Comparative Law and
Economics of Contracts
Cases slides Topic 3: Offer and
Acceptance and Standard Terms
Fernando Gomez Pomar
Universitat Pompeu Fabra, Barcelona
NYU School of Law
NYU School of Law, Fall term
Byrne v. Leon van Tienhoven
•
Facts:
– Defendant, operating a business in Cardiff, sends a letter
to plaintiff in NYC, on 1 October 1879
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Offers 1,000 boxes of tinplates Hensol at a given price plus
commission
Bank acceptance on London or Liverpool
Subject to acceptance by plaintiff through telegram by 15
October
– Plaintiff receives letter on 11 October 1879
– Plaintiff sends telegram on 11 October: “Accept thousand
Hensols”, and confirms by letter on 15 October
– The letter contains reference to payment: letter of credit of
Canadian Bank of Commerce on a London bank
Byrne v. Leon van Tienhoven
•
Facts:
– Defendant sends letter 8 October revoking the offer
alleging turbulences and price increases in the tinplate
market
– Plaintiff receives revocation letter on 20 October and
rejects the revocation claiming contract has been agreed
and is binding.
– Plaintiff requests delivery and informs defendant that
goods have been resold at a net profit of $ 1,850
– Defendant replies on 25 October refusing to ship goods
and returning letter of credit
– Plaintiff sues for damages
Byrne v. Leon van Tienhoven
•
Issues:
– Timing of contract when offer and acceptance are not
simultaneous
– Timing of contract in the presence of a revocation of the
offer
– Whether the fact that the behavior of the offeree is not
fully compliant with the offer prevents the contract from
being considered binding
•
Outcome:
– Court finds for plaintiff
Byrne v. Leon van Tienhoven
•
Grounds:
– Offeror may revoke offer, but revocation is considered
made upon receipt by offeree
– Offerees when they sent acceptance were unaware of
revocation
– A different rule would force offerees to wait to be certain of
contract existence until a reasonable time for arrival of
revocation had passed
– Defendant could have refused delivery based on the terms
of the banker’s credit documents, but this is not what
defendant argued to refuse delivery
Byrne v. Leon van Tienhoven
•
Analysis:
– Different possible rules to determine the timing of contract
when consent is sequential:
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Time
Time
Time
Time
of
of
of
of
acceptance of offer
releasing acceptance from offeree
acceptance reaching offeror
offeror knowing of acceptance
– Role of reliance by offeree? Should it affect the selection of
the rule or the application, once a rule is selected?
– Role of offeror’s steps to control timing of agreement
– Are means of communication relevant? Should there be
especial rules for e-contracts?
– Application of mailbox rule when there are differences
between terms in the offer and those accepted
Gibson v. Manchester City Council
•
Facts:
– Manchester City Council had at the time a policy of selling
council homes to their tenants, and provided information
forms
– Plaintiff sent a form and received a letter stating:
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City prepared to sell for a specified price
Maximum mortgage the City could offer
Clarifies it is not a firm offer of mortgage
Encloses an application form to formally apply to buy
– Plaintiff completed application form requesting a lower
price
– City answered that no reduction was possible
– Plaintiff sent a letter requesting the purchase to be
completed
– A new council was elected, with the policy of not selling
houses, unless a binding contract was already in existence
Gibson v. Manchester City Council
•
•
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Issues:
– When a firm offer or a proposal subject to contract exist
– What is dominant in determining the above, language used
or behavior undertaken
– Scope of agreement: does it need to cover all relevant
elements or only the core dimensions of contract
Outcome
– Court of Appeal found for the plaintiff
– House of Lords reversed
Grounds:
– Traditional offer and acceptance view of consent should
apply in the case
– Wording of Manchester Council document made clear that
it was a mere proposal, not a firm offer
– Important elements of what was the standard sale contract
of the Council (use as a private dwelling, no sale or lease
for 5 years) had not been discussed
Gibson v. Manchester City Council
•
Analysis:
– Role of reliance by offeree
– May the offeree waive knowledge or the need to agree on
other elements of the transaction in exchange for the
contract being binding with the terms supplied by the
other party or terms favorable to the other party?

