Protection against Unfair Contracts: An Economic Analysis of European Regulation

After considering the possible outcomes that may result from the interaction between potential contract parties, this paper discusses potential causes of inefficiency and investigates how the law affects conditions that would give rise to inefficiency. The analysis is focussed on the European regulation of standard form contracts. This regulation implies that unfair terms in standard form contracts are unenforceable in Member States of the European Community, and can be interpreted as a measure to curtail the adverse selection problem that originates in the fact that contract parties may use standard form contracts. This paper investigates the welfare implication of this protection against unfair contracts.