Empirical Approaches in Contract Scholarship

Saturday morning at KCON also included a session on empirical scholarship, summarized below. As always, errors in the notetaking are those of the taker–whom happened to be the moderator–and not the presenters.

From left: Gaston De Los Reyes, Colin Marks, Chris Odinet, and Mark Burge (Moderator)

Gaston De Los Reyes (George Washington University – School of Business): “Not From Guile But From Entitlement: Lawful Opportunism Haunts the Cracks in Contracts. Professor De Los Reyes dealt with opportunism based on a transaction cost perspective in contract law. Opportunism includes strategic manipulation of information or disclosure of intentions. Hybrid governance in deals has a timebomb built into it of “literal enforcement”–this is the longstanding contract law problem of Paradine v. Jane, where the parties didn’t bargain for the situation that actually happened, but that is a fully honest dealing by the parties (naivete rather than opportunism). Lawful opportunism would pursue these cracks with literal enforcement even when the outcome would be punitive. This isn’t lying or cheating in a deal, which would be blatant and unlawful. Can or should we adapt contract law to deal with the problem of lawful opportunism. Behavioral studies in contracting identified some variables (e.g., sense of entitlement) that could impact when parties defect from the spirit of the contract to enforce the letter. A strong sense of entitlement rather than a relational sense will contribute to the tendency to push literal enforcement. A study with about 1,300 participants tested the potential variables to see the tendency to be cooperative rather than opportunistic. Participants were not inclined to be blatantly opportunistic, lawful opportunism was more likely, and cooperative behavior was most likely. People with strong sense of entitlement were more likely to use lawful opportunism, as were people with a strong sense of economic exchange, but the latter were less likely to be blatantly opportunistic.

Colin Marks (St. Mary’s University): “On-Line and As Is.” Professor Marks studied online transactions where it is well established that parties dis not read the terms and conditions. For example, Wal-Mart terms online effectively create an “as-is” transaction through disclaimers where such disclaimers are not necessarily present in an in-store transaction. Are customers aware of these terms?  Are they enforced and enforceable? Data came largely from the top 100 retailers in the National Retail Federation who have both online and in-store sales. Eleven different terms in contracts that could impact consumers were compared. One difference is between browsewrap and clickwrap, with the former being much more passive in nature. Terms and conditions are fairly hidden in some websites. Clickwrap at least involves an active consent. Pizza Hut, for example, works hard at obtaining consent, but the actual deal is fairly user friendly. A newer innovation is “sign-in wrap” where continuing on a site (like Amazon creation of an account) is where the binding terms occur. Another variant is “scrollwrap” which requires scrolling to the end of the terms before clicking “I Accept.”  Surprisingly, 72.5% of the retailers still use browsewrap.  Clickwrap and scrollwrap are seldom used by large retailers. The retailers seem to be more concerned with reducing transaction friction rather than creating enforceability. Some disclaimers are only arguable in their enforceability. 85% of terms use some form of “as is” clause to disclaim the implied warranty of merchantability. 35% of retailers have arbitration clauses. None of the 110 retailers use conspicuous disclaimers in a brick-and-mortar store where they had the opportunity to do so. Most retailers (outside of food-sellers) have return policies despite the fact of an otherwise “as is” deal. Overall, browsewrap, as-is clauses, and return policies are prevalent.

Chris Odinet (Southern University Law Center): “Bitcredit: Marketplace Lenders and Consumer Protection.” Professor Odinet studied marketplace lending, which bypasses traditional financial institutions and puts borrowers and lenders together directly (e.g., Kabbage, Avant, Prosper, Lending Club). Information from an application is put into an algorithm that evaluates the potential borrower, including (allegedly) the borrower’s social media activity. Many of these lenders use the direct funding model with investors, but the bank-partnership model is becoming more prevalent, where the bank is the loan-maker, but the platform lender purchases the loan with funds put up by investors. How does this differ from traditional borrowing? Technology reduces the transactional cost of traditional lending through automation. Mainstream banks like these companies because someone else handles the FinTech, while the affiliate banks take on their traditional role albeit in a less-costly transaction. Marketplace lending arose following the 2008 financial crisis when many types of credit lending dried up as traditional banks became more cautious and shut down their non-core lending activities. The types of lending are diverse ranging from consumer to small business to refinancing. State banking regulators in some states have approached these firms, as have the CFPB and FTC, but the regulation is far less developed than what is occurring with traditional banks. Professor Odinet conducted an empirical study of these marketplace lenders based on data from the CFPB complaint portal to determine the nature of consumer problems with this type of lending. Study focused on 228 complaints over a five year period all based on consumer loans.  CFPB complaints tend to be disproportionately filed by higher income consumers and some racial minorities. California is disproportionately represented in the CFPB database, as is Florida. The narratives submitted by consumers are a rich source of information as well as to what is motivating filing consumers. Many complained about their credit score being pulled before they actually applied for the loan. Borrowers seem to be having some substantial misunderstandings with these websites. Marketplace lending does not have a concerned prudential regulator at this point.