A New Insight into the Standard Terms of Consumer Contracts from the "Behavioral Law and Economics" perspective; Emphasizing EU Directions and Iranian law

Document Type : Scientific research

Authors

Jalil Ghanavati ¹

Yadollah Dadgar ²

Mohammadali Rezapoor Akerdi ³

¹ Associate Professor, Department of Law, Faculty of law(Farabi Paradise), University of Tehran, Qom, Iran,

² Professor, Department of Economics, Faculty of Law, University of Shahid Beheshti, Tehran, Iran

³ PhD Candidate, Department of Law, Faculty of law(Farabi Paradise), University of Tehran, Qom, Iran,

https://doi.org/10.22067/economlaw.2023.76138.1167

Abstract

Nowadays, consumer contracts, which contain a wide range of contracts, are made in the standard form predominantly. Despite their economic benefit, these contracts have bad result for the consumer, In such a way that the trader, with exploitation of his superior position, arrange an unfair contract to his advantage and to the detriment of the consumer.The law can not be passive against this injustice but legal mechanisms to deal with unfair and one-sided terms of consumer contracts are inefficient, because that provisions, according to the neoclassic economics, believe that informational Asymmetry and Inequality are the main cause of unfair consumer contracts, And so, uses information disclosure strategies as the basic tool to solve the problem of unfair terms of consumer contracts, this approach need to be reviewed and changed. This new approach is taking the advantage of the findings of "behavioral law and economics". Accordingly, the main problem of consumer contracts lies not only in the information asymmetry between the consumer and the trader, but also in the consumer’s real perception and decision-making processes that are affected by cognitive biases and errors.
in this article, we will show in a descriptive-analytical way that the EU law approach, which includes the most detailed and advanced regulations in this field, as well as the consumer protection regulations in Iranian law, are based on the information paradigm, derived from neoclassical economics insights and failed in fair and equitable consumer contracts conclusion.

Keywords

behavioral law and economics

neoclassic economics

economic analysis of law

standard terms, Consumer Contracts

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©2023 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0)

