Hugely Unequal Bargaining Power Invalidates The Consent Necessary For A Valid Contract
By David Grace (www.DavidGraceAuthor.com)
People View One-Sided Contracts As Inherently Unfair
People get upset, angry, even violent when they feel that they didn’t get something they were entitled to or that they suffered some harm that they didn’t deserve.
Massive imbalances in bargaining power allow hugely powerful sellers and employers to force individuals to accept terms vastly inferior to the ones that would have been offered in a competitive, free market where each side had relatively equal bargaining power.
The more the unequal-bargaining-power terms vary from what would have been agreed to if the parties’ bargaining-power had been relatively equal, the more the people on the weaker side of the transaction feel that they weren’t treated fairly, that they have been abused, mistreated and cheated.
You can talk all you want about multi-billion dollar corporations’ alleged right to a form of freedom of contract that allows them to impose onerous terms on high-school-educated people who are barely surviving paycheck-to-paycheck, but that theory is not going to mean anything to those individuals.
An individual consumer forced to negotiate with unrestrained mega corporations is like putting Pee Wee Herman into the ring against Hulk Hogan. When Pee Wee crawls out beaten and bloody he’s going to feel that it wasn’t a fair fight and that he has been abused and mistreated.
The right wing is championing the “freedom” of Hulk Hogan to pulverize Pee Wee Herman and says it’s a fair fight because both sides are in the same ring and are fighting under the same set of rules, but that’s not a fair fight under any even halfway reasonable definition of the term.
The Danger From One-Sided Contracts
The more that people feel they have been shortchanged or mistreated, cheated or abused by the the powerful entities that affect their lives, the more angry, violent, unstable and contentious our world becomes.
In a populous and complex society, the adverse actions of even a few people can harm many others.
That anger, instability and violence also becomes increasingly damaging as people have access to greater and greater mechanisms of destruction — explosives, toxins, machine guns, cars, trucks and planes that can be crashed into buildings or crowds, and demagogues who will promise the angry citizens that they will punish the bad people in exchange for their votes.
Crowded, technological societies are fragile, and failures at any one of thousands of points can cause huge damage. Those societies are going to function increasingly badly with millions or tens of millions of members who believe that they have been treated unfairly.
It is against this reality of people upset because they think that they did not get what they were entitled to or suffered harm that they think they did not deserve that we need to discuss the situation where one side’s bargaining power is so overwhelming that, as a practical matter, the other side’s consent to the contract has been coerced and the transaction should be held to be unenforceable.
A Valid Contract Requires Voluntary Consent By Both Parties
Some right-wing people claim that sellers should be free to enforce any contract not negotiated at the point of a gun no matter how overwhelming the seller’s bargaining power and no matter how disastrous the consequences to the buyer if he fails to agree to the seller’s demands.
They argue that we have to honor the result of a fight between Hulk Hogan and Pee Wee Herman because Pee Wee “consented” to step into the ring even if Pee Wee’s alternative to entering the ring would have been starvation or homelessness.
It has long been the law that consent to a contract must be voluntary and consent that is coerced isn’t binding consent at all. When the alternative is starvation or homelessness Pee Wee’s entry into the ring is not voluntary under any meaningful definition of the word.
To understand if a buyer’s consent to a hugely one-sided agreement is voluntary or coerced we have to start with an understanding of monopolies.
What Are Monopolies?
A monopoly exists when there is only one supplier of a good or service.
A cartel exists when the available providers of a good or service have agreed among themselves not to compete with each other on the principle terms of sale.
In monopolies and cartels, the seller(s) charge the maximum revenue price, the monopoly price, which is far above the fair-market price that would be charged if individual providers competed for customers in a free market.
NOTE: Instead of writing “monopoly and/or cartel” everywhere in this article, I’m going to shorten that to just “monopoly.”
Monopolies Are Toxic To The Free Market
Monopolies are inherently toxic to the free market, free enterprise and capitalism.
The more harm, damage or cost a buyer will suffer if he does not purchase the monopolized good or service at the monopoly price, the more damaging the monopoly is both to those buyers and to the economy as a whole.
Monopolies are illegal for good commercial and practical reasons:
- Monopolies grant the selling party an artificial, massive, advantage in bargaining power over the buying party
- Monopolies result in prices that are far higher than the fair-market value of the goods or services provided
- Monopolies distort the economy by misallocating large amounts of resources to monopoly sellers far beyond the economic value of the goods or services they are providing, and thus they divert wealth away from the sellers of other goods and services
- Monopolies destroy the benefits of free-market competition
- Monopolies taint transactions by coercing the buyer’s consent.
