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Do Standard Agreements Lead to Exploitation? Advantages of Standard Agreements

Do mass contracts lead to exploitation? A landmark article by Friedrich Kessler, "The Contracts of Adhesion--Some Thoughts about Freedom of Contract Role of Compulsion in Economic Transactions" (Columbia Law Review in 1943), argues that they do, and many contracts professors today agree with him. https://youtube.com/watch?v=zrSzznd1KmM


Many people say, “Aha! the moment you have a standardized transaction between a large company on the one hand and small diverse consumers on another hand, there is a risk of exploitation and advantage-taking.” The most famous article in support of this position was written on contracts of adhesion by Friedrich Kessler in the Columbia Law Review in 1943. And he said that these adhesive contracts are such that you have to look with great suspicion on standardized terms. I think that this position is a mistake. First, everybody has to understand that standardized contracts are extremely efficient to negotiate because what happens is you could use one form for thousands upon thousands of people. The people who in fact draft these forms are aware of that and one of the things that you know as a draftsman if you make a mistake in the standard form contract, it can influence for the worst thousands upon thousands of transactions. Second point to note is that these things turn out to be efficient because, unlike military conscription, if somebody offers you a deal which is highly unattractive because of its contract terms, you just turn the thing down and what you do is you then go to a competitor who may offer you a standardized contract with better terms in it. So it’s not the fact that the terms are standardized, it’s that the firms in many cases turn out to be onerous and generally speaking, if people know what the terms are and have the options to walk away, that will not happen. The third point to understand about these kinds of arrangements is that people are often insecure in their own knowledge as to whether or not these agreements do or do not make sense. And what standardized contracts do is give them a bit of assurance. So many forms of mass contracts essentially rely upon the fact that the uninformed can rely upon the actions of the informed to protect themselves. The fourth point to note about these standardized contracts is they almost always provide some forms of remedy. They will often give you repairing services of some sort or another. If information is really very valuable, you don’t want to bring a suit for consequential damages; you want to back up your hard drive from an independent source so if it crashes you can recover the data from somewhere else. And so this leads to the last explanation for why there are limits on consequential damages in standard form contracts. It encourages responsible behavior by consumers which, when done, will minimize the total loss to the two parties. People understand that, and so the system, although it’s been widely attacked remains completely entrenched today.

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