Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law

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University of Chicago Law School Chicago Unbound Journal Articles Faculty Scholarship 2013 Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law Omri Ben-Shahar Oren
University of Chicago Law School Chicago Unbound Journal Articles Faculty Scholarship 2013 Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law Omri Ben-Shahar Oren Bar-Gill Follow this and additional works at: Part of the Law Commons Recommended Citation Omri Ben-Shahar & Oren Bar-Gill, Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law, 50 Common Market Law Review 109 (2013). This Article is brought to you for free and open access by the Faculty Scholarship at Chicago Unbound. It has been accepted for inclusion in Journal Articles by an authorized administrator of Chicago Unbound. For more information, please contact Common Market Law Review 50: , Kluwer Law International. Printed in the United Kingdom. REGULATORY TECHNIQUES IN CONSUMER PROTECTION: A CRITIQUE OF EUROPEAN CONSUMER CONTRACT LAW OREN BAR-GILL and OMRI BEN-SHAHAR * 1. Introduction The Draft Common European Sales Law (CESL) 1 incorporates four of the most important consumer protection techniques that have been widely used in European Contract Law. Unfortunately, these techniques superficial appeal does not withstand economic logic. This article argues that European Contract Law in general, and the CESL in particular, are far less likely to succeed in protecting consumers than lawmakers and commentators believe, and that the techniques they commonly employ may bring about unintended consequences and hurt consumers. The four consumer protection techniques commonly employed in European contract law are (1) mandatory pro-consumer arrangements, which must be part of every consumer contract; (2) mandated disclosure; (3) regulation of entry to and withdrawal from contracts; and (4) pro-consumer default rules and contract interpretation. Each of these techniques is utilized extensively and repeatedly in the CESL, but all originate from prior enactments. The first technique mandatory pro-consumer arrangements is perhaps the most phenomenal device. This technique has been proliferating over the past decades in European consumer law, but has reached its acme in the CESL. Eighty-one (!) provisions in the CESL are mandatory: sellers cannot write contracts that derogate from these arrangements to the detriment of consumers. The mandatory provisions concern remedies, withdrawal rights, risk of loss, warranties, notices and communications, disclosure rules, and more. Sellers, for example, do not have the right to cure non-conforming * NYU School of Law and The University of Chicago Law School, respectively. We thank Ariel Porat, Gerhard Wagner, and participants at the Chicago Conference on European contract law: A law and economics perspective in 2012 for helpful comments. Joseph Eno provided excellent research assistance. Bar-Gill gratefully acknowledges the financial support of the Filomen D Agostino and Max E. Greenberg Research Fund at NYU School of Law. 1. Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, COM (2011)635 final, Annex I: Common European Sales Law (hereinafter we refer to Annex I as CESL and to the entire proposal for a regulation as Regulation ). 110 Bar-Gill and Ben-Shahar CML Rev SI performance, and buyers have a non-disclaimable right to reject non-conforming goods for two years. We argue that many of these rules are unlikely to help consumers as a group. The ex post pro-consumer arrangements will be priced ex ante. Consumers will thus pay for protections that many of them would rather waive for a discount. This price effect is particularly disturbing when it is regressive namely, when all consumers pay for what only the more sophisticated ones enjoy. Ironically, when the price effect is regressive, a wholesale inclusion of mandatory terms undermines rather than promotes social justice concerns, which intend to protect weaker consumers and secure their access to the markets. 2 More fundamentally, we argue that many of the mandatory arrangements lack an a priori welfare-enhancing justification, because they are not responding to a systematic market failure or to a systematic redistributive problem. The second common technique is, unsurprisingly, mandated disclosure. This is a standard staple of consumer protection: give people information to help them make better autonomous choices. Sunlight is the best of disinfectants, as the truism goes. Unfortunately, the types of disclosures that consumers are accorded, nicely illustrated by the CESL s novel mandates, are likely futile. These disclosures are neither read nor used, and they are beyond most people s interest or understanding. While novel approaches to targeted disclosure are being experimented with elsewhere (including in the U.K., for instance), the conventional European disclosure paradigm reproduces archaic templates that have consistently and