Think of situations in which parties have a yet incomplete or
non binding agreement

One possible solution is the pro-defendant gap-filler (Omri
Ben-Shahar, 2005) under which each party is granted an
option to enforce the transaction supplemented with terms
supplied by the other party or most favorable (within reason)
to the other party
Gibson v. Manchester City Council
•
Analysis:
– Is language drafted by offeror to govern nature of
communication of offer and acceptance, and when the
contract becomes binding?
– Should there be exceptions to this offeror-controlled
regime?
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When rules of the game are set in standard terms?
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Are clauses “subject to contract” always enforceable vis-à-vis
consumers?
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Are clauses depriving agents of authority to bind unless
approval from superiors enforceable against consumers? (e.g.
art. 84 (c) CESL)

Should the reasonable expectations of the party who is not
setting the “rules of the game” be considered?
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Should the purpose of the provision leading to the contract
being non-binding be reasonable?
Morrison v. Thoelke
•
Facts:
– Plaintiffs own a house in Florida and have negotiated the
sale with defendants
– Defendants execute the contract for purchase and mail it
to plaintiffs, who are in Texas
– Plaintiffs sign and execute the contract and mail it to
defendants’ lawyer in Florida
– Before mail arrives plaintiffs telephone defendants’ lawyer
to cancel the agreement
– Defendants
plaintiffs sue
register
the
contract
nonetheless,
and
Morrison v. Thoelke
•
Issues:
– Timing of contract in the presence of revocation
•
Outcome
– Trial court finds for plaintiff and orders summary
judgement
– Appeals Court reverses and finds for defendants: the
contract had been concluded
•
Grounds
– Trial court considers that consent had been repudiated
prior to receipt of acceptance and thus there is no contract
– Appeals Court holds to the traditional mailbox rule and
considers there is a binding contract, after careful and
detailed review of all precedents on the matter
– The possibility of withdrawing a letter according to postal
regulations is irrelevant for the rule in Contract Law
Morrison v. Thoelke
•
Analysis:
– Is there a risk and cost free solution to the problem of the
timing of the contract becoming binding and final?
– Should the rule benefit the party who starts the
communication process and thus may set rules on timing
and conditions for the contract becoming binding?

