20, K40