irreparably failed. The third technique is the regulation of entry to, and withdrawal from, consumer contracts. Entry regulations help consumers make deliberate, conscious choices, tailored for their needs. Withdrawal regulations help them correct poor choices without bearing any pecuniary fine. Here, too, various European laws take a sensible starting point but leverage it to an extent that is unjustified and is likely to be either ineffective or harmful. The regulation of conscious entry is merely another form of disclosure, and the regulation of withdrawal takes a practice that is already prevailing in markets and imposes it in contexts where it might be too costly to consumers. The fourth and final regulatory technique is the supplementation of incomplete contracts with pro-consumer default arrangements. We find less use of this device in Europe compared to the U.S. for the simple reason that many arrangements that operate as gap-fillers in the U.S. are accorded mandatory status in Europe. But, interestingly, in the CESL for example, the few pro-consumer default rules are bolstered by stickiness. Parties can opt 2. Micklitz (Ed.), The Many Concepts of Social Justice in European Private Law (Edward Elgar, 2011), p. 37. Regulatory techniques 111 out, but the procedure for these opt-outs is more rigorous and costly. While sticky default options are a growing trend in consumer protection law a strategy designed to slow down wholesale boilerplate opt-outs we argue that opt-out regulation in the form adopted in the CESL is unlikely to generate any benefit, and may impose unnecessary cost. A related technique, directing courts to interpret ambiguous contract terms in pro-consumer fashion, is also likely to increase transactions costs without providing substantial benefits. The next four sections examine each of the four methods in more detail. We do not take issue with the substantive content of any of the rules. Looking at particular rules and rethinking their justification is beyond the scope of this article. Rather, we focus on the methods by which protective interests are promoted mandatory rules, disclosure, exit and entry, default plans and evaluate the likely effects of these methods vis-à-vis their objectives. The Conclusion points to some implications of our critique for the prospect of harmonization. 2. Mandatory arrangements 2.1. The law Much European legislation in the past several decades has created a web of mandatory arrangements that limit freedom of contract in consumer transactions. Since Member States vary in the scope of such legislation and in their choices to go beyond the benchmarks imposed by European Union directives, we will focus on the set of mandatory rules proposed by the CESL, which reflect the direction that many local jurisdictions have already taken. 3 The analysis we offer is general, however, and is not restricted to the CESL. In fact, we will pay little attention to the substance of the proposed mandates and comment instead on the generic merits and limits of the technique. This legislation features many pro-consumer arrangements concerning substantive contractual rights, remedies, formalities, formation procedures, disclosures, warranties, and interpretation. It could have done what many other sales statutes do, and establish these arrangements as default rules, allowing willing parties to opt out of them by express agreement. 4 But anticipating that such default-rules would likely result in standard form 3. We recognize that the CESL cannot reduce the level of consumer protection embodied in the acquis communautaire, which contains almost all of the rules below (in the existing EU regulations and directives). Accordingly, the critique we propose is not aimed specifically at the CESL and applies to existing law as well. 4. See e.g. UCC, paras ; U.K., The Sales of Goods Act of 1979, para 55(1). 112 Bar-Gill and Ben-Shahar CML Rev SI opt-outs and disclaimers, the protections are accorded mandatory, non-disclaimable status. In keeping with existing trends, the CESL includes a dizzying array of mandatory arrangements provisions that cannot be excluded and can only be modified to favour consumers. In thirty-one different places, the following sentence appears: The parties may not, to the detriment of the consumer, exclude the application of this Article [or Section, or Chapter] or derogate from or vary its effects. 5 In all, we counted eighty-one of the statute s articles which are bestowed a mandatory status. All of the buyer s remedies are mandatory, as are the withdrawal rights, the disclosure rules, the interpretation rules, the restitution rules, the risk of loss provisions, some of the implied and express warranties, limitations on sellers right to cure, rules relating to notices and communications, interest for late payments, grace periods, all the prescription rules, and much more. 6 For example, consumers have a non-disclaimable right to choose between repair and replacement. A seller must give the consumer a thirty-day mandatory grace period if the consumer is delayed in performance. Take-or-pay clauses are forbidden altogether in consumer contracts, and, strikingly, the seller does not have a right to cure defective performance, while the buyer has up to two years from the time she learned of the defect to reject delivery and terminate the contract. 