"Boilerplate":
Foundations of Market Contracts Symposium

It is tempting to open this symposium with yet another “boilerplate” salute to the challenge that standard-form contracts pose for contract law doctrine. You may have seen many tributes to this fundamental problem. If I were to offer my own variation on this familiar introduction, I would have perhaps tried to come up with an original spin to induce you to read forward another paragraph or two. I would probably have talked about a major divide within contract law between the “law of negotiations” and “product regulation.” The former is the body of doctrines that determine the legal consequences of bargaining behavior; the latter is the assortment of substantive limitations on terms of bargains, some general to all contracts, others industry-or area-specific. I would then have argued that the study of standard form belongs to the latter, not the former, and that this distinction can help overcome many difficulties in contract law doctrine.

The usual assumption in economic analysis of law is that in a competitive market without informational asymmetries, the terms of contracts between sellers and buyers will be optimal—that is, that any deviation from these terms would impose expected costs on one party that exceed benefits to the other. But could there be cases in which “one-sided” contracts—contracts containing terms that impose a greater expected cost on one side than benefit on the other—would be found in competitive markets even in the absence of fraud, prohibitive information costs, or other market imperfections? That is the possibility we explore in this Article.

A law backfires when it produces results opposite from those its drafters intended. Lots of laws may have backfired. For example, people opposed to hate crimes legislation think that the laws “inflame prejudice rather than eradicate it.” The Endangered Species Act, according to some analysts, has helped destroy rather than preserve the creatures listed by the Act. Even consumer protection laws, some believe, increase prices and confuse consumers instead of protecting them.

Among attorneys, judges, and legal academics, there is virtual consensus that the widespread use by business firms of standard-form contracts in their dealings with consumers has completely eliminated bargaining in consumer contracts. I believe that this perception is false, that rather than precluding bargaining and negotiation, standard-form contracts in fact facilitate bargaining and are a crucial instrument in the establishment and maintenance of cooperative relationships between firms and their customers. On this view, which I elaborate below, firms use clear and unconditional standard-form contract terms not because they will insist upon those terms, but because they have given their managerial employees the discretion to grant exceptions from the standard-form terms on a case-by-case basis.

On a recent day, I used my credit cards in connection with a number of minor transactions. I made eight purchases, and I paid two credit card bills. I also discarded (without opening) three solicitations for new cards, balance transfer programs, or other similar offers to extend credit via a credit card. Statistics suggest that I am not atypical. U.S. consumers last year used credit cards in about 100 purchasing transactions per capita, with an average value of about $70. At the end of the year, Americans owed nearly $500 billion dollars, in the range of $1,800 for every man, woman, and child in the population. Although the individual credit card transaction is small and routine, the transactions collectively have a significant effect on the overall stability of many American families, leading to a rise in consumer borrowing and an increase in bankruptcy filing rates. increase in bankruptcy filing rates. The crux of the borrowing problem is the relationship between the cardholder and the issuer, which the law relegates almost entirely to the private contractual relationships between those groups. Yet the existing literature has done little to assess the unique contracting problems that those transactions present.

The warranty that comes with your laptop computer is one of its many product attributes. The laptop has a screen of a particular size. Its microprocessors work at a particular speed, and the battery lasts a given amount of time between recharging. The hard drive has a certain capacity and mean time to failure. There is an instruction manual, online technical support (or lack thereof), and software. Then there are the warranties that the seller makes (or does not make) that are also part of the bundle. Just as I know the size of the screen, but nothing about the speed of the microprocessor, I know about some of the warranty terms that come with the computer and remain wholly ignorant of others.

Manufacturing contracts in the automotive industry have served a canonical role in the economic theory of contract and bargaining. The famous story of General Motors’ relationship with its supplier Fisher Body in the 1920s is a landmark illustration of the problem of contractual hold up, underlying a prominent theory of vertical integration and the nature of the firm. The theoretical fascination with automotive procurement contracts is well deserved. There may be no other merchant-to-merchant contractual template that governs such fantastic economic stakes—hundreds of billions of dollars per year—and implemented through a process that involves almost no negotiation of the legal terms. Boilerplate rules these transactions.

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.

That boilerplate is pervasive is hardly surprising. In a variety of ways, standardized terms in day-to-day contracts serve an essential cost-saving function. By this measure, one might expect less frequent reliance on boilerplate in high-value contracts among sophisticated parties. Yet standard terms would appear to be no less widespread in contracts among the sophisticated. Notwithstanding their representation by able counsel, charged to craft comprehensive and detailed, but also particularized, contracts, such parties will commonly conclude agreements comprised heavily of traditional terms—contracting norms of a sort—rather than terms tailored to the distinct features of their particular bargain.

Drafting contracts—by which I really mean the documents that embody contracts—requires investments of time, experience, and ingenuity. Those investments may yield significant returns because the quality of contractual terms can be an important determinant of the gains that parties realize from trade. This in turn suggests that, from an economic perspective, it is important to understand how contracts are produced. It seems particularly important to examine the production of contracts or individual contractual terms that are widely used—that is to say, “boilerplate.” In a market-oriented society, boilerplate is the predominant feature of the network of legal obligations that provides the formal structure of economic activity.

Bad boilerplate can shake one’s faith in evolution; not only does it not die away, it multiplies. The puzzle is why. Much of boilerplate is ambiguous or incomprehensible. This alienates consumers and is increasingly punished by courts construing the language against the drafter. There must, therefore, be some hidden allure to ambiguous boilerplate. The popular theory is trickery: drafters lure consumers in with promising language that comes to nothing in court. But this trick would require consumers to do three things they do not do—read the language, understand it, and take comfort in it.

The traditional model of contract interpretation focuses on the “meeting of the minds.” Parties agree on how to structure their respective obligations and rights and then specify their agreement in a written document. Gaps and ambiguities are inevitable. But where contract language exists for the point in contention and a dispute arises as to the meaning of this language, courts attempt to divine what the parties intended. Among the justifications for deferring to the intent of the parties is the assumption that parties know what is best for themselves. Deference also arguably furthers autonomy values.

Contractual boilerplate is a little like property. Such a statement might seem like a category mistake. After all, contractual boilerplate language is part of contracts, which, unlike property, are freely customizable by the parties. Contracts create rights between those parties, not against the world at large. Nor do people who devise new boilerplate terms usually have intellectual property in the provisions themselves.

Thanks to the vision of Omri Ben-Shahar and the excellence of the scholars contributing to this symposium, students of the law of commercial exchange transactions will now understand how important and interesting, and indeed exciting, boilerplate really is. The various presentations are so rich that my assigned task of commentary cannot approach an adequate summation. Instead of attempting such a task, therefore, I will take up a slightly different one. My commentary will relate some of the ideas presented in the symposium to two themes that I think are significant for the groundwork of contract today: the growing modularity of contracts and the waning of consent as the normative basis of legal enforcement. (The latter is also a major theme of my fellow commentator, Todd Rakoff, whose contributions in this field have been preeminent.)

In my view, the scholarship presented at this symposium demonstrates that, in order to analyze form contracts and boilerplate successfully, one must carry out a set of operations that embodies an approach I will call law and sociology. But I presume I was invited to be a commentator at this conference on boilerplate not because the article I wrote on one branch of the subject awhile back exemplified this methodological approach, but because it took a rather strong substantive position. And so I think I ought first to say a brief word about that.