In this case, actually the mailbox rule does not favor offeree,
but actually the offeror
– Is loss of control of the acceptance a good rationale for
mailbox rule?
Morrison v. Thoelke
•
Analysis:
– Is it having a default more important than what the default
is?
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Other examples of certainty being more important than
content: “conventional rules”
Unlikely that the balance of costs and benefits is exactly the
same for two alternative solutions, however “conventional”
they may seem
Changing a “convention” entails costs (learning, adaptation),
but also benefits (change of circumstances, technological
evolution)
– Is anticipating the time of the contract being perfected a
generally desirable effect?
CESL on timing of contract formation
•
Article 35 CESL: Time of conclusion of the contract
– 1. Where an acceptance is sent by the offeree the contract
is concluded when the acceptance reaches the offeror.
– 2. Where an offer is accepted by conduct, the contract is
concluded when notice of the conduct reaches the offeror.
– 3. Notwithstanding paragraph 2, where by virtue of the
offer, of practices which the parties have established
between themselves, or of a usage, the offeree may accept
the offer by conduct without notice to the offeror, the
contract is concluded when the offeree begins to act.
CESL on timing of contract formation
•
Article 32 CESL: Revocation of offer
– 1. An offer may be revoked if the revocation reaches the
offeree before the offeree has sent an acceptance or, in
cases of acceptance by conduct, before the contract has
been concluded
CESL on timing of contract formation
•
§ 63 Restatement (Second) of Contracts: Time When
Acceptance Takes Effect
– Unless the offer provides otherwise,
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•
(a) an acceptance made in a manner and by a medium invited
by an offer is operative and completes the manifestation of
mutual assent as soon as put out of the offeree's possession,
without regard to whether it ever reaches the offeror; but
(b) an acceptance under an option contract is not operative
until received by the offeror.
§ 66. Acceptance Must be Properly Dispatched
– An acceptance sent by mail or otherwise from a distance is
not operative when dispatched, unless it is properly
addressed and such other precautions taken as are
ordinarily observed to insure safe transmission of similar
messages
BGH oven clocks and battle of the forms
•
Facts:
– Defendant orders time-switch clocks to install in electric
ovens, referring the order to its own standard contract
terms of purchase
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Standard terms contains a clause stipulating that if supplier
accepts the order, consents to the standard terms, and that if
supplier consents but based on divergent terms, those of
defendant shall apply anyway, unless defendant agrees
explicitly in writing
If supplier does not accept this result, must say so explicitly
in writing
Standard terms will govern future transactions with supplier
Standard terms do not contain a reservation of title on
purchased but yet unpaid products
– Plaintiff confirms
– Defendant places additional order
– Plaintiff confirms order referring to its terms and
conditions, which include a reservation of title clause
– Defendant files for bankruptcy
– Plaintiff sues to recover unpaid clocks
BGH oven clocks and battle of the forms
•
Issues:
– Rules to solve battle of the forms
– The value of preventive clauses in standard terms on how
to solve battle of the forms
– The role of tacit consent in battle of the form cases
– The scope of application of default rules when there is a
battle of forms
•
Outcome:
– Appeals Court and BGH find for defendant
•
Grounds:
– There is no tacit consent on the part of defendant, as the
strong preventive language of the standard terms is not
contradicted by later behavior
– The point in which standard terms and conditions of both
sides diverge will be resolved by the default rules, and they
do not provide for a reservation of title
BGH oven clocks and battle of the forms
•
Analysis:
– Possible solutions to battle of forms:
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Mirror image rule: no contract exists as there is dissent over
non obviously immaterial terms (art 19 CISG; traditional rule
in Common Law: Ardente v. Horan)
Last shot rule: the last set of terms sent without being
objected by the other party prevails
First shot rule: the first set of terms prevails if the second
does not explicitly reject the first (Dutch Civil Code, art.
6:225.-3)
Knock-out rule: Mutual destruction of conflicting terms and
entry of default rules to fill the gap in need of a solution (§
2207 UCC; Art. 2.122 Unidroit Principles; Art. 2:209 PECL;
art. 39 CESL)
The unilateral prevalence rule: Court makes overall
assessment of standard term, and the set that is more
favorable to the other side prevails
– Is there a risk and cost free solution?
BGH oven clocks and battle of the forms
•
Analysis:
– Should one defer to meta terms on the value of terms and
absolute rejection of terms of the other side (as in the
German case, or PECL or CESL, or Unidroit principles?
– Risk of arms’ race, as shown by the following:
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Upon learning that a prospective buyer wants to purchase, seller sends
quotation inviting an order but specifically states that no agreement
can be made until the parties sign a sales confirmation to be provided
by the seller after the order details are specified
The buyer specifies the details of its order
If it does so by submitting a form purchase order with its own
boilerplate terms, this will not be considered an acceptance and thus
does not create an enforceable contract with conflicting terms→
whatever terms contained in the purchase order are inconsequential
BGH oven clocks and battle of the forms
•
Analysis:
– Risk of arms’ race
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Seller sends a sales confirmation to the buyer, detailing the order
placed by the buyer and stating the seller's terms
Confirmation contains an integration or merger clause stating that
those terms govern the sale and supersede all prior terms that may
have been discussed by the parties
Buyer may counter-attack by using same strategy
– Is conflict between terms the same as non-conformity of
terms?
– Should we try to harmonize the terms from both sides?
CESL rules on battle of the forms
•
Article 39: Conflicting standard contract terms
– 1. Where the parties have reached agreement except that
the offer and acceptance refer to conflicting standard
contract terms, a contract is nonetheless concluded. The
standard contract terms are part of the contract to the
extent that they are common in substance.
– 2. Notwithstanding paragraph 1, no contract is concluded
if one party:
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(a) has indicated in advance, explicitly, and not by way of
standard contract terms, an intention not to be bound by a
contract on the basis of paragraph 1; or
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(b) without undue delay, informs the other party of such an
intention.
Hill v. Gateway
•
Facts:
– Plaintiffs make a phone order for a computer
– Computer arrives in box containing also standard contract
terms and conditions, including an arbitration clause