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  References

  • Adel, Morteza; Shamsollahi Mohsen. (2019). Unfair Contract Terms in Consumer Contracts, Private Law Research, 7(25): 205-233. (In Persian).
  • Akerlof, G. (1970). The market for ‘lemons’: quality uncertainty and the market mechanism, Quarterly Journal of Economics, 84(3): 488-500.
  • Altman Moris. (2019). Behavioral Economics, Translated by Ranani Mohsen, Tehran, Avande Danesh Publication. (In Persian).
  • Becher, S. I. (2009). A 'Fair Contracts' Approval Mechanism: Reconciling Consumer Contracts and Conventional Contract Law. University of Michigan Journal of Law Reform, 42(4):747-804.
  • Ben-Shahar, O. (2009). The myth of the “opportunity to read” in contract law. European Review of Contract Law, 5(1). 1–
  • Bettman J, Luce M, Payne J. (1998). Constructive Consumer Choice Processes, Journal of Consumer Research, 25(3):187-217.
  • Coase, Ronald. H. (1960). The Problem of Social Cost, Journal of Law and Economics, 3:1-44.
  • Dadgar, Yadollah. (2017). Patterns of Behavioral Economics and the Capacity to Modify the Governing Approach, Comparative Economics, 4(1): 69-88. (In Persian).
  • Dadgar, Yadollah. (2020). Behavioral Economics; an evolutionary Approach in the Comprehensive science, Tehran, Noore Elm Publication. (In Persian).
  • De Geest, G. (2002). The signing-without- reading problem: An analysis of the European Directive on unfair contract terms. In H. B. Schäfer & H. J. Lwowski (Eds.). Konsequenzen wirtschaftsrechtlicher Normen Festschrift für Klaus Ott (pp. 213–235). Wiesbaden: Gabler.
  • De Hoon, M. W. (2007). Power Imbalances in Contracts: An Interdisciplinary Study on Effects of Intervention, Tilburg University Legal Studies Working Paper No. 006/2007, Available at: ssrn.com/paper=985875.
  • Engel Christoph, Gigerenzer Gerd. (2006). Law and Heuristics: An Interdisciplinary Venture, p.1-2 in Heuristics and the Law, Edited by Gigerenzer Gerd, Engel Christoph, The MIT Press.
  • European Commission Report. (2016). Study on consumers’ attitudes towards Terms and Conditions (T&Cs). https://ec.europa.eu/info/sites/default/files/terms_and_conditions_final_report_en.pdf.
  • Faure Michael G., Luth Hanneke A. (2011). Behavioural Economics in Unfair Contract Terms Cautions and Considerations, journal of consumer policy, 34:337-358.
  • Ford J. Kevin et al. (1989). Process Tracing Methods: Contributions, Problems, and Neglected Research Questions, Organizational Behavior and Human Decision Processes, 43(1):75-117.
  • Ghanavati, Jalil. (2010). liberty of contracts: contracts and unfair terms, Journal of Fiqh and Usul, 42(2). pp.135-157.
  • Grundman S, Kerber W, Weatherill S. (2001). Party Autonomy and the Role of Information in the Internal Market, Berlin: de Gruyter.
  • Grundmann, S. (2002). Information, party autonomy and economic agents in European contract law. Common Market Law Review, 39(2): 269–293.
  • Hadfield, G. K., Howse, R. and Trebilcock, M. J. (1998). Information-Based Principles for Rethinking Consumer Protection Policy. Journal of Consumer Policy, 21(2): 131- 169.
  • Hartlief, T. (2004). Freedom and protection in contemporary contract law. Journal of Consumer Policy, 27(3): 253–267.
  • Haupt, S. (2003). An Economic Analysis of Consumer Protection in Contract Law. German Law Journal, 4(11): 1137-1164.
  • Helberger, Natali. (2013). Form Matters: Informing Consumers Effectively, University of Amsterdam - Institute for Information Law (IViR) https://ssrn.com/abstract=2351791.
  • Hillman, R. A. and Rachlinski, J. J. (2002). Standard-Form Contracting in the Electronic Age. New York University Law Review, 77(2): 429-495.
  • Howells, G. G. (2005). The potential and limits of consumer empowerment by information. Journal of Law and Society, 32(3). 349–370.
  • Howells, G. G., & Weatherill, S. (2005). Consumer protection law. Aldershot: Ashgate.
  • Jolls C, Sunstein C.R, Thaler R. (1998). A Behavioral Approach to Law and Economics, , STANFORD LAW REVIEW, 50:1471-1550.
  • Kahneman Daniel, Tversky Amos. (1979). Prospect Theory: An Analysis of Decision under Risk, Econometrica, 47(2):263-292.
  • Katouzian, Nasser. (2008). The Limitations of Freedom of Contracts on the Basis of Protection of the Consumer, Private Law Studies, 38(3):327-342.
  • Kelman, Mark. (1979). Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 Southern California Law Review 52 (3): 669-698.
  • Kornhauser, L. A. (1976). Unconscionability in Standard Forms. California Law Review, 64(5): 1151-1183.
  • Korobkin Russell. (1998). The Status Quo Bias and Contract Default Rules, 83 Cornell Law Review, 83(3):608-687.
  • Korobkin, R. (2003). Bounded Rationality, Standard Form Contracts, and Unconscionability, Chicago Law Review, 70(4): 1203-1295.
  • Leff, A. A. (1970). Contract As Thing. American University Law Review, 19(2): 131-157.
  • Levitin, A. J. (2007). All But Accurate: A Critique of the American Bankers Association's Study on Credit Card Regulation. SSRN eLibrary. Available at: SSRN.com/paper=1029191.
  • Llewellyn, K. N. (1960). The Common Law Tradition - Deciding Appeals. Boston: Little, Brown and Company.
  • Luth H. A. (2010). Behavioral Economics in Consumer Policy: The Economic Analysis of Standard Terms in Consumer Contracts Revisited (PhD thesis). Erasmus University Rotterdam, Rotterdam, https:// repub.eur.nl/pub/19572/Proefschrift-Hanneke-A.-Luth.pdf, last visited November 14, 2018.
  • Luth, Hanneke A. (2008). Extending the Scope of the Unfair Terms Discipline in Consumer Contracts - An Economic and Behavioural Perspective, RILE Working Paper No. 2008/01, Available at SSRN: https://ssrn.com/abstract=1115302 or http://dx.doi.org/10.2139/ssrn.1115302
  • Marotta-Wurgler, F. (2009). Are “Pay Now, Terms Later” Contracts Worse for Buyers? Evidence from Software License Agreements”, The Journal of Legal Studies, 38(2): 309-343.
  • Mathis K, Steffen D. (2015). “From Rational Choice to Behavioral Economics: Theoretical Foundations, Empirical Findings and Legal Implications”, in: European Perspectives on Behavioral Law and Economics (ed. Klaus Mathis). Cham 2015, 31.
  • Maxeiner, J. R. (2003). Standard-Terms Contracting in the Global Electronic Age: European Alternatives. Yale Journal of International Law, 28(1). pp. 109-182.
  • Olshavsky Richard W. (1979). Task Complexity and Contingent Processing in Decision Making: A Replication and Extension, Organizational Behavior and Human Performance, 24(3).
  • Payne J.W, Bettman J.R, Johnson E.J. (1993). the Adaptive Decision Maker, New York: Cambridge University Press.
  • Radonjić, Aleksa. (2018). Behavioral approach to unfair terms and conditions in EU consumer law, Strani Pravni Zivot. (4):7-24.
  • Rahbar F, Motavasseli M, Amiri M. (2013). Behavioral Economists and their Theories. JPBUD, 18 (1) :133-165. (In Persian).
  • Rakoff Todd D. (1983). Contracts of Adhesion: An Essay in Reconstruction, Harvard Law Review, 96(6): 1173-1284.
  • Ramsay, I. (1984). Rationales for Intervention in the Consumer Marketplace. London: OFT.
  • Sibony A.L. (2014). Can EU Consumer Law Benefit from Behavioural Insights? An Analysis of the Unfair Practices Directive, European Review of Private Law, 6: 901-942. Available at SSRN: https://ssrn.com/abstract=3183933.
  • Stiglitz Joseph E. (1985). Information and Economic Analysis: A Perspective, The Economic Journal, 95:21-41, https://www.jstor.org/stable/2232867.
  • Sunstein Cass R. (2002). Probability Neglect: Emotions, Worst Cases, and Law, Yale Law Journal, 112(1): 61-107.
  • Thaler, R. H. (1980). Toward a positive theory of consumer choice. Journal of economic behaviour and organisation, 1(1). 39–60.
  • Träger, M. (2008). Party Autonomy and Social Justice in Member States and EC Regulation: A Survey of Theory and Practice. In: H. Collins (Ed.). Standard Contract Terms in Europe: A Basis for and a Challenge to European Contract Law, pp. 57-74. Alphen aan den Rijn: Kluwer Law International.
  • Van den Bergh, R. J. (2003). Competition law and consumer protection legislation. In: A. N. Hatzis (Ed.). Economic Analysis of Law: A European Perspective. Cheltenham: Edward Elgar.
  • Wilhelmsson, T. (2006). Cooperation and Competition Regarding Standard Contract Terms in Consumer Contracts. European Business Law Review, 17(1). pp. 51-72.