Rolling Contracts as an Agency Problem

Abstract

Rolling contracts involve terms that sellers include with delivery of goods and that purport to affect the rights of the parties to a contract. They have become common in contracts concluded in telephone or on-line transactions, and controversial because buyers often do not explicitly assent to them and are highly unlikely even to read them. In this article, I suggest that it is appropriate to evaluate the effectiveness of rolling terms, and of standard form contracts generally, as a principal-agent problem. When buyers do not represent themselves in the process of drafting a contract, their interests may still be internalized by sellers in competitive markets, by courts that adjudicate the terms that the contract drafter selected, or by government agencies that mandate or prohibit certain contract terms. I suggest that the best agent for nonreading buyers is likely to vary for different clauses. In some, but not all situations, sellers have incentives to include terms that serve buyer interests. In other situations, sellers may insert clauses that appear to serve seller interests, but sellers may invoke their rights under those clauses only when it is likely that buyers are acting exploitatively. Sellers who use clauses to avoid such observable, but nonverifiable acts of buyer misbehavior may actually serve the interests of the majority of buyers. Sellers will not have incentives to consider buyer interests with respect to other clauses, however. In those cases, courts or agencies may be superior surrogates for buyers. Nevertheless, courts and agencies suffer from their own biases, so that the legal rules that they impose will not necessarily reflect the interests of buyers at large. Thus, rather than approve or condemn the practice of rolling contracts generally, the proper analysis requires a nuanced view that identifies when market mechanisms are likely to internalize the interests of nonreading buyers and when legal actors can better fulfill that role.

Keywords: contracts, agency

JEL Classification: K12, K40