Terms indicate that if buyers keep the product for 30 days,
the standard terms will govern the contract
– Plaintiffs use the computer for more than 30 days, and
then sue for malfunctioning of components and other legal
grounds
– Defendant opposes suit asking enforcement of arbitration
provision
Hill v. Gateway
•
Issues:
– Validity of “pay now, terms later”
– Disclosure of standard terms, notice of their existence, and
opportunity to read
– Relevance of the content of the disputed clause?
•
Outcome:
– District Court finds for plaintiffs, as contract is concluded
when consumer pays, and terms not communicated at
that time are unenforceable
– Court of Appeals reverses
Hill v. Gateway
•
Grounds:
– Pro CD v. Zeidenberg applies even if in the former case
buyer was not a consumer
– Contract was in fact concluded when the Hills did not
return computer within 30 days of delivery, and then they
had had opportunity to read the terms
– Standard terms not communicated in advance to buyers
save significant transaction costs, and these savings
benefit consumers as a group
– Contract and payment preceding terms is common in
many industries, like transportation
– The arbitration clause is per se enforceable until Congress
says otherwise
Hill v. Gateway
•
Analysis:
– Should the Law require sellers to have their standard
terms easily available
contracting?
for prospective
buyers before
– Are transaction cost savings of not forcing “opportunity to
read” on firms significant? If they are, what are the
conditions for these cost reductions to benefit consumers?
– Are all systems to agree to the standard terms comparable
in terms of how buyers are likely to react?
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Prior availability
Simultaneous availability
Posterior availability coupled with time to return if buyer
disagrees with terms
Hill v. Gateway
•
Analysis:
– Some reasons point towards the negative:
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Sequential specific investments in contracting→ further down
the road in the contracting processes buyers have made more
irrecoverable investments in contracting with a given seller
Biases towards the existing alternative may be stronger at
later times and when payment has been made:
– Statu quo
– Availability heuristic and real or imaginary lack of alternative
suppliers
– Sunk investments, return costs and loss-avoidance
– Endowment effects
– Framing
– Learning may help buyers make the right choices, at any
time in the contracting sequence, when transactions are
repeated

However, there are ways in which firms can interfere with
buyer’s ability and incentives to obtain information, or learn
from previous interactions
Hill v. Gateway
•
Analysis:
– Should the rules be the same in this regard for consumers
and businesses?
– If legal constraints are considered necessary, should they
focus on contracting process or on content?
– Are rules concerning how consent is expressed effective in
improving overall welfare from transaction?
– Are there ways in which firms may use
Modes of agreeing to terms
 Substantive terms
to distinguish between buyers of different types and screen
them?

