OBLIGATIONS AND CONTRACT LAW II (2022)
Class 1 - Class 5
Class 1 - Contract & Regulation
Class notes
What is regulation?
● Rule-making, monitoring, enforcement
● Perspective on study of law → process-based & goal-oriented
○ What is the logic of rules through a regulatory lens? (what do legal rules want to
achieve?)
● Invites questions on effectiveness → when does the regulatory process lead to attainment of the
goal?
● Many approaches (theories) exist
● Applied beyond the law (not unique to law)
Regulatory regime of contract law
● What goals does it have?
○ Conventional view → libertarian
■ Contracts are there to service transactions (do business) & maximize wealth
■ e.g. caveat emptor
○ Regulatory view → distributive justice/social welfare
■ Secure fairness
■ Achieve social welfare rather than individual economic welfare
● Elements
1. Standard (rule)
2. Information gathering (monitoring)
3. Behavioral change (enforcement)
● Contract (law) and regulation
○ Collins (2004) → contract law cannot be seen as facilitative only, so also as distributive
justice/fairness
■ Distributive justice (optimize social welfare) e.g. implied terms, unfair terms
● Focused on society rather than individuals in a contract (putting it in a
broader perspective)
■ Understanding contract law as a regulatory mechanism invites new questions for
research and practice
3 views on interplay between contract law & regulation
1. Contract law as regulation → law of contract sets rules that determine your legal position vis a
vis a contracting party
● How is contract law regulatory? → it defines rules on:
1
, (1) When there is a legally enforceable contract (e.g. Carlil v. Carbolic Smoke Ball
Co.);
(2) Wo may contract (legal capacity, agency);
(3) What is contracted for (interpretation, gap-filling);
(4) What happens in case of non-compliance (remedies for breach of contract)
2. Contracts as regulatory tools → law of contract to attain certain goals and practices beyond
economic welfare but rather social welfare)
● Contracts as a means of regulation (rather than regulation itself) which is regulating a
relationship between two or more parties
● Contracts regulate the obligations between parties → self-regulation at the micro
level/private ordering (contracts as mini-governments, contracts as statutes) & freedom
of contract, pacta sunt servanda & certain type of contract (terms → commercial, labor,
general terms & conditions, long-term (relational))
● What terms are actually NOT regulatory tools? → it seems almost everything in a
contract can be seen as a term that the contract regulates
3. Contract law is being regulated (by other fields of law) → law of contract to better achieve goals
of social welfare
● Contract law as an object of regulation → how can it better deliver on goals of fairness
and justice?
● State intervention → public laws introducing, adjusting, or removing contract law rules
○ Why is state intervention needed? → triggered by manifest power imbalance, so
one party of the contract is in a position of dependency (the other party holds a
position of power over the first party)
○ So state intervention needed to resolve market failures
○ Example from consumer law: information asymmetry as a market failure →
information disclosure rules (contact details, qualities product, payments); unfair
commercial practices (misleading and aggressive practices); unfair terms (plain
intelligible language, significant imbalance terms are void)
○ What does the above example assume to effectively protect consumers? (why is
intervention necessary?) → that consumers are not able to make the best
decisions for themselves (rational behavior → are we all so rational, in each
transaction?) → time, access to, and knowledge and skills to assess
● Limits to the information paradigm → information paradigm is not enough to achieve
that people choose what is in their best interest (Sunstein & Thaler (2003))
○ Infusion of economic theory by insights from psychology
○ Behavior (law) economics
● Sunstein & Thaler (2003)
○ Balancing two extremes (under heading of choice architecture) → liberalism v.
paternalism
■ We value choice, but we know that if we give too much choice to people
they will not act rational, and thus will not make the optimal decision for
their own benefit
2
, ■ State-intervention (paternalism) to construct architecture of choice
through different models that can be chosen from/providing default
rule, so people are “inside” but can opt-out (liberalism) → most people
will probably stay “inside”
○ Choice architectures
■ e.g nudging → steering consumers into the favorable direction
■ Biases and heuristics (short-cut) influence how people process complex
information and make (ill)informed decisions
● Bounded rationality → individuals faced with time constraints &
limited access to information (and maybe even limited cognitive
possibilities) use short-cuts by employing rules to safe on mental
processing
● Bounded self-control → individuals that are unable to exercise
self-control when they are presented with certain choices
■ It is thus best to direct them to the optimal choice for their own welfare
→ default rules (opt-out/opt-in)
● No pre-ticked boxes for additional payments (EU Consumer
Rights Directive)
● Cooling-off periods for consumer sales (EU Consumer Sales
Directive)
○ Fit with the three perspectives on contract & regulation
■ They want contract law to be regulated, because under circumstances of
no regulation people will not make the optimal choices → linked to the
third type of relationship i.e. contract law as being regulated by
state-intervention
3
Class 1 - Class 5
Class 1 - Contract & Regulation
Class notes
What is regulation?