7 In addition, many terms are blacklisted conclusively presumed to be unfair. These include some of the most common choice-of-forum terms, such as mandatory arbitration or seller s home court. 8 They also include asymmetric arrangements, for example when the consumer is bound but the seller is not, or notice periods that are more lenient to the seller, or remedies that are more forgiving to the seller. Some terms are banned more softly by presuming them (not conclusively) to be unfair. These are some of the most common provisions one would otherwise find: limits to buyers remedies, one-sided termination rights, sweeping modification clauses, assignment terms, large advance payments, restrictions on seeking supplies or repairs 5. CESL Arts. 2, 10, 22, 27, 28, 29, 47, 64, 69, 70, 71, 72, 74, 75, 77, 81, 92, 99, 101, 102, 105, 108, 135, 142, 148, 150, 158, 167, 171, 177 and 186. In some of the Articles, the sentence quoted in the text appears with slight variations. In a handful of Articles, the phrase to the detriment of the consumer does not appear. 6. Ibid.,Arts. 2, 10(3)(4); Ch. 2.1; 2.3;Arts. 28, 29; Ch. 4;Arts. 64, 69 72, 74, 75(2), 77; Ch. 8; Arts. 92(2), 99(3), 101, 102, 105; Ch. 11; Arts. 135, 142, 148(2), 150(2), 158, 167; Ch. 16.3; Ch. 17; Art Ibid., Art. 106(3)(b); Art. 111(1); Art. 135(1)(2); Art. 155(3); Art. 106(3); Art. 84(j); Art Ibid., Art. 84(d). Regulatory techniques 113 from third parties, bundling separate goods and services, or setting a contract s duration to exceed one year. In this cornucopia of mandatory protections, it is important to remember which elements of the contract are not mandatory. The main subject matter of the contract and the price are excluded from the unfairness tests, and are binding even if set unilaterally by the seller. 9 Surely, subjecting quality and price to mandatory restrictions would deal a fatal blow to any notion of freedom of contract, and even the most ambitious statutes honour the parties freedom to agree on any quality and price, even if such agreements reflect harsh bargaining realities Discussion It is tempting to think that a pro-consumer mandatory regime would benefit consumers. All else equal, consumers are better off with more favourable provisions. But all else is not equal. Consumer protection comes at a price. Pro-consumer terms that actually constrain and change sellers behaviour raise sellers costs, and sellers will pass on (at least some of) these increased costs to consumers in the form of higher prices. 10 Recall, the CESL preserves freedom of contract with respect to price. Of course, higher prices are not inherently bad. Consumers may prefer high-quality products with a high level of consumer protection, even if these high-quality, protection-intensive products cost more. But consumers might also prefer to pay a lower price and get lower quality products with a lower level of consumer protection. People often waive warranty programmes, buy non-refundable items, choose slower delivery options, or decline to insure, because it makes the product cheaper. A thirty-day grace period, or a generous remedy, or an easy no-questions-asked termination option, are surely beneficial to consumers, but they are also costly to sellers, resulting in higher prices. If most consumers prefer these perks, sellers would offer them and lure consumers with them.the fact that they do not and the fact that the law needs to mandate them suggests that most consumers prefer the discount (assuming that consumers are sufficiently sophisticated). The preceding discussion lumps all consumers together, asking whether consumers as a group would benefit from strong protections once these protections are priced. But consumers are a heterogeneous group, with different preferences and different budgets. Indeed, heterogeneity of 9. Ibid., Art. 80(2). 10. See, e.g., Posner, Economic Analysis of Law (1998); Shavell, Foundations of Economic Analysis of Law (2004); Craswell, Passing on the costs of legal rules: Efficiency and distribution in buyer-seller relationships, 43 Stanford Law Review (1991), 361. 114 Bar-Gill and Ben-Shahar CML Rev SI consumers is one of the important premises of the harmonization project, aiming to grant access justice to those who are excluded from the market or to those who face difficulties in making use of the market freedoms. European private law rules have to make sure that the weaker parties have and maintain access to the market. 