Consumer Preferences for Performance Defaults

Abstract

Commercial law in the United States is designed to facilitate private transactions, and thus to enforce the presumed intent of the parties, who generally are free to negotiate the terms they choose. But these contracts inevitably have gaps, both because the parties cannot anticipate every situation that might arise from their relationship, and because negotiation is not costless. When courts are faced with these gaps in a litigation context, they supply default terms to fill them. These defaults usually are set to reflect what courts believe similar parties would have agreed to if they had addressed the issue. These “majoritarian” defaults are justified as being most likely to carry out the presumed intentions of the parties. Despite the frequent assertion that the defaults used by courts reflect the views of most contracting parties, there is remarkably little empirical evidence that they do. Neither the legal scholars who study contract law nor the business scholars who study business transactions seem to have examined whether important default terms really are those that parties actually prefer. Statements by judges and scholars that these defaults are those the parties would presumably have chosen do not appear to rest on anything except the personal opinions of the writers. This article attempts to remedy that situation by focusing on one very important situation in which default rules are generally relied upon—and then asking which rule the parties actually prefer. In particular, we look at how consumer purchasers of goods and services view the default rules that apply when sellers tender an imperfect performance. Do those purchasers prefer a rule that allows them to insist on getting exactly what they sought (a rule reflected in the Uniform Commercial Code’s concept of “perfect tender”), or one that requires them to accept a performance that is reasonably close to, but not exactly, what they wanted (the common law’s “substantial performance” rule)? And does purchasers’ preference depend on the goods/services nature of the product? The UCC applies a perfect tender standard for goods, and a substantial performance standard for services. To shed light on consumer preferences, we conducted three studies, reported here. These studies uncover a powerful consumer preference for perfect tender in contracts for both goods and services. Consumers reject the idea that they have any moral or legal obligation to pay for things when they did not receive exactly what was ordered, even where the failure relates to an idiosyncratic preference rather than a difference in economic value between the promised performance and what was tendered. These findings are important because they show that one very large group of contracting parties (consumer purchasers) would not choose substantial performance as a default. Because there is already ample historical evidence that commercial buyers and sellers also prefer perfect tender, courts need to reevaluate the claim that substantial performance is a standard that most parties would agree to. While there may be good reasons for courts to impose a substantial performance standard on parties, their presumed preference is not one.