Bargaining Within the Shadow of Fairness: Economic Analysis of Article 4.109 of the Principles of European Contract Law

Abstract

The problem of unequal bargaining power has been widely analyzed within the philosophical and economic literature. In this article I would like to concentrate on the issue of “excessive benefit or grossly unfair advantage” as envisaged in Article 4.109 (ex art. 6.109) of The Principles of European Contract Law (PECL). The normative significance of PECL indicates that the codification may be applied by parties as a supranational system of general principles of law or international commercial law (lex mercatoria). The economic analysis of European contract law will be divided in two parts. The first part will include the traditional economic analysis of contract law under an unrealistic assumption of zero transaction costs. It could be argued that even then contract failure may occur. This part concerns the so-called “contract failure”. The second will be focused primarily on contracts made in a positive transaction cost world, where the presence of transaction costs leads to a “market failure”. Both parts pertain to the regulation of contracts by courts within a framework of judicial governance. The main instrument of such judicial governance seems to be the concept of a hypothetical bargain or hypothetical contract. The most appropriate tool to be implemented in these cases seems to be game theory. Whether the benefit is excessive or not, it should be compared with the hypothetical division of surplus from the exchange stemming from the face-to-face ideal bargaining process. Thus the problem of a “market failure” may be analyzed from the perspective of a potential solution to the bargaining problem. In conclusion I would like to address the question of whether and under what conditions it is possible to construct any plausible and generally accepted criteria of fairness in order to restore contractual equivalence in case of gross inadequacy in bargaining power.