● Rule-making, monitoring, enforcement
● Perspective on study of law → process-based & goal-oriented
○ What is the logic of rules through a regulatory lens? (what do legal rules want to
achieve?)
● Invites questions on effectiveness → when does the regulatory process lead to attainment of the
goal?
● Many approaches (theories) exist
● Applied beyond the law (not unique to law)
Regulatory regime of contract law
● What goals does it have?
○ Conventional view → libertarian
■ Contracts are there to service transactions (do business) & maximize wealth
■ e.g. caveat emptor
○ Regulatory view → distributive justice/social welfare
■ Secure fairness
■ Achieve social welfare rather than individual economic welfare
● Elements
1. Standard (rule)
2. Information gathering (monitoring)
3. Behavioral change (enforcement)
● Contract (law) and regulation
○ Collins (2004) → contract law cannot be seen as facilitative only, so also as distributive
justice/fairness
■ Distributive justice (optimize social welfare) e.g. implied terms, unfair terms
● Focused on society rather than individuals in a contract (putting it in a
broader perspective)
■ Understanding contract law as a regulatory mechanism invites new questions for
research and practice
3 views on interplay between contract law & regulation
1. Contract law as regulation → law of contract sets rules that determine your legal position vis a
vis a contracting party
● How is contract law regulatory? → it defines rules on:
1
, (1) When there is a legally enforceable contract (e.g. Carlil v. Carbolic Smoke Ball
Co.);
(2) Wo may contract (legal capacity, agency);
(3) What is contracted for (interpretation, gap-filling);
(4) What happens in case of non-compliance (remedies for breach of contract)
2. Contracts as regulatory tools → law of contract to attain certain goals and practices beyond
economic welfare but rather social welfare)
● Contracts as a means of regulation (rather than regulation itself) which is regulating a
relationship between two or more parties
● Contracts regulate the obligations between parties → self-regulation at the micro
level/private ordering (contracts as mini-governments, contracts as statutes) & freedom
of contract, pacta sunt servanda & certain type of contract (terms → commercial, labor,
general terms & conditions, long-term (relational))
● What terms are actually NOT regulatory tools? → it seems almost everything in a
contract can be seen as a term that the contract regulates
3. Contract law is being regulated (by other fields of law) → law of contract to better achieve goals
of social welfare
● Contract law as an object of regulation → how can it better deliver on goals of fairness
and justice?
● State intervention → public laws introducing, adjusting, or removing contract law rules
○ Why is state intervention needed? → triggered by manifest power imbalance, so
one party of the contract is in a position of dependency (the other party holds a
position of power over the first party)
○ So state intervention needed to resolve market failures
○ Example from consumer law: information asymmetry as a market failure →
information disclosure rules (contact details, qualities product, payments); unfair
commercial practices (misleading and aggressive practices); unfair terms (plain
intelligible language, significant imbalance terms are void)
○ What does the above example assume to effectively protect consumers? (why is
intervention necessary?) → that consumers are not able to make the best
decisions for themselves (rational behavior → are we all so rational, in each
transaction?) → time, access to, and knowledge and skills to assess
● Limits to the information paradigm → information paradigm is not enough to achieve
that people choose what is in their best interest (Sunstein & Thaler (2003))
○ Infusion of economic theory by insights from psychology
○ Behavior (law) economics
● Sunstein & Thaler (2003)
○ Balancing two extremes (under heading of choice architecture) → liberalism v.
paternalism
■ We value choice, but we know that if we give too much choice to people
they will not act rational, and thus will not make the optimal decision for
their own benefit
2
, ■ State-intervention (paternalism) to construct architecture of choice
through different models that can be chosen from/providing default
rule, so people are “inside” but can opt-out (liberalism) → most people
will probably stay “inside”
○ Choice architectures
■ e.g nudging → steering consumers into the favorable direction
■ Biases and heuristics (short-cut) influence how people process complex
information and make (ill)informed decisions
● Bounded rationality → individuals faced with time constraints &
limited access to information (and maybe even limited cognitive
possibilities) use short-cuts by employing rules to safe on mental
processing
● Bounded self-control → individuals that are unable to exercise
self-control when they are presented with certain choices
■ It is thus best to direct them to the optimal choice for their own welfare
→ default rules (opt-out/opt-in)
● No pre-ticked boxes for additional payments (EU Consumer
Rights Directive)
● Cooling-off periods for consumer sales (EU Consumer Sales
Directive)
○ Fit with the three perspectives on contract & regulation
■ They want contract law to be regulated, because under circumstances of
no regulation people will not make the optimal choices → linked to the
third type of relationship i.e. contract law as being regulated by
state-intervention
3