Coercion From The Fear Of Harm Caused Directly By The Seller
Coercion that nullifies consent can take the form of harm the seller threatens that it will directly inflict on the buyer if the buyer refuses to enter into the contract.
“Sign up for my trash removal service instead of a service from one of my competitors or I will burn your building down” is an example of coercion by a threat of harm that will be directly inflicted by the seller.
This seller’s threat to directly harm the buyer nullifies the buyer’s consent and renders the agreement invalid.
Coercion From The Fear Of Harm Caused Indirectly By The Seller
But coercion that nullifies consent can also take the form of harm the seller threatens to indirectly inflict on the buyer if the buyer refuses to enter into the monopoly contract.
By deliberately closing off all of the buyer’s opportunities to acquire the product or service from other sellers at a competitive price, the monopoly seller indirectly inflicts the harm the buyer will suffer if he refuses to pay the monopoly price.
Suppose the cost to manufacture and distribute a vial of insulin is $10 and the competitive market price is $50.
Now suppose that all of the suppliers of insulin entered into an agreement to raise the price of insulin to $500/unit which is ten times the previous competitive market price of $50/unit.
By closing off access to market-price insulin, the monopoly sellers are telling the diabetic buyers that they must either pay the monopoly price of $500/unit or die. The buyers’ potential death is a harm the sellers indirectly cause by preventing the buyers from purchasing insulin from anyone other than themselves.
It’s as if five people have adjacent shops selling insulin for $50. The buyer goes to the first one and the monopolist tells the owner, “Don’t sell him any insulin.” The shop owner complies.
The buyer goes to the next shop and the next and the next and each time the monopolist goes to the shop keeper and orders, “Don’t sell him any insulin.”
On the verge of a entering a diabetic coma the diabetic goes back to the monopolist seller who demands that the diabetic give him $500 or go away empty-handed and die.
By preventing the diabetic from buying insulin from any other seller, the monopolist has no less coerced the buyer’s agreement to pay 10 times the free-market price than a mugger putting a gun a diabetic’s head and saying: “Give me $500 or die.”
Coercion by the threat of indirect harm nullifies the consent necessary to form a binding contract between the monopoly seller and the buyer.
Monopolies Can Be By Explicit Agreement Or From Random Circumstances
Monopolies aren’t always the result of an explicit agreement. Monopolies that arise from random circumstances are no less toxic nor is the consent to their terms any less coerced.
It is as irrelevant to the buyer if the monopolist happens to accidentally have a monopoly instead of creating one through plotting and planning as it is to your doctor how you got lung cancer. The thing that matters is not how you got it, but how that condition will affect you from now forward.
Accidental Monopolies
Two people are standing near a ledge. The first man slips, goes over the edge, and is left hanging by his fingers.
Since he is the only person there, the second man has a monopoly on the ability to save the first man.
Desiring to exploit his monopoly, the second man says:
“Agree to give me $1 million or I’ll walk away and let you fall to your death.”
Having no choice, the first man agrees and the second man pulls him to his feet and demands to be paid.
It’s irrelevant to the first man how the second man came to have a monopoly on the ability to save his life. What counts is that
- The second man has a monopoly on the service necessary to save the first man’s life,
- The first man will die if he does not agree to buy that service at the price demanded, and
- the payment the monopolist demands is massively greater than the price that would have been charged had there been competitive providers of that service — the price demanded is massively greater than the fair-market value of the quantity and quality of the services the second man is offering to provide.
The second man’s monopoly on the ability to save the first man makes the first man’s consent to pay a massively inflated monopoly price coerced, and that coerced consent renders the contract to pay that inflated, monopoly price unenforceable.
The Second Man Didn’t Have To Do Anything
This is not to say that anytime anyone is in need they can demand that someone else fill their need.
The second man was always free to just walk on by and do nothing. What he wasn’t free to do was to exploit his accidental monopoly by demanding the payment of an inflated monopoly price. He could have, instead, asked for and collected a fair-market-value price.
What Is A Coerced Contract?
A coerced contract is one where one party’s consent to the agreement was materially coerced.
A contract where one party’s consent will be deemed to have been been materially coerced is a contract where:
- One side’s massively greater bargaining power, together with
- Serious harm to the greatly weaker other party if it fails to agree to the take-it-or-leave-it terms, allows the hugely more powerful party to impose
- Terms substantially in excess of those that would be available were the transaction one between parties of relatively equal bargaining power.