– Are there advantages of using arbitration in consumer
contracts? Any type of arbitration?
CESL and Hill v. Gateway
•
Article 70: Duty to raise awareness of not
individually negotiated contract terms
– 1. Contract terms supplied by one party and not
individually negotiated within the meaning of Article 7 may
be invoked against the other party only if the other party
was aware of them, or if the party supplying them took
reasonable steps to draw the other party's attention to
them, before or when the contract was concluded.
– 2. For the purposes of this Article, in relations between a
trader and a consumer contract terms are not sufficiently
brought to the consumer's attention by a mere reference to
them in a contract document, even if the consumer signs
the document.
– 3. The parties may not exclude the application of this
Article or derogate from or vary its effects.
CESL and Hill v. Gateway
•
Article 71 CESL: Additional payments in contracts
between a trader and a consumer
– 1. In a contract between a trader and a consumer, a contract term
which obliges the consumer to make any payment in addition to
the remuneration stated for the trader’s main contractual
obligation, in particular where it has been incorporated by the use
of default options which the consumer is required to reject in
order to avoid the additional payment, is not binding on the
consumer unless, before the consumer is bound by the contract,
the consumer has expressly consented to the additional payment.
If the consumer has made the additional payment, the consumer
may recover it
– 2. The parties may not, to the detriment of the consumer, exclude
the application of this Article or derogate from or vary its effects
CESL and Hill v. Gateway
•
Article 84 CESL :Contract terms which are always
unfair
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(d) exclude or hinder the consumer's right to take legal action
or exercise any other legal remedy, particularly by requiring
the consumer to take disputes exclusively to an arbitration
system not foreseen generally in legal provisions that apply to
contracts between a trader and a consumer;
ECJ- Caja de Ahorros v. Ausbanc
•
Facts:
– Defendant savings bank includes in its standard terms for
mortgage loans with variable interest rate (typically, a
baseline rate + an additional rate, 1%, 1.5%, 2%) a clause
“rounding up” the rate to the next (higher) quarter of
percentage point: e.g. if the resulting rate, given the
baseline rate (EURIBOR, as the most common) for the next
period is 3,66, the interest rate would be rounded up to 3,
75
– A Consumer Organization sued to declare the term unfair,
under national legislation implementing Directive 93/13
– After winning on first instance and appeal, the Spanish
Supreme Court refers questions to the ECJ for preliminary
ruling
ECJ- Caja de Ahorros v. Ausbanc
•
Issues:
– Terms affecting the main subject matter of the transaction
(price, quality of goods, and the price/quality trade-off)
may be considered unfair under EU Law even if clauses
are clear and intelligible to consumers?
– What terms should be considered as affecting the main
subject matter or the basic contractual trade-off?
•
Outcome:
– The ECJ answers that EU Law does not preclude national
Law of MS to subject terms affecting main elements to
unfairness test, even if they are drafted intelligibly
•
Grounds
– Directive is minimum harmonization, and the exclusion of
main subject matter from Directive’s scope is not binding
upon MS, who may protect consumers to a larger degree
ECJ- Caja de Ahorros v. Ausbanc
•
Analysis:
– Are the main elements of the transaction typically salient
to consumers? Is adverse selection likely to be an acute
problem with respect to them?
– If main elements subject to fairness controls, do we replace
market by courts in defining terms of trade?
– Can there be non-salient terms affecting price or quality?
– What is considered the main subject matter uniform
across contract types and other circumstances?
– Are all terms equal and should they be treated equally in
terms of fairness or unfairness? Are they not all part of the
“product package”?
ProCD v. Zeidenberg
•
Facts:
– Pro CD sells a database containing many telephone
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–
–
–
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directories in CD-ROM format
The product comes in two versions, one for commercial
users at a high price, other for personal use at a low price
The license for personal use version forbids commercial
use of database
License is not communicated beforehand to prospective
buyers, it is enclosed in the box with the discs. The box
shows language indicating that the product comes with
restrictions formulated in the enclosed license
Defendant buys the consumer package but resells the
information on database on a commercial basis
Pro CD seeks an injunction against defendant
ProCD v. Zeidenberg
•
Issues:
– Enforceability of shrinkwrap licenses
– Which standard terms drafted by seller will be binding on
buyers
– Extent of proper Government’s and Law’s interference with
the terms through which firms do business, and the form
in which those terms are communicated to buyers
•
Outcome:
– District Court considers the restrictive license ineffectual
and finds for defendant
– Court of Appeals reverses
ProCD v. Zeidenberg
•
Grounds:
– The intention of Pro CD was to price discriminate between
–
–
–
–
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business and consumer segment
Price discrimination is desirable for both segments in these
circumstances
The separate license is important (though not crucial, for
instance delaying the product for consumers was also
possible) for such purposes
The contract is not necessarily formed at time of payment,
but at the time of using product without objecting to the
terms enclosed in the box
Informing beforehand of content of terms is not necessary
for many contracts to be properly agreed, and to require it
would be counterproductive
UCC and Copyright Act do not affect the outcome
ProCD v. Zeidenberg
•
Analysis:
– Empirical evidence about “Pay now, terms later” contracts
– Is the opportunity to read valuable for consumers?
– Does it make sense to draw attention of consumers by
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Requirements of conspicuousness
Requirements of separate signature of standard terms or
some of them
– Are terms inseparable from the good or service itself? Are
contract terms part of the product?
– Are reputational controls and market forces going to solve
all problems in this setting?
ECJ- Freiburger Kommunalbauten
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Facts:
– Plaintiff, a local council firm, sells to defendants a parking
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space in a new multi-storey car park to be built by plaintiff
A standard term in the contract determined that full price
was payable upon receipt of a bank guarantee issued to
the plaintiff in order to secure return of money or other
claims by defendants against plaintiff
Defendants refused to pay until the parking space was
delivered and they took possession of it
Plaintiff sued claiming interest on the price for the period
between the time price was due according to standard
terms and the time at which payment was actually made
LG upholds plaintiff’s claim
