March 2006 Vol. 104 No. 5 THE REVIEW

The Hidden Roles of Boilerplate and Standard-Form Contracts: Strategic Imposition of Transaction Costs, Segmentation of Consumers, and Anticompetitive Effects

David Gilo & Ariel Porat

Standard-form contracts offered to consumers contain numerous terms and clauses, most of which are ancillary to the main terms of the transaction. We call these ancillary terms “boilerplate provisions.” Since most consumers do not read boilerplate provisions or, if they do, find them hard to understand, courts are suspicious of boilerplate provisions and sometimes find them unenforceable under the doctrine of unconscionability. At times, courts conclude that harsh terms have not been accepted by consumers in the first place and therefore are not included in the contract, and on other occasions courts interpret boilerplate provisions in favor of consumers, applying the rule of interpretation against the draftsman.

There is ample legal writing discussing the justification for legislatures’ and courts’ intervention in consumer standard-form contracts. Most law and economics scholars agree that striking down harsh clauses included in boilerplate language could be justified when there is asymmetry of information—either factual or legal—between the supplier and consumers with respect to the harsh clause, which precludes consumers from fully understanding the effects of the clause on their legal rights. In such cases, there is a risk that the supplier will extract payment from the consumer without the latter being aware of the fact that the payment does not reflect the reduction of value due to the harsh clause. Thus, if an exclusionary boilerplate clause phrased in a sophisticated legal manner releases the supplier from liability for late delivery of goods, the consumer might not realize the full effects of such a clause or understand the very high price she might pay for it in the future. If this risk is a substantial one, a court could be justified in striking down the clause. If, however, most consumers could reasonably understand the exclusionary clause and estimate its costs for them, a court’s intervention would not be justified, since absent asymmetry of information there is no reason to suspect that incorporating the clause into the contract would be inefficient. On the contrary, when information is symmetric, both parties strive to incorporate efficient terms into their contract, terms that increase the surplus of the contract to the benefit of both parties.

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