11 The protections secured by the CESL or by even more ambitious Member States laws are intended to benefit consumers who are otherwise mistreated, denied service, or left without access. Unfortunately, the perspective we offer suggests that the proposed protections would undermine, rather than secure, access justice. While some consumers may prefer to pay high prices for strong protections, others may prefer the low-price-low-protection combination. Among this latter group are some consumers who would be priced out of the high-protection market. When consumers are heterogeneous, a one-size-fits-all mandatory approach necessarily hurts certain subgroups of consumers. Metaphorically, some air travellers prefer to fly first class, even at the higher airfare. But most consumers would protest if airlines were required, by notion of equal access, to fly all passengers in first class. This is precisely why many people reject extended warranty programmes offered by retailers. They don t want to buy better terms. 12 The focus, thus far, has been on heterogeneity with respect to the price-protection trade-off. Consumers are also heterogeneous with respect to their propensity to benefit from protections. Some consumers are more likely to inspect goods and return them, to invoke warranties, to demand replacements, or to sue and seek damages. For them, the right to sue the seller in court rather than arbitration, or the right to obtain strong remedies for breach, is more valuable. To others often the silent majority who are not aware of their legal rights and protections the enhanced access to court and remedies is less beneficial. They do not complain, do not sue, or reach an off-contract understanding with the seller and de facto waive the protections. For example, the Eurobarometer survey, cited and relied on by the Commission in proposing the CESL, shows that consumers report a preference for arbitration over litigation. 13 Since sellers are generally unable to segregate, in advance, the more vs. less litigious consumers, all consumers will pay the price of the 11. Micklitz, op. cit. supra note 2, 5. See also Mak, Unweaving the CESL: Legal-economic reason and institutional imagination in European contract law (in this volume). 12. Only 1/3 of consumers purchase extended warranties; see Chen, Kalra and Sun, Why do consumers buy extended service contracts?, 36 Journal of Consumer Research (2009), 611, 615; Ross and Ahmed, Extended warranties: A behavioral perspective, 19 Advances in Consumer Research (1992), 879, 879 (30 50% estimates). 13. See Hubbard, Another look at the Eurobarometer surveys (this volume). Regulatory techniques 115 protections that only the few enjoy. 14 This is a cross-subsidy from the majority to the few (and not from sellers to buyers). This cross-subsidy is often inefficient: the cost to the many is greater than the benefit to the few. It is also regressive and unfair. To benefit from the legal protections, consumers need to be informed about these rights, to have the sophistication to insist on compliance, and to afford legal advice. 15 The wealthier and healthier consumers are systematically more likely to invoke the protections. The poor, the elderly, the less educated those for whom the protections are enacted in the first place lack the information, the sophistication, and the resources. And yet, they bear an equal share of the cost. Thus, mandating such a long list of protections is likely to diminish the access to markets for those who already face the greatest barriers. Mandatory rules are not bad by definition. They could be utilized efficiently when voluntary contracts cannot be relied upon to maximize social welfare for example, when contracts impose externalities, or when one of the parties is unable to make good decisions. 16 Consumers may fail to make good decisions either because of asymmetric information or because of imperfect rationality (and often the combination of the two). A rational, informed consumer would selectively bargain for the protections that are worth the added price. Less sophisticated consumers might not fare so well in a laissez-faire environment. They might fail to appreciate certain risks or powers, and so they might underestimate the importance of certain protections. When sophisticated sellers face such naive consumers, the market equilibrium may include an inefficiently low level of consumer protection. 17 This concern may justify an occasional protection, but it hardly justifies the CESL s wholesale inventory of mandates, which are often based on exaggerated ex post concerns rather than any systematic notion of market failure, and are not justified by any empirical evidence that suggests any systematic market failure Gillette, Rolling contracts as an agency problem, (2004) Wisconsin Law Review, 679; Quillen, Contract damages and cross-subsidization, 61 Southern California Law Review (1988), Hubbard, op. cit. supra note 13. Studies show a disproportionate advantage to the wealthy in learning about pecuniary benefits through mandated disclosure. See e.g. O Neill et al., Money 2000 participants: Who are they?, 37 Journal of Extension (1999), 6; Gartner and Todd, Effectiveness of Online Early
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