Many Contracts Are Automatically Invalid
There are many types of contracts that are invalid and unenforceable as a matter of law even though both sides agreed to them. For example, all of the following contracts are legally invalid and unenforceable:
- Contracts where one party’s consent was coerced
- Contracts based on mutual mistake of a material fact
- Contracts to perform an illegal act
- Contracts with an unlicensed person to perform an act for which a license is required
- Contracts to make a gift
- Contracts to pay a penalty
- Contracts to pay an unlicensed lender an interest rate above the statutory maximum
- Contracts to buy a human being
- Contracts to sell a human organ
And others
How Do We Deal With Coerced Contracts?
Make Them Legally Unenforceable
The party with the massively greater bargaining power does not have the right to collect a monopoly price any more than it would have the right to collect a payment for performing an illegal act, collect interest at a usurious rate, collect a payment for selling a child, or collect on a promise to make a gift.
The problem with relying on the courts to refuse to enforce a coerced contract as our only tool to deal them is that this tactic would force the courts to potentially have to evaluate every contract on a case-by-case basis, an expensive, time-consuming process that would introduce great uncertainty into commercial transactions.
Make Them Unprofitable
In the commercial world, coerced contracts are almost always imposed to get more money.
We could remove or reduce the incentive to impose coerced contracts in the first place by taking away some of the money to be gained from them.
A tax on excess profits above the level needed to motivate investment and innovation would reduce much of the incentive to impose coerced contracts. See my column: Seven Ways To Fix Capitalism
Increase The Weaker Party’s Bargaining Power By Creating Automatic Floors & Ceilings On The Terms Of Selected Transactions
The historical method used to reduce the harm from coerced contracts is to put a cap/floor on the terms that the stronger party can impose in certain common categories of contracts so that no matter how great the imbalance in bargaining power, the Hulk Hogan side of the transaction will not be allowed to force the inclusion of terms above or below that cap on the Pee Wee Herman side.
If given free reign to impose any terms their massively greater bargaining power allows them to get away with, many employers would exclude any obligation to pay the medical bills for an employee’s on-the-job injuries or pay overtime, but those employer obligations are automatically included as a floor in all employment contracts.
If given free reign to impose any terms their massively greater bargaining power allows them to get away with, many banks would include high late fees for the failure to make a small payment within a very short period of time, but those charges are automatically excluded by a late-fee ceiling in all credit-card contracts.
See my column: Gov’t Regs Compensate For Massive Imbalances In Buyers’ & Sellers’ Bargaining Power
At its base, most government consumer regulations are a mechanism to increase the bargaining power of the immensely weaker parties by the automatic inclusion of floors and ceilings in common transactions where vastly unbalanced bargaining power would otherwise cause the weaker party’s coerced consent to those take-it-or-leave-it transactions.
Why Do People Leave The Wilderness & Form Communities?
When we live in a group we expect that one of the benefits of living in a civilized community will be that the group will use its power to protect us from being mistreated by people and forces who are more powerful than we are.
We expect to gain the benefit of safety in numbers.
We expect that by living in a society we will not be subject to the dangers that we would face when living alone in the wild.
We expect the community to provide us with institutions that will allow us to live a peaceful and productive life free from the might-makes-right ravages of the law of the jungle.
We expect the power of the group through
- Its army to protect us from being oppressed, robbed or killed by invaders.
- Its police to protect us from being oppressed, robbed or killed by thieves, robbers and killers.
- Its fire and emergency departments to protect us from the ravages of fires, floods, and other disasters.
- Its legal system to protect us from being oppressed, coerced, and mistreated by vastly more powerful people, businesses, institutions, and organizations.
Safety in numbers is one of the main reasons why we have governments in the first place, namely, to build and operate systems that will protect the weak from domination by the strong.
Why The Right Wing Hates The Government
In the same way that wolves hate the shepherd, gangsters hate the police, and monopolists hate anti-trust prosecutors, survival of the fittest, law of the jungle conservatives, libertarians and anarchists hate the government because government is a tool that can be used to protect ordinary, average citizens from abuse, domination, and coercion by the rich and powerful, a group that the right wingers are sure they are or will some day become members of.
The wolves consider it their right to eat the sheep. If the sheep aren’t strong enough to fight off the wolves, then the wolves believe that the sheep deserve to be eaten.
The right wingers consider it their right to take every penny they are powerful enough to extract from their customers and employees. As far as they’re concerned, if their customers and employees aren’t strong enough to resist their corporations’ demands, then they deserve to be impoverished.
Right wingers hate the government because it dares to impose laws that stand in the way of their coerced contracts and longed-for law-of-the-jungle world.
— David Grace (www.DavidGraceAuthor.com)
