Here is a FIRST DRAFT of a short paper I am writing for a course in law and economics. If "a free lance trumpeter of the highest quality" sounds familiar, you may have an inkling where this article is headed.
N.B. Prof. Kaplinsky: don't read this article.
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In instances where a contract clause is particularly unusual, there ought to be an onus on the vendor to bring that clause to the buyer's attention. Why? One can imagine a situation in which a vendor inserts a by-the-way-we-get-your-first-child clause into a cellphone contract. The reasonable expectations of buyers is that such a clause would not exist. As bad contract law increases transaction costs1, when the appropriate circumstances arrived before the judges in Interfoto v. Stiletto, they found for a naive purchaser, setting precedent in accord with R. Posner's observations on the role of the common law.2
Case Brief
The facts of the Interfoto case are straight forward. Fourty-seven photographic slides were rented. They were delivered in a bag that contained a contract which was unread by the receiving party. This contract stipulated a fee of £5 per day late per slide. In their judgement, the judges reduced the penalty to £3.50 per week per slide3 – as we shall see, this number was hardly arrived at by fiat. The issue with which the court dealt, as Dillon J. noted, was this: “When for instance, one condition in a set is particularly onerous does something need to be done to draw customers' attention to that particular condition?”4
Increased Transaction Costs
Dillon J. was, in effect, describing an information asymmetry: the seller (or lender) of the slides likely knew that the term was particularly onerous, and the borrower (or buyer) would not have expected such a term. Importantly, N. Mercuro has described information costs as the most expensive of transaction costs.5 In the instant case, the borrower, Stiletto, would not have expected such a condition. Reading the contract to acquire such information would have taken time, increasing the cost of the transaction. In this way, the issue of asymmetric transaction costs6 arises; specifically, is it cheaper, at an aggregate, for the for all borrowers to acquire information through reading the contract, or, opposingly, should Interfoto have brought the condition to all borrowers' attention? In the opinion of Dillon J., the onerous term “never... became part of the contract.”7
This judgement reflects the expectations of the borrower. Dillon J. notes that in surveying similar photo libraries, the average penalty for the late return of slides was £3.50 per week per slide, with the highest being £4 per week.8 Notably, the penalty that both judges arrived at for the late return was £3.50 per week per slide[?] – exactly the same as the normal contractual rate for slides of that kind.9 Bingham's judgement is instructive: he suggests not that the penalty was not lowered tenfold10 because the borrower failed to read the term; rather, it was lowered because the defendant failed to draw attention to the unusual clause.11 In one sense, not drawing attention to the onerous term is analogous to the term being non-consensual. R. Posner has said of crime that there ought to be unconditional deterrence of non-consensual transactions12; perhaps, by extension, this applies equally to contract.
If the common law were not corrected – from an efficiency standpoint – by the ruling in Interfoto, than incentives for lenders in such transactions would be distorted. Essentially, strategic behaviour would be incentivized. Furthermore, as N. Mercuro asserts, information asymmetries give rise to strategic behaviour.13 Given that strategic behaviour is unavoidably present in situations of bilateral dependancy14, it makes sense for the court in Interfoto to specifically forbid the concealment of onerous or unusual clauses in the minutiae of the contract. After all, from an ex ante perspective, future borrowers (or, more broadly, buyers) would be disinclined to transact if they were forced to read every contract, or worse, higher a lawyer to sort through the legalese of every contract. As C. Veljanovski notes:
“[T]he law must focus on the way information is disclosed and on the incentive effects that disclosure rules and laws have on the willingness to produce information.”15
In the absence of such a corrective action by the courts, exchange of goods would impose costs on buyers, decreasing the demand for goods at a given price and ultimately decreasing the the number of otherwise mutually-beneficial transactions that would take place. Would, for instance, a “a free lance trumpeter of the highest quality” ever again park in a garage if reading the all the terms and conditions of parking caused him to miss “the train or the boat” to a gig?16
Included in transaction costs are the costs of negotiating and acquiring information17; had the court gone the other way in Interfoto, transaction costs would necessarily rise. To maximize the gains from trade, as Harrison asserts, it makes sense to keep “formation” costs low.18
Logical development of Common Law
This judgement is important from a law and economics perspective. If, indeed, as R. Posner has asserted, the common law is a set of rules that are designed to maximize efficiency19, then this judgement increases the efficacy of the common law in its role. Moreover, the Coase Theorem buttresses the philosophical argument for legal rules being made in accordance with efficiency.20 As C. Veljanovski asserts, the economic approach focuses on the presumption that real-world contracts are generally efficient adaptations to the costs and uncertainties of transacting.21 Without saying explicitly whether he was guided by economic principles, Dillon J. in Interfoto advanced the common law in accordance with economic principles:
“It is in my judgment a logical development of the common law into modern conditions that it should be held, as it was in Thornton v. Shoe Lane Parking Ltd, that, if one condition in a set of printed condition is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.22 [Emphasis added]
Conclusion
Property law, tort law, and contract law are inextricably linked in the common law23: property law assigns a bundle of rights, contract law facilitates the transfer of that bundle of rights, and tort law stands as a corrective measure when someone tries to eschew the system. As described above, there can be significant transaction costs associated with contracting. If the lawyer's role is, in part or in whole, to mitigate such costs, then judges Dillon and Bingham succeeded aptly in Interfoto v. Stiletto.
1Velja 123
2Fried 297
3Dillon
4Dillon
5Merc 114
6Merc 117
7Dillon
8Dillon
9Dillon and Bingham
105x7 = £35 or £3.50
11Bingham in Interfoto
12Dillon
13Merc 114
14Williamson 144
15Velja 125
16This is a play on the scenario in Lord Denning's judgement in Thornton v. Shoe Lane Parking Ltd
17Merc 113-114
18Harrison 165
19Fried 297
20Merc 113
21Velja 112
22Dillon
23Velja 58
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