BGH refers the question to ECJ for a preliminary ruling
ECJ- Freiburger Kommunalbauten
•
Issues:
– The substantive unfairness test for standard contract
terms and conditions: what is unjustified imbalance
between rights and obligations, and the factors bearing
upon it
– How local or national the meaning of unfairness is
•
Outcome:
– ECJ fails to respond
•
Grounds:
– The particular circumstances of the contract and the case
are decisive for an answer, and thus ECJ cannot answer in
abstract terms
– Distinguish form Oceano and Salvat Cases (C-240/98 and
C-244/98) where the clause was unfair regardless of the
type of contract and the circumstances
CESL on general unfairness test
•
Article 83: Meaning of "unfair" in contracts between
a trader and a consumer
– 1. In a contract between a trader and a consumer, a
contract term supplied by the trader which has not been
individually negotiated within the meaning of Article 7 is
unfair for the purposes of this Section if it causes a
significant imbalance in the parties‘ rights and obligations
arising under the contract, to the detriment of the
consumer, contrary to good faith and fair dealing.
– 2. When assessing the unfairness of a contract term for
the purposes of this Section, regard is to be had to:
CESL on general unfairness test
– (a) whether the trader complied with the duty of
transparency set out in Article 82;
– (b) the nature of what is to be provided under the contract;
– (c) the circumstances prevailing during the conclusion of
the contract;
– (d) to the other contract terms; and
– (e) to the terms of any other contract on which the contract
depends.
ECJ- Freiburger Kommunalbauten
•
Analysis:
– What is an imbalance between rights and obligations?
What is the measure of balance?
– How relevant default rules are for determining whether a
standard term that departs from them may be unfair?
– What factors to use to consider an imbalance justified?
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Only internal to the contract?
Market practice?
Terms that are to be expected (consumers’ expectation test)?
A weaker form of consumer expectation test, the “surprise”
term?
Relative knowledge of the parties?
– Is it desirable to have common unfairness standards
across legal systems? How is it going to affect B2C crossborder trade?
– Are black and grey lists helpful? Do they increase legal
certainty?
Williams v. Walker-Thomas Furniture
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Facts:
– Plaintiff operates a furniture store in DC
– Plaintiff sells furniture and home appliances on credit to
low-income families
– Each purchase contract on credit is accompanied by a
printed form, containing provisions to the effect:
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Title will remain with plaintiff until all monthly payments
adding to the total stated value set in the form have been
made to seller
In case of default of any monthly payment, plaintiff could
repossess the good
Monthly payments were not credited to individual goods
purchased, but pro-rata to all goods purchased on credit,
implying that until all payments had been made, all goods
remained under the plaintiff’s title
– Defendants bought several items in the spring of 1962 and
shortly thereafter they stopped paying the monthly
installments
– Plaintiff seeks to repossess all items sold on credit to
defendants since December 1957
Williams v. Walker-Thomas Furniture
•
Issues:
– The existence and basis of an unconscionability doctrine
that would strike down unfair contract terms
– The factors to take into account for making the fairness
assessment of terms
– The grounds and effects of such doctrine
•
Outcome:
– The DC Court, though condemning in strong words
plaintiff’s credit-giving behavior, found for the plaintiff
– US Court of Appeals finds that the terms giving support to
claim may be unconscionable
– A vocal and strong dissenting opinion
Williams v. Walker-Thomas Furniture
•
Grounds:
– Unconscionable contract terms are not enforceable
– UCC, although not directly applicable to the dispute,
shows that the Law is clear in mandating courts not to
enforce unconscionable terms
– Circumstances of the case show that it is indeed possible
that terms are so unfair as to deserve being non-binding
Williams v. Walker-Thomas Furniture
•
Analysis:
– Unconscionability test
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Lack of choice
Terms unreasonably favorable to drafter
– Court says that the cross-collateralization clause was
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“hidden in a maze of fine print”. Would it have been
different if Plaintiff had explained the clause to
defendants?
Is the US test similar or identical to the EU test, as shown
in Directive 93/13 or in CESL?
Should disclosure be relevant for unfairness test? Should
procedural unconscionability be a self-standing notion?
What are the likely effects of unfairness control in these
cases? Would it make credit more difficult for low-income
families? Is this good or bad?
How would you think a complete contract allocate risks of
events lowering income?
Williams v. Walker-Thomas Furniture
•
Analysis:
– Augmented
reality (our smart phones providing
information at the time we are about to enter into the
contract) should it affect how we apply the test for
unconscionability?
– A consumer who has accessed online consumer reports
and rankings may claim that terms are unconscionable?
– What is the role of behavioral biases? Does it support the
doctrine or show its ineffectiveness since debiasing is very
hard to happen?
Signalling and screening through contract
terms
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•
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If you remember the adverse selection problem
– Individuals have hidden characteristics and a selection
process results in a pool of individuals with characteristics
unwanted by the other party to the interaction
Signaling is an attempt by an informed party to send an
observable indicator of his or her hidden characteristics
to the other party in the transaction who is initially
uninformed party
To produce effect, the signal by one type of party must
not be easily mimicked by the other types –less
desirable in the eyes of the uninformed party
– Example: costly education in employment contract; long
hours in the office in the employment contract; large
liquidated damages; harsh covenant terms in debt
contract; extensive warranties in sales contracts
Signalling and screening through contract
terms
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Screening is the attempt by an uninformed party to sort
individuals according to their characteristics. Screening
occurs when the uniformed party adopts a mechanism
to elicit the information from the informed party
•
Often accomplished through a self-selection device
– A mechanism in which informed parties are
presented with a set of options, and the options they
choose reveals their hidden characteristics to an
uninformed party
– Examples: leg room in plane seats (coach vs.
business class); price discrimination in restaurants
and Cable TV; limited warranties tied to lower prices;
different terms linked to different prices or interest
rates
CESL on prohibited standard terms
•
Article 84:Contract terms which are always unfair
– A contract term is always unfair for the purposes of this
Section if its object or effect is to:

(a) exclude or limit the liability of the trader for death
or personal injury caused to the consumer through an
act or omission of the trader or of someone acting on
behalf of the trader;

(b) exclude or limit the liability of the trader for any
loss or damage to the consumer caused deliberately or
as a result of gross negligence;

(c) limit the trader's obligation to be bound by
commitments undertaken by its authorised agents or
make its commitments subject to compliance with a
particular condition the fulfilment of which depends
exclusively on the trader;
CESL on prohibited standard terms
•
Article 84:Contract terms which are always unfair

(d) exclude or hinder the consumer's right to take legal action
or exercise any other legal remedy, particularly by requiring
the consumer to take disputes exclusively to an arbitration
system not foreseen generally in legal provisions that apply to
contracts between a trader and a consumer;

(e) confer exclusive jurisdiction for all disputes arising under
the contract to a court for the place where the trader is
domiciled unless the chosen court is also the court for the
place where the consumer is domiciled;

(f) give the trader the exclusive right to determine whether the
goods, digital content or related services supplied are in
conformity with the contract or gives the trader the exclusive
right to interpret any contract term;

(g) provide that the consumer is bound by the contract when
the trader is not;
CESL on prohibited standard terms
•
Article 84:Contract terms which are always unfair
•
(h) require the consumer to use a more formal method for terminating
the contract within the meaning of Article 8 than was used for
conclusion of the contract;
•
(i) grant the trader a shorter notice period to terminate the contract
than the one required of the consumer;
•
(j) oblige the consumer to pay for goods, digital content or related
services not actually delivered, supplied or rendered;
•
(k) determine that non-individually negotiated contract terms within
the meaning of Article 7 prevail or have preference over contract terms
which have been individually negotiated.